Why Health Care Isn't Fair

Bush's health insurance plan would eliminate a pernicious tax preference.

You may be wondering how President Bush's health insurance plan would affect you, the taxpayer. The answer depends on whether you have medical coverage, where you get it, and how much it costs.

My family, for example, gets health insurance through my wife's employer, and it costs­...actually, I have no idea what it costs. That's one of the problems Bush wants to address by eliminating the tax code's bias in favor of employer-provided medical coverage, which distorts the insurance market, promotes insecurity, and raises health care costs.

This bias was created more or less by accident. During World War II, businesses competing to attract scarce workers got around wage and price controls by offering health insurance instead of higher pay. In 1943 the Internal Revenue Service decided not to count this increasingly popular fringe benefit as taxable income, a policy codified by Congress in 1954.

In effect, notes John Goodman, president of the National Center for Policy Analysis, someone in the 25 percent income tax bracket may receive a subsidy of close to 50 percent for employer-provided medical coverage, once you consider state income taxes and the 15.3 percent payroll tax that funds Social Security and Medicare. If he buys insurance on his own, he typically gets no tax break at all.

The upshot is that most Americans get medical coverage through their employers, which is a strange situation when you think about it. People do not, as a rule, expect their employers to pay for their car insurance, their life insurance, or their homeowner's insurance. Why should employers pay for their health insurance?

In a system based on employer-provided insurance, people lose their medical coverage when they lose their jobs, a problem that becomes increasingly serious as they get older and sicker. At the same time, the seemingly free coverage makes health care more expensive for everyone.

Not only are you unlikely to know or care how much your employer spends on health insurance, but the coverage may be more generous than you would choose on your own, which means you are unlikely to know or care how much particular services cost. If you were using your own money to buy insurance, you might opt for a cheaper policy with a higher deductible, in which case you would be more conscious of things like the fee for an office visit or the difference in price between name-brand and generic drugs. Indifference to such considerations contributes to escalating health care costs.

Bush's solution to these problems is straightforward. He would reverse the policy of excluding health insurance from taxable income. To avoid an overall tax increase, he would give taxpayers with health insurance a standard deduction of $7,500 for individuals and $15,000 for families.

The White House estimates that 80 percent of taxpayers who get health insurance through their employers would receive tax cuts as a result of these changes because their coverage costs less than the deduction. (The average cost of employer-sponsored medical coverage last year was about $4,200 for individuals and $11,500 for families.) The other 20 percent would pay higher taxes, which might encourage them to seek less generous coverage and get more of their compensation in cash.

Everyone who buys his own health insurance would pay lower taxes under Bush's plan. Some people who currently cannot afford coverage might be able to swing it as a result of the tax break, which (in the example favored by the Bush administration) would amount to $4,500 for a family of four earning $60,000.

The complaint that changing the tax treatment of health insurance would encourage employers to stop providing it misses the point: If employers are offering medical coverage instead of extra pay purely for tax reasons, they should stop. Eliminating the pernicious preference for employer-provided insurance would promote a greater diversity of options and help people choose the coverage that makes the most sense for them.

© Copyright 2006 by Creators Syndicate Inc.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement