Mo’ Money, Less Generous Health Insurance (But Lower Overall Costs and a More Equitable Distribution of Coverage)
The idea of taxing health insurance benefits entails a lot of complexity, but in a general sense it comes down to a pretty simple question. Do you think that John, who earns $80,000 a year and gets an insurance plan worth $8,000 should pay more taxes than Jim who earns $70,000 a year and gets an insurance plan worth $18,000? After all, John and Jim are both getting $88,000 worth of compensation so it seems like they should pay the same in taxes. But under the current system, Jim pays substantially less. This has the effect of encouraging the Johns of the world, and their employers, to switch compensation packages from John-style “high wages, modest health benefits” to Jim-style “lower wages, better health benefits.” In the Jim-o-verse, copayments are lower and you have more access to specialists. Then again, in the John-o-verse if you want to see a doctor you have more cash in your pocket with which to afford the copayments if that’s what you want to do.
On the face of it, this is a no-brainer. Having the tax code encourage Jim-style compensation packages rather than John-style packages is a big economic distortion. What’s more, by artificially subsidizing health care consumption by the relatively prosperous, it drives prices up for everyone, including the not-so-prosperous. And because it’s a tax-side subsidy, the subsidy does little-to-nothing for the poor.
So scrapping or curbing the subsidy makes sense in general. And it especially makes sense as a way of raising money to finance progressive policy like ensuring that health care is affordable for the poor and the lower-middle class. But there are a few problems with just scrapping it. One is that suddenly altering the status quo in this regard could be very disruptive to a lot of people. The other is that, as John McCain discovered, it sounds politically toxic. The answer to the first problem is pretty easy—you cap the tax subsidy in a way that leaves almost everyone unaffected in the short term but that phases the subsidy out over the long-term. The answer to the second problem is courtesy of John Kerry who suggested that we levy the tax not on the buyers of expensive insurance plans but on the sellers. The impact of this is basically the same (Ezra Klein notes the small difference) but since people don’t understand tax incidence it could be politically easier.*
The two major advantages of relying on this method of financing health care are that (1) it “bends the curve” by encouraging people to take more of their earnings in the form of money (which of course can be spent on health care but also on other things) rather than health care services, and (2) it lets you stay deficit-neutral over the long-haul. What the House has done, by contrast, is deficit-neutral inside the three-year window but not longer than that.
The big problem with Finance’s excise tax, I would say, is that it doesn’t actually raise enough money. Hence, Finance has subsidies that are stingy relative to what the House is proposing. What’s more, CBPP has a good analysis out support an excise tax but also calling for several modifications that would lead to the tax raising even less revenue in the short-term. The solution to this, I think, is to modify Finance’s proposal à la the CBPP and then also tack on a dose of the House’s surtax on the super-rich.** That way you could get House-style subsidy levels with Finance-style curve-bending and long-term fiscal sustainability.
* This would also arguably let the Obama administration claim not to be violating their unwise pledge to avoid raising any taxes on any individuals making less than $200,000.
** I think doing the itemized deductions thing is a better way of raising taxes on the rich, but congress seems to hate that.
31 Responses to “Mo’ Money, Less Generous Health Insurance (But Lower Overall Costs and a More Equitable Distribution of Coverage)”
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October 20th, 2009 at 3:29 pm
One of the big mistakes unions made in the past was to demand “benefits” rather than salary. So, you’d work for 10k less a year but you would be promised retiree healthcare and a pension when you retired. In reality, you hit 55, the company went bankrupt and you ended up with a PBGC pension and no healthcare.
Everything should be done to encourage people to take cash now rather than promises of things in the future.
October 20th, 2009 at 3:33 pm
I never see this discussed, but the exemption has the effect of raising the compensation of individuals in the public sector, such as teachers and firefighters, etc., all of whom tend to have very generous health care packages. I think there’s more public support for providing these generous benefits for these workers than there is for dramatically increasing their wages.
Eliminating the tax exemption might therefore have the effect of lowering real compensation for workers such as educators and policemen who are already relatively under-compensated.
This could have the effect of further increasing income inequality — most of the upper-middle-class professionals I know (lawyers, actuaries, etc.) actually have pretty mediocre health care plans. On the other hand, teachers in my state would almost certainly pay higher taxes because they have excellent health care benefits.
I seriously doubt teachers are included among “groups you think ought to be paying higher taxes.”
October 20th, 2009 at 3:35 pm
How do we know that, under the excise tax, employers will purchase a more affordable health package and then pass the savings to employees as wages. What’s to stop them keeping the money?
