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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