Manhattan Institute for Policy Research.
Subscribe   Subscribe   MI on Facebook Find us on Twitter Find us on Instagram      

National Review Online


Health Care's Taxing Problem

August 12, 2009

By Regina E. Herzlinger

Mainstream economists generally agree that current U.S. tax policy for health insurance is fundamentally irrational, regressive, and ultimately destructive. Fixing this system should be one of Congress’s top priorities when it comes to health reform. Sadly, the current Congressional health-reform proposals would leave the worst feature of the current system in place and make a bad situation worse.

Current tax policy generally permits employers, but not individuals, to use pre-tax income for buying health insurance. Therefore, it is much cheaper to buy insurance through an employer than in the individual market. Because tax-exempted employer-based insurance is not portable — workers can’t take it with them when they change jobs — this harms labor mobility: People hesitate to leave jobs at big firms that provide health insurance to work for small firms that might not. The phenomenon, known as “job lock,” robs small firms of talent and slows U.S. job growth, because small, entrepreneurial firms have generated 70 percent of new jobs.

Uneven tax treatment also may cause employees to prefer health insurance to other forms of income. This is one of the reasons that the Congressional Budget Office estimated that in 2007, the tax break for employer-provided insurance was worth a staggering sum — about $246 billion in foregone tax revenues. Further, wealthier employees, because they’re in higher tax brackets, get more of a tax benefit than lower-wage workers.

The current congressional tax proposals do not solve any of these problems. The American people smell a rat when they read about proposals to tax health benefits — but only for the rich (sometimes defined as families earning above $250,000). They worry that tax increases on the rich will eventually become tax increases on the middle class. Further, current legislation in the House and Senate to tax employers who don’t offer “creditable” health insurance includes a host of small employers, making the proposal a job-killing measure.

But a simple solution would level the tax treatment of health insurance, make it portable, and appeal instantly to taxpayers: Congress could simply extend the present tax exclusion to all employees.

Here is how that would work. An employer who today spends $17,000 on health insurance for the family of an employee, for example, could instead offer her $17,000 in wages — provided the employee purchases at least a catastrophic health-insurance plan that is appropriate for her income. The amount spent on health insurance would remain tax-free. If any was left over (say $5,000 after the purchase of a $12,000 comprehensive family policy), it would be taxable.

Those who didn’t want to opt out could maintain their employer-sponsored plans, though union bosses and others would have to explain why their members were better off with high-cost health insurance than higher wages. (Middle-class families have seen their take-home pay stagnate in recent years due to insurance premiums, which have nearly doubled since 2000.) On net, this proposal would raise pay for the vast majority of American workers. The cash-out of employer-sponsored health insurance would have caused the 90 percent of joint 2006 tax filers who earned less than $73,000 after taxes to enjoy an average 16 percent increase in their after-tax incomes. Even after these taxpayers bought insurance in the private market, it’s likely that much of their gains would remain: In Switzerland, about a quarter of the market has opted for lower-cost high-deductible plans, and another quarter buys lower-priced managed care.

Over time, the availability of these funds, adjusted for health-insurance price increases, would lift wages; encourage employees to shop for affordable, portable insurance that met their needs; and — as a bonus for Washington — produce an infusion of new taxable income. Critics might argue that people would buy less insurance than they really need — but the requirement to purchase an income-adjusted catastrophic plan obviates that possibility. Insurance companies would still have powerful incentives to market comprehensive policies to employees. In Switzerland, where consumers are the sole purchasers of health insurance, the majority choose to buy comprehensive policies; but competition holds Swiss insurers’ general and administrative expenses to 5 percent of revenues, as compared to 12–18 percent for ours. To protect the sick against outrageous pricing, employers could require insurers to guarantee issue to their employees at community prices. The IRS could monitor the accuracy of this transfer.

This approach is virtually costless, requires very little new regulation, and helps control health-care costs by encouraging employees to think carefully about their health-insurance options. (The Swiss consumer-driven system costs 40 percent less than ours, and its health-care price index has decreased, yet it achieves universal coverage and very good health care.) It could also help reverse income stagnation by putting more money in the average employee’s pocket. As for job lock, workers at small firms that didn’t offer health insurance could set aside part of their take-home pay (tax-free) for buying insurance.

Rather than taking a trillion-dollar gamble on everything at once, Congress should focus on fixing what’s broken. Important additional reforms — expanding coverage for the uninsured and eliminating waste, fraud, and abuse in Medicare and Medicaid — could be added as health-care cost inflation moderates. By starting with the tax treatment of health insurance, Congress can ultimately achieve true health-care reform.

Original Source:



America's Legal Order Begins to Fray
Heather Mac Donald, 09-14-15

Ray Kelly, Gotham's Guardian
Stephen Eide, 09-14-15

Time to Trade in the 'Cadillac Tax' on Health Insurance
Paul Howard, 09-14-15

Hillary Charts the Wrong Path on Wage Inequality
Scott Winship, 09-11-15

Women Would Be Helped the Most By an End to the 'Marriage Penalty'
Diana Furchtgott-Roth, 09-11-15

A Smarter Way to Raise Paychecks
Oren Cass, 09-10-15

Gambling with New York's Pension Funds
E. J. McMahon, 09-10-15

Vets Who Still Serve: After Disasters, Team Rubicon Picks Up the Pieces
Howard Husock, 09-10-15


The Manhattan Institute, a 501(c)(3), is a think tank whose mission is to develop and disseminate new ideas
that foster greater economic choice and individual responsibility.

Copyright © 2015 Manhattan Institute for Policy Research, Inc. All rights reserved.

52 Vanderbilt Avenue, New York, N.Y. 10017
phone (212) 599-7000 / fax (212) 599-3494