October 20th, 2009 at 3:55 pm
Zach- Basically the same thing that stops your employer from just plain slashing you wages. The potential that you’ll get angry and quit.
That’s not that much of a guarantee, but ultimately its the only guarantee you’ve got of anything at all with an at will employer.
October 20th, 2009 at 3:57 pm
The solution to this, I think, is to modify Finance’s proposal à la the CBPP and then also tack on a dose of the House’s surtax on the super-rich.**
Bingo.
How do we know that, under the excise tax, employers will purchase a more affordable health package and then pass the savings to employees as wages
They won’t pass on all savings as wages. Just some of it. And we know this from basic intuition. Employers who are profit-seekers are highly likely to at least spend some of the extra money on whatever they think will help them make more money. Like paying down debt. Upgrading equipment. Hiring better (and higher-billing) tax attorneys. Increasing the advertising budget. And yes, putting more money into payroll either to expand production or to chase/retain higher productivity workers.
October 20th, 2009 at 4:06 pm
Another group that could get screwed are workers in dangerous professions. As long as we’re ruling out charges based on preconditions, how about ruling out charges based on profession. Then, workers who do jobs that tend to result in chronic injuries that can’t be directly attributed to the workplace won’t get screwed by an excise tax.
October 20th, 2009 at 4:19 pm
Uncap FICA.
Tax capital gains as normal income.
Why isn’t this being sold?
October 20th, 2009 at 4:24 pm
Another group that could get screwed are workers in dangerous professions.
There are specific provisions in the bill that exclude workers in dangerous professions from the excise tax, for that exact reason.
October 20th, 2009 at 4:31 pm
Thats it. The added tax is whatever. They need to eliminate employer based healthcare all together. Mandate that current employers adjust incomes to the levels that they in fact are from those benefits, and tell everyone to buy insurance.
The job system acts as a net transfer of income from young healthy employees who bring down group rates (and are not likely to have, need, or use these benefits or at least purchase the cheap ones) to older unhealth people who bring it up (and likely have much larger saleries as well). These young need the money more anyway (as they are likely to be buying a first house, having children, and starting a life) and endure a much larger tax burden (unmarried, non-home owners with middle incomes have a large buden from the “pro-family” tax incentive schemes). This doesn’t hurt the finance industry tho, who has a great incentive to keep working wages rear loaded so everyone must finance when young.
Ensuring that the insurance product purchased is not difficult. Public plan with age only based premiums that provide basic necessities and access to normal preventative, day to day, emergent, and calamitous service. Require insurance companies to offer many choices and a “public plan like” plan (or specialized services) and operate everywhere to encourage competition. Guarantee to insurace companies that they will be compensated fairly for taking high risk patients, but require them to do so without discrimination (at least for the “minimum services”).
The fact is that insurance companies should not be making money based on care provided, but on ingenuity of products offered at a good value(caps, copays, prescriptions, preventative, suites at hospital, immediate service, newest technology/techniques.. there are many possible customizations that would entise customers) and a competative administration method. If the insurance company makes a loss from providing for a skewed pool, despite competative administration costs, then they get a guaranteed subsidy from the govt (the cost the govt program would have incurred – the costs incurred by insurance companies). If they are offering gold plated services, their premiums should cover this difference (over the large pool), so only “public plan” covered service is considered. They may take some losses, but will eventually be able to adjust their premiums and they have the capital to have these adjustment periods for a new product (just like any other company with a new product).
In exchange, consumers get coverage, higher wages (and more taxes), guarantees, and a fair market. The rest is taxes on unhealthy behavior, subsidies for the very poor and medicare, and rigorous investigation into the billing side from providers.
October 20th, 2009 at 4:33 pm
“The big problem with Finance’s excise tax, I would say, is that it doesn’t actually raise enough money…”
Hmm…maybe this is why:
FROM: http://www.huffingtonpost.com/robert-reich/lessons-from-letterman-in_b_325557.html
“…the White House promised Big Pharma, big insurance, and the American Medical Association the moral equivalent of what Joel Halderman allegedly demanded of David Letterman: hush money. The groups agreed to stay silent or even be supportive of healthcare reform, as long as they were paid off. ..
Big Pharma is on the road to getting its deal: not only 25 to 30 million more paying customers, but also a continued ban on Medicare using its bargaining clout to reduce drug prices, a bar on genetic drug manufacturers introducing similar biologic drugs until the originals have been on the market at least twelve years…
Big insurance is well on the way to getting what it wants: 25 to 30 million more paying customers (many of them young and healthy), a requirement that almost all businesses “pay or play,” and no competition from a public option….
