Houston's Clear Thinkers

Economic ripples from the tax subsidy for employer-based health insurance

Following on prior posts a here, this NY Times article addresses the unhealthy economic effect of the favored tax treatment of employer-based health insurance. As opposed to individual health insurance policies, employer-based health insurance is a tax deductible expense of the employer and employees are not required to report the economic benefit of that policy as taxable income on their individual returns. The amount of the subsidy (in foregone tax collections) is about $150 billion and is expected to increase to $180 billion by 2010. As Harvard economist David Cutler notes: "If you had $150 billion to play with, you could come very close to universal coverage."

Nevertheless, making employed taxpayers pay income tax on the value of their employer-based health insurance would be enormously unpopular politically, and the Times article reports that MIT economist Jonathan Gruber sees other problems as well:

As soon as the tax break was eliminated, company-provided health insurance would be likely to disappear, too. So some mechanism would be needed to pool groups of people and to avoid leaving higher-risk people to face enormous insurance costs. Such a mechanism would probably make health insurance affordable for all. And to make it universal, a mandate would be needed to make people buy it.

This isn't communism. The changes could happen under a public health care system or one that is privately run.

Despite the knotty political problems involved in ending the tax subsidy for employer-based health insurance, the article notes the clear benefits from doing so:

[T]he fiscal incentive isn't helping many of the people who need it most. A report by the Kaiser Family Foundation says two-thirds of the 45.5 million Americans who lacked health insurance in 2004 earned less than twice what the federal government defines as poverty. (For a family of four, the poverty line is about $19,300.) In four of every five cases, the uninsured made less than three times the poverty level.

In addition to going to the wrong people, the subsidy as designed promotes wasteful medical spending, encouraging the wealthy to buy more insurance and to use more health services than they need, according to the president's tax panel. And it may bolster premiums across the board.

Altogether, the health insurance tax break exacerbates America's medical dystopia: while the nation has the highest per-capita spending on health in the world - about $5,400 in 2002 - 18 percent of the population under 65 remains uninsured.