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.
Houston's Clear Thinkers
Longtime Houston attorney Tom Kirkendall's observations on developments in law, business, medicine, culture, sports, and other matters of general interest to the Houston business, professional, and academic communities.
Tom:
Does your comment apply to those of us who oppose Bush’s proposal who aren’t politicians… or are we also “ignorant about the issues involved or in the pocket of the large business interests”?
Do you really think the lack of a tax deduction on insurance premiums is what is keeping people from buying health insurance? People have many reasons for not buying health insurance, only one of which is the cost, and providing a bit of a subsidy isn’t going to make a noticeable dent in the number of those going without insurance. And since buying health insurance isn’t like buying a house in that there aren’t as many options to downsize one’s health insurance premiums, I think there’s a bigger likelihood that those without insurance will spend their new deduction elsewhere and continue to use free clinics and emergency rooms for their health care needs.
It seems like Bush is missing the forest for the trees. The ‘problem’ is not the cost of health insurance or that employers ‘pay’ for it or that such benefits are not taxable income. The problem, to the extent one exists, is the high cost of health care… and if Bush truly grasped the concept, he would do what he could do to make basic health care more affordable.
Steve, how can anyone fairly oppose a proposal that seeks to give equitable tax treatment to someone covered by an individual medical insurance policy and someone who is covered by an employer-based policy? You may be right that the number of uninsured will not be reduced measurably by this proposal, but what difference does that make? Are you suggesting that the people burdened by inequitable treatment of their medical insurance premiums are only justified for relief if a proposal addresses the separate issue of the uninsured?
And on the other separate issue you address — i.e., the supposed “high cost” of health care — how do you suggest that President Bush address that? Through government rationing?
Look, as with the HSA legislation, President Bush’s proposal to give individual medical insurance policies equal tax treatment with employer-based policies will not solve all problems in the American health care system, of which Medicare is the biggest. However, if enacted, the measure would encourage insurance markets to provide individual medical insurance policies (by making those policies more competitive economically with employer-based policies) and will encourage consumers to think rationally about the true cost of health care services and products. Those are meritorious goals.
As a political independent, it’s hard for me to understand how someone could oppose such a measure unless that person is attempting to protect the interests of big employer-based insurance providers who profit under the current system or has an ax to grind with President Bush politically.
I agree that there is no good reason to have a tax disadvantage for people who buy health insurance outside of their employment.
But I think this won’t end up making that big a difference, because the largest number of Americans will take the standard deduction. Unless this new one would be seperately included, it wouldn’t figure in to the tax bill of almost anyone making less than 45 or 50 thousand dollars per year.
OK, I definitely fit into the third category: those who dislike Bush.
That said, my problem with his proposal is that, while it ‘might’ be equitable to give a tax deduction to those who don’t have employers paying their premiums, he’s not presenting his proposal in that way… he actually thinks his proposal will accomplish something… when all it is is a sop to those who buy insurance on their own.
Do you really think insurance companies are going to start pricing individual policies as they do group policies? Without a large pool to spread the risk, insurance companies will charge the individual much more than they would if he were in a group.
As for my prescription for the high costs of health care, I’ve put up something here
Adam and Steve, it is exceedingly difficult to predict how markets will respond to a modification of tax policy such as Bush has proposed. The market for individual policies has grown over the past couple of years as a result of the HSA legislation, so there is precedent for a market adjustment in that direction. But who really knows until we give it a try?
However, if the result is no modification whatsoever in the market for individual health insurance, a more equitable tax treatment of health insurance is more likely to create an environment in which consumers start making cost-benefit decisions with regard to health care. That alone would validate the proposal and trigger change of a fundamental problem with the current system — that is, a large number of the insured are insulated from being forced to confront the true cost of their health care decisions.