Doctors (that is, the American Medical Association) are on the way to getting what they want: Instead of a temporary patch on scheduled decreases in Medicare reimbursements to them, a permanent fix that would change the reimbursement formula altogether and reward them $240 billion over the next ten years.”
—————————————-
Ha ha ha…
Enjoy Tauzincare bumpkins as Obama ra(h)ms the bill up your ass.. somebody has to pay for all the deals Obama cuts with The Important People. I fucking told you this was going to happen.
October 20th, 2009 at 4:54 pm
The other is that, as John McCain discovered, it sounds politically toxic.
Let’s remember this clearly:
The reason that is “politically toxic” is because the entire idea was demonized by the likes of Matthew and Ezra Klein (and Barack Obama). If Matthew and Ezra and Obama had been interested in the policy, they would have supported the essentials of the McCain Plan. But, instead, Matthew and Ezra and Obama consciously chose to support a plan that was worse for the country (but better for Democrats).
October 20th, 2009 at 5:02 pm
Shorter Matt. Again.
“This is how Obama can cover his ass and claim he’s not lying even as his nose grows bigger than his dick.”
October 20th, 2009 at 5:23 pm
The reason that is “politically toxic” is because the entire idea was demonized by the likes of Matthew and Ezra Klein (and Barack Obama).
Al is entirely correct. I think it’s astounding that Dems are talking about doing this after we ran so heavily against McCain during the ‘08 campaign for proposing the same thing (taxing healthcare benefits, that is).
This was a terrible idea when McCain proposed it and it is still a terrible idea. We should be taxing people based on their income or wealth. Adding a new tax bracket at $5 million is a better way to raise revenue and so is a surcharge on the wealthiest 1%–as is a tax on carbon for that matter. There is no reason that health care reform must be paid for with a tax on health care benefits.
I seriously doubt teachers are included among “groups you think ought to be paying higher taxes.”
This is actually kind of funny. Given Matt’s propensity toward teacher bashing, I wouldn’t doubt that he does think teachers are a group that should be paying higher taxes. Surely someone somewhere will can come up with an argument that higher taxes on teachers will somehow incentivize them to teaching excellence and clear out the dead wood or something like that.
October 20th, 2009 at 5:24 pm
@12 Please keep your sexual fantasies to yourself, ChooChoo.
October 20th, 2009 at 5:24 pm
Oh Al. You’re so cute.
Cuter still, though: actually remembering why the McCain plan sucked. Which is, of course, that removing the employer tax exemption was it. That was the whole goddamn plan. And again: if that’s the whole goddamn plan, the only result will be fewer insured people. It does nothing for cost control, does nothing to reduce the uninsured number, does nothing to expand access, does nothing to reduce rescission rates, etc., ad nauseum.
A change to the tax code does not in and of itself a sound policy make. It may be a piece of a good plan, but it was not one. It was, on its own, much, much, much, much worse than Obama’s plan.
October 20th, 2009 at 5:36 pm
So scrapping or curbing the subsidy makes sense in general.
You may be right, Opie. But Yglesias believed a year ago that imposing a tax by itself was bad, and he believes today that imposing that tax by itself is good.
And of course, McCain’s health plan would have used the revenue to pay for credits in the individual insurance market.
Clinton, also supported expanding taxes, again to pay for more coverage.
It was Obama who opposed the whole deal, and spent millions on ads against it.
October 20th, 2009 at 5:54 pm
You may be right, Opie. But Yglesias believed a year ago that imposing a tax by itself was bad, and he believes today that imposing that tax by itself is good.
No, he didn’t, and you don’t get to make stuff up. He, like myself and everyone else, hated McCain’s plan because it didn’t do anything. All it did was tax employer-based health care and give everyone a 5k tax credit. It didn’t remotely deal with any of the health care problems we have.
As for the ads, yeah, you could say they were a little misleading, but it’s impossible to get into a nuanced health care discussion in a commercial, and I’m giving him a little slack when the other side was calling him a terrorist sympathizer.
October 20th, 2009 at 6:25 pm
Here’s Yglesias a year ago.
As you say, McCain’s plan would have taxed employer-based health care. If you read the post, Yglesias now likes that idea, as did some Obama healthcare advisors.
McCain favored a refundable tax credit. Even people who don’t pay taxes collect from that.
October 20th, 2009 at 6:32 pm
Which is, of course, that removing the employer tax exemption was it. That was the whole goddamn plan.
This is, of course, completely false. Not that I expect any left-winger to be fair and accurate about health care.
October 20th, 2009 at 8:05 pm
The practice of shifting taxable wages into untaxed health insurance evolved under WWII tax laws where the top marginal rate was 90%. And it made perfect sense to do that when the taxes were that high.
