McCain’s Health Care Tax Hike
One issue that hasn’t gotten nearly the widespread attention it deserves is that in the context of John McCain’s overall policy for steep tax cuts for high-income Americans he’s also proposing a very significant tax increase on the broad group of people who receive health insurance through their employers. Specifically, at the moment compensation you receive from your employer in the form of money is subject to income tax, but compensation you receive from your employer in the form of employer contributions to health insurance premiums is not taxed. McCain proposes to change this and start subjecting those benefits to taxation. Some people, obviously, don’t have employer provided health insurance in which case this won’t make any difference to them. But for those of us who do get insurance through work, this is a very big increase.
Doug Holtz-Eakin, writing for the McCain campaign disputes the characterization of this policy as a tax increase, arguing instead that it “is a transformation of the tradition of a tax subsidy to private insurance to make sure that subsidy is fair, both in the sense that it is available to every American regardless of the source of their private insurance and that every person gets the same amount — $5,000 for a family, $2,500 for an individual.” James Kvaal counters that McCain’s plan “would tax workers’ health benefits, which are largely tax-free today,” thus increasing the amount of tax people need to pay, which is a tax increase in any common sense understanding of the term. More important, though, is the fact that the new somewhat counterbalancing subsidy McCain is proposing won’t make up the difference over the long run:
Second, the value of McCain’s credit will erode quickly. While health care premiums are expected to grow by 7 percent a year, McCain’s credit will increase by only about 2 percent a year. In contrast, current tax benefits keep up with rising premiums.
You can read more here (PDF) but I would note that one thing we’re seeing here is the basic fatuousness of the conservative monomania about low taxes. What Holtz-Eakin is really trying to get at here is that Holtz-Eakin thinks McCain’s proposal is a good proposal that will treat people more fairly. This is debatable and goes to the issue of whether or not it makes sense to reduce the overall scope of public subsidy for health insurance at a time of rising health care costs in order to clear budgetary space for high-income tax cuts. But pretty clearly what’s proposed here is a tax increase. Which in a sane world, conservatives would be prepared to admit. But since they’ve spent the past 30 years trying to convince people that any hint of tax increase for any purpose is the purest evil they’re now stuck in a rhetorical trap of their own devising.
68 Responses to “McCain’s Health Care Tax Hike”
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August 15th, 2008 at 12:24 pm
you can’t get caught in a rhetorical trap if nobody is going to call you on it.
August 15th, 2008 at 12:29 pm
While this is absolutely a tax increase, I don’t think an honest liberal can criticize the basic premise behind it, which is that people whose employers do not offer health care and therefore must buy health insurance themselves ought not be put in a worse tax position than people whose employers do pay for their health insurance. Obviously, the best solution is for there to be universal health care, which would eliminate the need for employer sponsored health care entirely.
August 15th, 2008 at 12:41 pm
That makes me smile.
Of course, the better outcome would be for people to stop the “candidate X wants to raise your taxes!” bullshit but it’s probably more likely that any hint of tax increase will, indeed, be avoided as a policy proposal.
August 15th, 2008 at 12:50 pm
McCain wants to tax your health insurance so he can afford more tax cuts for the rich. Succinct. I like it.
August 15th, 2008 at 12:54 pm
Seth, this should absolutely be criticized along the terms suggested. (”Raise your taxes to cut taxes for the rich.”)
If McCain wanted to do what you suggest, he could just offer a tax subsidy to “people whose employers do not offer health care and therefore must buy health insurance themselves,” not try to pass on more health care costs to the average person.
August 15th, 2008 at 12:57 pm
McCain wants to raise your taxes on health insurance should be the entire rest of the Obama ad campaign since, well, McCain does, and voters will HATE that idea.
August 15th, 2008 at 1:02 pm
Seth raises a good point here. As a contractor, I have to buy my own insurance. But I don’t buy it. Until the day comes when my pre-existing conditions aren’t a barrier to coverage, I will cover myself. And that day will obviously come after my death. If someone wants my vote, give me a tax credit for self-insuring, or make the insurance companies provide coverage in exchange for the premiums I would pay.
August 15th, 2008 at 1:33 pm
Of course an honest liberal can criticize it even without leaning on universal healthcare. (As a small business owner, this is an issue near and dear to my heart.) There are two obvious responses to the disparity you point out:
1. Create a tax exemption for the self-employed that is similar to the one already in place for the traditionally employed (with some commonsense limits and protections to prevent tax fraud.)
