A couple of days ago, Max Baucus dumped a bombshell into the lap of the uneasy coalition that's formed to create health care reform:
Sen. Max Baucus says he'd prefer funding health care reform by taxing people's health benefits rather than phasing out tax deductions on the richest Americans....Currently, the portion of health benefits that are covered by a person's employer is tax-free income. Baucus said last week that taxing those benefits should be considered. That way, health care reform would be funded with health care dollars.
Baucus says taxing health benefits wouldn't necessarily be harmful to lower- and middle-class Americans.
President Obama is proposing to phase out income tax deductions for people making more than $250,000 a year. Baucus has told Obama he doesn't like that idea.
According to a Reuters report, "critics say the tax break encourages workers to seek a more generous benefit package than they might want if it was taxed." That is, by instituting a tax on benefits, workers would seek cheaper, less comprehensive health care.
Frankly, that's the same old "moral hazard" rationale that got us into this health care mess in the first place. Malcolm Gladwell eviscerated this argument years ago; the "moral hazard" rationale is responsible for the Byzantine paperwork that has driven up administrative costs for health care, and has encouraged people to avoid routine checkups or treating minor illnesses and injuries -- which leads to more emergency care and higher treatment costs later. Basically we should be encouraging people to have good and comprehensive health care. Healthy people are less of a burden to the system; illnesses and injuries treated early reduce long-term treatment costs. Comprehensive health care for all saves money in the long run.
Taxing all health benefits is also regressive tax policy. That is, it affects middle-income families and small businesses disproportionately. It's also the same policy that John McCain was slammed for by Obama during the election. And to be honest, Obama's proposal -- phasing out health care benefits for those making over $250K -- isn't all that hot, either. We should be encouraging people to have health care, not punishing them for it.
But let's face facts. Health care reform will cost money. So...how do we go about raising the funds needed? |
Personally, I think rather than rolling back deductions, we need tax reform. Freakenonmics blogger Daniel Hamermesh argues that phasing out deductions is a poor strategy: it hog-tie the incentives to, say, donate to charities. Hamermesh:
What to do? Be honest: instead of the proposed top marginal tax rate, go to 42 percent; and perhaps kick in the top bracket a little earlier.
In short, don't phase out deductions or exemptions, just put in slightly higher rates that impose the same tax burden and avoid the price effects on these presumably desirable activities. Conservatives will surely argue that this will reduce incentives to work.
Give me a break: Nearly all the labor economics evidence suggests that labor supply elasticities are very low at the upper end of the wage distribution. The disincentive effects on work effort will be trivial.
Matthew Ygelias has a better idea for reform, IMHO. He espouses creating more upper-income tax brackets with higher rates. Yes, someone making $500K is doing very well, but it's kind of nuts to think they're paying the same rate on their income above aroudn $350K as someone making $5 million (let alone $5 billion). Nate Silver:
What the discussion over the top marginal tax rate ignores, however (and what Ygelsias picks up upon) is that this rate has been assessed at very different thresholds of income. In 1940, for example, the top marginal tax rate was 81.1 percent -- but this rate only kicked in once you made $5,000,000 or more in income, which is equivalent to about $75,000,000 in today's dollars.
But today, the threshold where the top tax bracket kicks in isn't $75 million, or $5 million, or even $1 million ... it's a mere $357,700. The progressivity of the tax code stops there.
Silver argues that creating a tax bracket at $1 million at 40.5 percent would raise the same revenue as "restoring the $250K (which is really $360K now given indexing to inflation) to 39.6 percent, as it was under Clinton."
Of course, all this means an overhaul to our tax system. Most of us are ready for it, the country needs it, and the ambitious goals of the Obama administration could be funded by it. And certainly our tax system is inextricably intertwined will the economic crisis, our energy woes, and our health care system. There's no reason not to forge ahead with an ambitious tax reform program.
Which isn't to say we'll get it. Another facet to this push for health care reform led by Max Baucus is that we're heading for a compromise solution. The fact that we're following an Obama/Baucus solution, which mixes public and prive insurance, is a compromise in and of itself, over a single-payer system (which many of us would prefer). But even as it is, health reform is going to be difficult to pass and implement. Taxation of health care benefits may be something we have to take (instead of tax reform) along with universal health care.
If there's something to fault Baucus for, it's that he brought this idea to the table now. By doing so, it's no longer a tool for negotiation, but an inssue that divides our Senator and his allies from the President and most working Americans. This isn't the first time Baucus has misfired on timing; by bringing up a repeal of the Alternative Minimum Tax when he did, soon after grabbing the gavel of the Senate Tax and Finance Committee, without proposing any closing of tax loopholes to fund its repeal, he ensured that the AMT would linger. (And, sure enough, it's still here with us today.)
Unfortunately for many of us who desperately want some kind of health care reform that provides universal coverage, Baucus is spitting in the soup, creating a broth that's difficult for us to swallow. |
