With the President having proposed a new health care plan in his State of the Union Address, this might be an occasion to comment. The plan is to recognize employer-provided health insurance premiums as taxable income, while creating a standard deduction that everyone with health insurance can use. Because the deduction is limited to $7500 for individuals and $15,000 for families, the most expensive policies would lose their tax subsidy. Thus, this is a small step toward tilting the tax system away from insulation and toward real insurance.
The President’s policy is reasonable and centrist. If you had shown it to me six months ago, I could have not guessed whether it came from a Republican or a Democrat.
Daniel Pink, in the book Free Agent Nation, sees employer-provided health insurance as an anachronism. He is passionate on the issue of the unfairness of the tax code for workers who are outside the large organizational umbrella. He writes, “becoming a free agent means entering a sort of tax hell. You’re hit with double taxation. You’re not permitted to deduct much of your already towering health insurance premiums.”
Pink is no Republican—he worked in the Clinton White House as a speechwriter for Al Gore. Yet he recognizes that the current system is a “tax hell.”
Since the President’s plan was leaked, I have seen three complaints from the left.
- The tax break benefits the rich more than the poor.
- The tax break encourages people to leave employer-provided health plans and instead get health insurance on their own.
- The proposals encourage catastrophic health insurance rather than insulation.
In my view (2) and (3) are positive developments. I am curious whether Holt or Cohn finds them objectionable.
As for (1), I fail to see the cause for alarm. Consider the status quo. An economist on the faculty at Princeton who receives generous health benefits from the University is able to enjoy them tax-free. So can the professor’s secretary. But, as with all tax breaks, there is a vertical inequity—the professor derives more benefit from the tax break than does the secretary. But today there is a horizontal inequity as well. A self-employed economist and a self-employed secretary get no tax break for obtaining comprehensive health insurance.
Now, if the President’s proposal is enacted, the self-employed economist and the self-employed secretary will get a tax break. It is true that this introduces a new vertical inequity—the new tax break benefits the economist more than the secretary. But those who complain about this vertical inequity leave themselves open to the charge of being insincere. If they believe that vertical equity is more important than subsidizing health insurance, then why don’t they support getting rid of the tax break for employer-provided health insurance?
Personally, I could get behind eliminating the employer-provided health insurance tax break. But the President is dealing with political reality, and he is taking a different approach. I think it is a reasonable approach.
In the past, when Democrats have suggested centrist ideas, I have given them fair consideration. For example, I was supportive of the “catastrophic reinsurance” idea when it was floated by the Kerry campaign in 2004. My sense is that the hard left is going to dig in against the President’s proposals. Too bad for the millions of people for whom health insurance is more expensive simply because where they work falls outside the corporate umbrella.