2. Screw us all over, by creating a single crappy exemption that will substantially increase everyone’s tax bill.
A quick web search shows that the average family insurance bill is around 11,480 (employer + employee contribution). That’s a heck of a lot more than the exemption McCain proposes. Plus as Matt points out, it’s crazy that the McCain exemption isn’t tied to premium increases.
Maybe the designers started with some good intentions, but there’s simply no way anyone could put together a package like this and /not/ know that they were going to substantially increase most people’s tax burden. And if someone is proposing this with full knowledge, the question is: why? Who in their right mind thinks that in 2008 the working middle class needs an increase in their tax burden, combined with a powerful incentive to reduce health care coverage?
It’s either crazy or malicious.
August 15th, 2008 at 1:41 pm
at the end of this campaign, assuming mccain doesn’t win, holtz-eakin will emerge with his reputation as an economist unscathed, just as greg mankiw has. the guild protects its own.
August 15th, 2008 at 2:17 pm
I don’t think an honest liberal can criticize the basic premise behind it, which is that people whose employers do not offer health care and therefore must buy health insurance themselves ought not be put in a worse tax position than people whose employers do pay for their health insurance.
Oh, bullshit. It’s not a zero sum game. If A gets a tax break for health insurance and I (as an independent contractor) don’t, it doesn’t help me in the slightest to take away A’s tax break.
What I want from health insurance policy is something that makes it easier for me to bear the costs of health care, not something that makes things more difficult for other people.
Christ, Seth–there are hungry people in Africa–maybe the government should take away your food, just to be fair.
August 15th, 2008 at 2:20 pm
This is a terrible idea. Offering exemptions to those who buy it out-of-pocket is a much, much better idea.
Let’s say somebody makes $20,000 a year, but gets health insurance (a union clerk or food stocker). Chances are, this person is already able to write off enough expenses to pay very little in taxes. Adding another $5000 exemption will do almost nothing for this person’s tax return, whereas taxing health insurance would increase its immediate cost by 30%. That’ll cause the worker to drop the plan.
Then we have even fewer people covered, which increases unpaid medical bills–increasing the cost of ALL medical bills and thus increasing the premiums on insurance.
BUT you HAVE made it easier for rich people to commit tax fraud.
August 15th, 2008 at 2:31 pm
A few responses to my critics:
As for the proposal to simply subsidize people whose employers do not offer coverage, this seems very similar to McCain’s actual proposal. The only difference is that he proposes subsidizing everyone equally, rather than givng some people (whose employers spend more on their health insurance) greater subsidies. His position has appeal as a matter of fairness.
The better objection to McCain’s proposal seems to be that he is simultaneously lowering taxes on the wealthy and therefore transferring wealth from a subset of the working poor to the wealthy. I agree that calling McCain a hypocrite is effective.
However, I question whether the benefit of the health care benfit exemption really goes primarily to the working poor. Generally, my sense is that the richer and more sophisticated the profession, the better and more expensive the health care plan. I am willing to bet that hedge fund managers have more expensive health care plans than Walmart employees. If McCain limits their tax exemptions while subsidizing the self-insured, I am not sure why I should throw a fit about it.
Taking the average health care spending of all families doesn’t actually address the distribution of health care insurance spending, which I am willing to bet is slanted heavily towards the wealthy.
Lastly, as a matter of economic policy, it is insane to continually subsidize health care spending without any limits. This leads to over-consumption of health care and run away inflation. If we do not eliminate the health care exemption, then the amount of money spent on health care will continue to grow as will the profits of the insurance companies.
Like I said, a much better solution to all of this is to have universal healthcare. But as Republican proposals go, this is hardly the sham it is being made out to be.
August 15th, 2008 at 2:33 pm
And the $20,000 a year union clerk is not likely to be paying a 30% marginal tax rate on his health insurance benefits, even under the McCain plan.
August 15th, 2008 at 2:53 pm
If McCain limits their tax exemptions while subsidizing the self-insured, I am not sure why I should throw a fit about it.
Because you’re full of shit? Just a thought…
August 15th, 2008 at 3:01 pm
Seth, that loon, sees the problem with health care as being that we use too much of it, thus raising its cost. Oh, if only more Americans had the fortitude to die of untreated diseases, the country would be a better place!
August 15th, 2008 at 3:05 pm
The self-employed are already able to deduct some — I do not remember the % off the top of my head — of their health insurance premiums on their taxes. So the tax treatment between those who get their health insurance at work and those who pay for themselves is not as clear cut as the above comments assume.