So all that’s really needed is to restore the tax rates to WWII levels and everything else should balance out fine.
October 20th, 2009 at 10:03 pm
JMO – The unions did ask for higher wages and social insurance – see Walter Reuther’s 1948 “Open the Books” campaign with the Big Three. It was the employers, who viewed the “wage hike without price hike” as socialism, and universal health care as…also socialism, who offered them private h.c and pensions instead. See here.
Zach is quite right here as to the unions’ opposition to this. We are not in an abstract economic circumstance of full employment and prices and wages based on marginal returns – we’re in a 10% unemployment rate economy and there are millions of desperate replacements for anyone who wants to quit, where wage cuts are already happening, and where corporate profits, executive salaries, and capital gains as a proportion of the economy are at record or nigh-record levels.
You cannot, cannot, cannot assume that employers are simply going to pass on the savings. Ezra Klein, for example, thinks that the correlation between the advent of HMOs and rising wages in the 90s shows that this will happen – but he neglects the fact that the economic environment of the time was one of strong economic growth, low unemployment, and much more of a seller’s market for labor.
October 21st, 2009 at 12:18 am
The current tax structure is inequitable, yes, but taxing health care benefits is a tax targeted at the middle class. This is distinctly not the time to be adding extra tax burden to the middle class.
October 21st, 2009 at 12:38 am
I was against people slashing open my abdomen. Then, when I got an inflamed appendix about to burst, I was for it. The minor details of someone removing the appendix and sewing me back up are irrelevant. It is plain that I have no logical consistancy.
October 21st, 2009 at 12:44 am
McCain proposed a tax credit, which would quickly become insignificant compared to the additionally incurred tax burden. He also had the great idea of getting better medical care for less money. No details are given on how he’d make it happen, but he’s John McCain, he could just knock heads and get cranky about it.
October 21st, 2009 at 1:38 am
The simplest thing Matt and many Liberals want to forget is tax on rich should be used to address the general deficit and not Health Care Deficit. There, revenue must come from the system where growth rates tend to match.
Matt, Ezra and most of the Liberals – their blithe attitude towards Deficits is frustrating. Minimum One Trillion Dollars deficit for next 7 years – that is what Obama is projecting and we are still not serious enough for new sources needed to address this gap.
For every Paul Krugman who advocates Kenesian remedies of defecit funded government programs; there are large number of Nobel Laurets insisting on being mindful of Deficits here. You have Niall Fergusson who is predicting complete Sun Set on America. You have Jim Rogers totally bearish and so on. I am not saying they all are right.
However, what I do want to point is difficulty in ability of State to utilize borrowed funds efficiently to stimulate the Economy. Obama Stimulus package is showing clearly (for whatever reasons, political or economical); how difficult it is to for the Government to kick start American style Capitalist system. In that case, why do we keep on piling on that State with total disregard to deficits?
House is stupid to talk about tax on rich to fund health care. Matt is being equally careless and intellectually lazy to simply accept that in any form. House suggestion has to be rejected entirely.
October 21st, 2009 at 3:53 am
Yeah, just want to agree with the above that MattY called out Doug Holtz-Eakin for trying to play this semantic game last year in this post http://yglesias.thinkprogress.org/archives/2008/08/mccains_health_care_tax_hike.php
But now apparently is perfectly fine with it.
October 21st, 2009 at 9:18 am
Re: We are not in an abstract economic circumstance of full employment and prices and wages based on marginal returns – we’re in a 10% unemployment rate economy
True, but that will not last forever. By the time healthcare reform kicks in (2013), the late unpleasantness should be well behind us.
October 21st, 2009 at 10:24 am
Anyone advocating Keynsian remedies should be advocating Keynsian surplusses shortly after the recession is over. That would mean higher taxes on the wealthy and elimination of stimulus spending. What it wouldn’t affect are policies based on what should be done by government regardless of good times or bad. Health care reform has nothing to do with Keynsian beliefs.
October 21st, 2009 at 10:30 am
\
That’s nonsense. Matt came out against DHE’s semantic cowardice. Matt comes right out and calls it a tax.
October 21st, 2009 at 1:00 pm
[...] lieu of another boring post about health insurance excise taxes let’s talk raw politics. At the moment, there are two big disagreements between the moderates [...]
October 21st, 2009 at 11:18 pm
I see it as while it encourages people spend on healthcare rather than other things…
…The consumers don’t really have much control over that spending, no matter whether it is taxed or not.
So this tax won’t really impact the costs of healthcare, and only hurt those who are pushed into the upper edges of spending on it.