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A Compromise Proposal On Financing Health Reform

October 30th, 2009

Both the new House health reform bill and the Senate Finance Committee bill, despite their best efforts, have to impose some taxes on some taxpayers; they cannot get all of a trillion dollars of subsidies for insurance out of Medicare.  But they differ on what and whom to tax: the House proposes to tax well-off people by limiting their tax deductions for things unrelated to health care or insurance, while Senate Finance proposes to levy an excise tax on high cost health plans. 

As a card-carrying health economist, I am programmed to believe that the best choice for limiting health spending is to curtail the current open-ended exclusion of employment based health insurance premiums (whether nominally paid by employer or worker) and the flexible spending account loophole.  As an economist I am programmed to believe that a tax on insurers will be mostly shifted to buyers of insurance, who in turn are mostly employers—but who in turn will react by paying the higher premiums through lower worker wages and by curtailing the generosity of benefits to keep the tax burden on workers down.

Here I want to suggest a meritorious compromise: why not tax the high cost benefits of high income workers?  This would avoid one of the objections to the insurance tax—it may harm middle income workers—but, more importantly, it is consistent with the House distributional objective of having the better-off pay.  It just gives us two for one: it raises money from those who ought to pay, and it does so in a way that also curtails insurance spending (and then medical care spending) that is worth less than its true cost.

Of course, the intersection of high cost insurance and high income is smaller than either all high-income deductions or all high-cost insurance taken alone, but the parameters of such a health care resource-guzzling tax for rich people could be adjusted to raise as much revenue as needed.  For example, the premium level at which high-income people would have to pay the insurance tax could be set lower (say, at $15,000 for a family) than for middle-income people, and lower-middle income people (the few making the serious sacrifices needed to buy generous coverage) could be exempt entirely.  In addition, the tax rate could be set higher for higher-income workers — ideally just enough to offset the marginal value of the exclusion (which equals the marginal tax rate) — and lower for lower income workers.  With that rate close to 50% for very high wage workers, the offsetting insurance tax would be high indeed.

Taxes on high wage workers do potentially deter work effort.  The theory is not bullet proof but I think it likely that taxes on compensation that goes for health insurance might have a smaller or no deterrent effect. Do I choose to work less because the share of my compensation which goes for health insurance now will be taxed (or, to put it the other way, do high wage workers strive harder under the current exclusion to earn more money to pour into their health insurance)?  I think the answer is likely to be negative in both cases.

This kind of provision would generate more tax revenues (relative to the status quo) over time as rising insurance premiums and rising money incomes would expand the tax base. It shares with any method that limits the exclusion the nice property that the government would collect more whether people continued to buy the taxed good (insurance) or if they cut back, since in the latter case taxable money income would rise.  It is also more politically honest than the insurance excise which apparently is intended to trick some people into thinking that insurers will end up paying it. 

I would not imagine that this provision would fully finance the needed system of subsidies (nor do I imagine that Medicare cuts can do so); the middle class will eventually have to pay something and we should start preparing them for the payments they will need to make to get the uninsured off their consciences.  But it could form the nucleus of a way of raising money that actually improves rather than worsens efficiency.  Two-for-one deals are rare enough we ought to seize them when we can.

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  1. uberVU - social comments
    October 30th, 2009 at 2:49 pm

3 Responses to “A Compromise Proposal On Financing Health Reform”

  1. Steven Cosby Says:

    I enjoy the “card carrying economist” opening.

    However, I have heard time and time again that workers who receive their health care through their employers do so at the expense of lower wages. If the price of food and water increases then the masses of workers will demand higher wages. If the price of health care increases would not the same occur? This is where reasonable and prudent people disagree on how much health care is a necessity and how much is a luxury.

    Prospective payment mechanisms that purchase all the health care one can conceive verse insurance purchased for the ” just in case” scenario are two options that are appear to be at odds with one another. Individuals should purchase financial tools that protect them from large financial losses.

    Federal and State legislators have mandated too many illnesses and benefits to financial mechanisms that were intended just to be insurance or for the just in case.

    Finally, we do not need more taxes or more income into our already bloated and wasteful system. There is enough money existing in the sytem already. We just need a lot more efficiency. And since our doctors prescribe 90% of all health care here lies our solution or failure.

  2. Dan Smith Says:

    Your idea may be workable, but may not be comprehended by the average worker. Nevertheless, one thing I learned is that businesses do not pay taxes. Any added costs are passed on through to their customers or absorbed by paying their workers less. So in the end, it is the people associated with these businesses who share the added costs. Why not be upfront with the people and just implement a state healthcare sales tax. Since they are going to pay for universal healthcare one way or the other. There is no need to hide or futher confuse the problem of paying for universal healthcare. The sales tax could exclude food and medicine to spare the poor.

    A sales tax would be progressive. The more money a family makes and spends, the more tax they would pay. This would spread the healthcare tax across the maximum number of people in proportion to their income who are going to pay for univeral healthcare one way or the other. You might as well know upfront your contribution to universal healthcare. If the Federal Government wants to pick-up some of this cost, the government could give you a tax deduction for a portion of this tax. I would prefer that each state administer a plan for its disadvantaged. I don’t believe that the Federal Government should take over our healthcare system for a number of reasons. However, a state healthcare sales tax would prevent any tax shifting from one state to give to another that Washington is known to do.

  3. John Ballard Says:

    How about uncoupling group insurance from taxes altogether?
    For that matter, uncoupling ALL insurance premiums from taxes altogether?

    Maybe “beneficiaries” would wake up to the real costs of health care when private sector stock dividends, insurance sales commissions, advertising dollars, and extravagant corporate compensation packages for staying and golden parachutes for leaving are all included in their health care bills.

    Non-medical expenses are not the same as medical expenses. Should I repeat that? No one seems to be hearing…

    And the millions funding political campaigns coming from lobbyists do not originate with lobbyists. Every dollar can be traces to someone’s insurance premium, which they foolishly imagines has something to do with their health.

    Here’s an excellent analysis from the American Enterprise Institute for someone to study.

    I would say AEI has respectable conservative credentials. I haven’t dig around at CATO but I bet someone over there would also find the idea of uncoupling insurance and taxes to be an attractive, If politically impossible idea.

    Until we get there, I have no problem with the resource-guzzling tax for rich people you mentioned. When I learned that a fourth of the nation’s assets were under the control of the top one percent of the population I quit worrying about hurting either their feelings or their revenue streams. (The really obscene part is that most of that group likely pay no income taxes anyway, with lifestyles supported by tax-exempt sources and trusts. I wouldn’t know. I’m a product of the great unwashed.)

    (Please excuse my thinly-veiled sarcasm. I’m still smarting over the latest Congressional Sausage product. It’s the fattest accumulation of quid pro quos of recent vintage.)

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