August 15th, 2008 at 3:22 pm
His position begins by appealing to basic fairness, then proceeds to suggest an exemption that is so low it has the potential to inflict a lot of financial hardship. Using basic fairness to “sell” a plan that screws people is not commendable. (Plus, it’s not even that clever a plan. If it ever comes close to passing Congress, expect a huge backlash.)
Good point. Perhaps there should be a limit on these exemptions. However, I think that this limit should be set well over the average health insurance premium. That prevents abuse, while ensuring that most Americans are covered. As I said above, the average yearly premium is far, far higher than McCain’s proposed exemption (and is increasing far more quickly than the rate he proposes to adjust it at.)
If the exemption were 150% higher and adjusted to the average rate of premium increases, it wouldn’t be a sham. At the proposed rates it represents a huge burden on the middle class and discourages people from buying sufficient health insurance. Which will have predictable consequences for both individual health and Federal spending.
August 15th, 2008 at 3:33 pm
Aside from being a de facto tax increase on the middle class, the truly insane thing about McCain’s proposal is how pathetic the credit is. $5000 for a family?! I am self-employed and currently pay over $17,000 per year for a crappy straight-HMO family plan — and I just got a notice that my premiums are increasing by more than 20% as of October 1.
August 15th, 2008 at 3:44 pm
“Oh, bullshit. It’s not a zero sum game. If A gets a tax break for health insurance and I (as an independent contractor) don’t, it doesn’t help me in the slightest to take away A’s tax break.”
Actually, um, yes it does.
In tax-holistic terms, that tax break “comes from” somewhere (it seems odd to say a break or exemption “comes from” somewhere, but in the grand equation, it has to). For instance, if Joe Corporate-Emp is getting a $5000 tax break on his insurance, that means that $5000 less is going to the general fund, which means that everyone needs to take on that cost.
This is identical in mechanism to tax breaks for the rich. You could just as easily, and just as wrongly, say that giving Bill Gates a tax break on his Microsoft earnings doesn’t cost any sweat on my brow. But it does, because him contributing less tax to the general fund means that either programs need to be cut or I have to pay more for the existing programs. The effective cost of every single federally-funded program goes up.
The Republican claim on health care is absolutely that it keeps rising in cost because the costs are hidden from the cost generators (that’s you and I, in Republospeak). It’s a relatively sound economic principle, and as an idea it should be debated. It’s the real idea behind (1) making health care deductions a flat credit instead of a rate reduction, and (2) pushing people into catastrophic-coverage-only plans rather than wellness plans.
The problem here is that there’s no debate on the economic principles here, just typical political subterfuge, hiding taxes away and calling up down. The dishonesty is the problem.
All that having been said, this is also a trap. If we accept (which isn’t a good thing to do for more than a moment) that Obama will win in November, the Republican goal is to have a hamstrung President Obama. Gaining clear rhetorical advantage over him now is key to that. If Obama vilifies McCain for proposing a tax increase, then the next four years we’ll get that soundbite playing on every proposal which might be seen as increasing someone’s taxes somewhere. On the other hand, if he attacks the dishonesty of McCain’s pandering, and talks about the underlying issues instead, he both wins the current debate AND is not hamstrung for the next four years.
The Republican establishment is not fighting, today, for a McCain presidency. They by and large don’t see that as much of an improvement over an Obama presidency. What they are fighting for is a neutering of Obama before he takes office, a self-defeat of liberal principles. That’s the fight we need to keep our eyes on and counter (while, obviously, not losing to McCain in November either).
August 15th, 2008 at 3:54 pm
Exactly. My guess is that if you look through the details of McCain’s budget plan, you’ll find that this thing accounts for some huge new chunk of Federal revenue that slightly offsets the enormous cost of his tax cuts for the wealthy.
In reality, the plan will never pass Congress, particularly a Democratic one. Try explaining to your working constituents that you’re going to increase their taxable income by $5k to $8k — because they were stupid enough to buy decent health insurance for their families! — and see how that flies during your re-election campaign.
McCain knows this, and he doesn’t care. His campaign budget proposals aren’t really supposed to mean anything past November.
August 15th, 2008 at 4:28 pm
McCain simply wants health insurance to go abck to the free market, as it was before WWII. I would prefer private insurance, but since my employer gets a tax break, it would be silly for me. Kill that tax break, employers no longer have an incentive to provide health insurance, then we all go private, the free market kicks in, competition rises, we all win.
The way it is now sucks. I’m single, so I get substantially less compensation than coworkers making the same salary that have kids. It’s a ridiculous system.
