The Bush Administration announced over the weekend that President Bush will propose a common sense reform of the health care finance system during his upcoming State of the Union Address — extension of the tax deductibility of health coverage to everyone who acquires it outside of the workplace.
As has been noted many times in this blog, the federal government doesn’t currently tax employer-provided health insurance benefits but gives no tax breaks to most consumers who buy medical insurance outside the workplace. President Bush will propose to make it easier for consumers who do not have employer-provided health insurance to buy coverage on their own by making the tax incentive for doing similar so simlar to that of homeowners who deduct interest payments on their mortgages. The Bush Administration’s plan would also set a cap on the amount of employer-based health care benefit that an employee could receive tax-free.
The Bush Adminstration proposal is particularly sound because it addresses the mindset that has developed over the past couple of generations of Americans who are conditioned to employer-based health insurance — that is, that health care benefits are some sort of obligation from employers with regard to which employees have little incentive to care much about cost. The Bush plan treats employer-based insurance as compensation (which it is — such insurance arose as a loophole to get around wage and price controls during WWII), which provides a much sounder basis for assessment of the value of employer-based insurance. In so doing, it addresses the problem of medical “insulation” policies that Arnold Kling and others recently addressed over at Cato Unbound (see here and here).
By the way, this proposal addresses one of the issues that is a wonderful litmus test for political candidates. Although a politician could argue that removing the tax deductibility of all medical insurance makes even more sense than President Bush’s proposal, no reasonable argument can be made to support the current disparate tax treatment of employer-based versus individual policies. The Administration’s proposal is actually much more progressive than the current state of affairs because the wealthier employees currently benefit the most from not having to declare the value of their employer-based insurance as income.
Thus, if a politician opposes the Bush Administration’s proposal, then that politician is probably either ignorant about the issues involved or in the pocket of the large business interests that profit from the current employer-based insurance system. That’s a pretty clear indication that such a person should not be in a position of deciding one of the most important economic and social issues facing American society today.
A first-rate health care finance proposal
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