Fear Not: Confronting the Controversial Issues (Part II)

24 Jul

Here’s the final part of the two-part series….

The New York Times has an excellent article out today that captures the public’s unease about health reform and Obama’s perceived failure to shoot from the hip with all of the details. It’s genuinely helpful to know what sorts of things are running through people’s minds. Paul Krugman has an op-ed that takes a more favorable view of Obama’s remarks from Wednesday night. Now, the third and final fear….

Fear #3 – Government Wants to Tax my Health Benefits
One of the ways that has been proposed to pay for health reform is to make some portion of health benefits taxable for the wealthiest Americans. Comments I received on this topic include:

Regressive taxation is not the same thing as a subsidy. Excluding premiums for employer-sponsored insurance from taxable income reduces the tax revenue the government collects, but does not give them authority on how to spend the extra cash. This argument sounds like the old “rich people only donate to charity for the tax break”. It’s emotionally charged and convincing at first, but the numbers don’t add up. Removing the insurance premium from a wealthy person’s taxable income might give them a tiny break ($400 off a $1000 premium in the 25% bracket), but since they are in a higher tax bracket they are, as you mentioned, already paying far more tax than a poor person. This “benefit” is minuscule by comparison. Furthermore, this exclusion is unlikely to encourage a wealthy person to pay for more coverage than they need, so it isn’t as though a wealthy person is going to carry more insurance just to get a bigger “break”. Spending $5000 to save $2000 just doesn’t make sense.

Facts: This one seems particularly widespread, and generates a lot of public outcry. The funny thing is, it would not likely affect you or most anyone you know personally. At least not in the way people fear. Quickly, how many families do you know, yours included, that earn at least $300,000 a year? How about $1 million a year? Well, those are the people that would see a portion of their health benefits become taxable.

I never equated regressive taxation with a subsidy. Those are two separate points. The subsidy point is simply that the government is helping to prop up the private employer-based health insurance market by foregoing hundreds of billions of dollars in tax revenue every year. I didn’t say it was a subsidy just that that’s the effect it has on things. Health economists everywhere agree on this point, whether or not they support it.

The other point, regressive taxation, works like this: There are six tax brackets in the U.S. ranging from a low of 10% to a high of 35%, which operate progressively (i.e., the higher your income, the higher your tax bracket—although the actual amount of your income paid in taxes is less than that as shown here).

For the sake of simplicity, I will use the 10%, 25%, and 33% brackets here, and salaries will be based on the median salary for that particular tax bracket. An average family health insurance plan runs about $11,000, so I will base my numbers around that, and use $15,000 for a more generous plan.In the first example, everyone has the exact same insurance coverage. In the second example, the wealthier individuals have coverage, while the less well-off individual has no coverage at all, because it was too expensive for their employer to offer.

Now, if we look at the “tax break as % of salary column,” in the first example, the numbers decrease as people get wealthier. That’s because the denominator (i.e., salary) goes up faster than the tax break. But, as we can see from the second example, this figure can be misleading. Here, an individual without coverage has the lowest “tax break as % of salary” (i.e., zero!).

But, back to the first example, what we see is that—if everyone has the exact same coverage in terms of plan cost—the actual dollar level of the tax break goes up with income. Now, the lower “tax break as % of salary” figure suggests that the wealthy may not take much notice of this benefit accruing to them, but as far as real dollars are concerned, the health care system as a whole certainly takes note.

This is precisely why it is suggested that a sizable portion of health reform could be paid for by taxing at least some portion of the wealthiest individuals’ health benefits. Would it not make sense for them to get the same tax break for the same insurance coverage as, say, the middle class get? Perhaps then we could use that revenue to avoid the situation in the second example where the person’s employer can’t afford to offer coverage.

On a lighter note, I did also receive some good questions, which I will work to find the answers to for a later post next week. They included:

  • Of the 47 million uninsured, how many are actually citizens?
  • How many can afford it but choose to remain uninsured?
  • And how many are turned away from care due to lack of coverage?

Don’t forget to check back later this afternoon for this weekend’s “Lazy Sundays” post.

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Posted by on July 24, 2009 in Uncategorized


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