August 15th, 2008 at 5:14 pm
The way it is now sucks. I’m single, so I get substantially less compensation than coworkers making the same salary that have kids.
You call yourself “Ben,” but you’re really Peter Pan, right? Never gonna grow up, have kids, get old or sick . . .
August 15th, 2008 at 5:28 pm
McCain knows this, and he doesn’t care. His campaign budget proposals aren’t really supposed to mean anything past November.
I’m pretty sure McCain doesn’t know shit. He’s an old man and the only thing he’s really aware of at this point is his desire to shit on the rest of the world to prove how tough he is. His campaign, of course, is just trying to get elected by cooking the financials in whatever way they can, while reassuring the ownership class they have their backs.
August 15th, 2008 at 6:10 pm
Apparently Rea thinks I am a “loon” for daring to think that the United States spends too much money on health care. Apparently the only options are to die of an untreated disease or to spend upwards of 20% of our GDP on healthcare, while obtaining significantly worse health results than many other developed countries.
I always thought it was the crazy Republicans who defended our broken and corrupt health care system, but I guess it is crazy liberals to.
August 15th, 2008 at 6:26 pm
Spencer, it’s about %30-35 of premiums that can be deducted for the self-insured. BUT, when I added everything up it still didn’t exceed the standard deduction, so bumpkus.
August 15th, 2008 at 6:50 pm
McCain barely has a health care plan, so who can honestly be shocked by this lack of honesty in regards to them actually PAYING for their “health care plan.”
The Iowa Democratic Party released a video that is funny as shit attacking McCain and at the same time attacking his dopey health care plan.
best quote of the video: “Shaq Challenged ME!”
http://www.mccainvsiowa.com
August 15th, 2008 at 6:54 pm
The Obama campaign should say that McCain wants to increase taxes for families making $20,000 a year — it’s far more accurate than the McCain campaign’s assertion that Obama voted to increase taxes on people making $42,000.
August 15th, 2008 at 7:08 pm
>It’s a relatively sound economic principle,
Not when applied to healthcare, when the “cost generators” are viruses, genetic diseases, and the roller skate your daughter left on the walkway that you didn’t see.
They don’t care about yours, or anybody’s economic theories.
Otherwise basically a good post. But if you are really a liberal, then I gotta tell you that we must never, ever, let BS “Economics 101″ rear its head in this discussion beyond:
1) Healthy people are productive people
2) People who are not worried about healthcare can much more easily unleash their enterprenurial nature.
And that’s it. We pay for this out of the general productivity of this healthier society, that is, by taxes.
And we adminster it thru the provences of medical science.
The economists can just go eff themselves. Their so-called science has absolutely no business here, you might as well hire an architect to write music.
August 15th, 2008 at 8:34 pm
Is John McCain in the pocket of oil companies?
Is John McCain in the pocket of insurance companies?
Is john McCain in the pocket of pharmaceutical companies?
What countries is john McCain in the pocket of?
Here is a list of lobbyists and employees of major companies working in major positions in the McCain campaign.
It will answer any questions you might have about the people who are advising and influencing him.
http://mccainsource.com/corruption?id=0006
August 15th, 2008 at 8:55 pm
Attacking employer-provided healthcare insurance is monumentally stupid, although economists are sure to love it since it fits their ideological prejudices.
–The “tax credit” ploy is worthless (even if the tax credit were high enough to offset the actual premiums that most people pay) because people would have to itemize deductions in order to claim it. As most people don’t itemize, they won’t get the credit, so it effectively increases taxes.
–Most companies have HR departments or hire consultants that analyze and compare health insurance plans. They also arrange meetings for employees to learn about the plans and benefits. Individual employees cannot afford to hire such analysis and most certainly won’t spend the needed 20 to 25 hours comparing plans. The individual employees also won’t have the experience to recognize the various games by the insurers. Eliminating economies of scale and consumer expertise is idiotic.
–Given the difficulties in getting employees to sign up for 401(k) plans when the employer is making a match — hell, even Direct Deposit rates are under 50% — I seriously doubt that even 40% of employees will independently obtain health insurance.
–Efficiency is reduced again because the insurer has to dun each employee for premiums rather than just the employer. Healthcare premiums are also handled through payroll processing systems (ADP, etc.) that most employers hire.
–Of course, even my 50-employee company has far more bargaining power with insurers than I have alone.
How can eliminating efficiency and consumer knowledge be offset by a few people choosing less expensive insurance plans ?
August 15th, 2008 at 9:01 pm
The “McCain Health Care Plan,” if we can call it that, isn’t a serious proposal and probably won’t even be mentioned after the November election, save for a brief appearance during McCain’s state of the union address, after which it will be conveniently forgotten. No way in hell will a Democratic congress pass a health care “reform” that raises taxes on your average worker by (as another commenter accurately noted)somewhere between 5 and 8k per year. It would be political suicide. The current system isn’t in bad enough shape for people to embrace such a radical reform. Most workers still have health insurance and most of the people who don’t have insurance aren’t voting. Besides, a McCain presidency will be focused on Iraq, Iran, and Russia. It will be a foreign policy presidency; domestic issues will be pushed to the side. Health care reform will have to wait for 2012, when HRC will be making her Nixonian comeback.
August 15th, 2008 at 9:46 pm
Re: but compensation you receive from your employer in the form of employer contributions to health insurance premiums is not taxed.
Sometimes it is. If you insure a domestic partner rather than a spouse you pay income tax and even FICA taxes on the whole amount of the partner’s premium.
Re: The self-employed are already able to deduct some — I do not remember the % off the top of my head — of their health insurance premiums on their taxes.
It’s 100% (though it used to be less), but you have to actually be self-employed. People who have to buy health insurance because their employer doesn’t provide it get no tax break at all.
August 16th, 2008 at 9:24 am
What cleek said.
Also, I agree with the statements that this “plan” is not meant to have any life past November.
More immediately, though, I think everyone (especially the media) should subject this proposal to the “Clinton Test.” If Bill or Hillary Clinton had come up with this proposal, wouldn’t the right wing be calling it a tax increase?
August 16th, 2008 at 1:57 pm
To all you folks in favor of raising taxes, especially on all the rich; ie. that includes small business owners who employ local people:
“If it is logical to tax cigarettes to discourage smoking, what is the logic in taxing income?”
August 16th, 2008 at 5:49 pm
Re: To all you folks in favor of raising taxes, especially on all the rich; ie. that includes small business owners who employ local people:
Most small business owners do not qualify as rich. At best they are upper middle class, many are not even that well off.
Re: “If it is logical to tax cigarettes to discourage smoking, what is the logic in taxing income?”
Cigarettes you can do without. Income you can’t. And because money is so desirable (besides being necessary) people will always work hard to get more of it.
August 18th, 2008 at 12:18 pm
You are defending the current arrangement, which is entirely regressive. Why should someone with an AGI of $100K to $200K get a $4,504 tax deal for employer provided health care, vs. only $2,502 for someone who’s AGI is $30K to $50K ? Holtz-Eakin’s idea is to flatten this out so that lower income folks can more easily afford health insurance. It’s revenue neutral. Every policy wonk knows that the current tax deal is the heart of the problem, so let’s undo it. Obama will be forced to consider this – see recent hearings by Baucus and star witniss Edward Keinbard.
August 18th, 2008 at 12:25 pm
One other thought: your thinking is TWISTED. The irony is that the Republicans in this case are working on behalf of the little guy (taking away from the rich) as you apparently advocate. Wealth redistribution not something I’m a fan of, but want to point out you are completely upside down here. Perhaps because it’s coming from Republicans and you can’t see straight?
August 22nd, 2008 at 9:18 am
Yes, it is a tax increase, but the point everyone is missing is that the $2,500 or $5,000 for a family is not in the form of an exemption. That money, according to McCain’s Website, will be sent directly to the insurance company, or if you should be so lucky as to find an insurer for less that the $2,500 or $5,000 (Yeah, Right!), then that money will be placed in a medical account for you.
So, your taxes will increase as you get the medical benefit your employer pays is counted as income for you, yet the subsidized payment goes directly to the insurance company. Whose premium is reduced? Yours? Your employers? The insurance company simply raises rates to cover the money from the government?
I think it’s scary to think that the money goes directly to a large coporation (i.e. the insurance company), depending upon that company’s integrity to reduce my premium.
August 28th, 2008 at 5:56 pm
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September 3rd, 2008 at 3:03 pm
We bought in the private market before I took a soul-killing job with insurance. It cost us $24,000 a year for the family, one kid and no major illnesses for anyone. That is almost 40,000 pretax dollars a year.
So, thanks for the $5000 but it really won’t cut it.
September 9th, 2008 at 1:29 pm
If the Democrats are “Tax and Spend”, what do you call the Republicans ?
TAX AND HIDE
September 14th, 2008 at 10:37 am
When McCain starts talking about also doing this for ALL federal employees, then I pay attention. Let him start advocating taking away federal employee health insurance and replacing it with $5000. Himself included.
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