Health insurance for most nonelderly Americans is purchased with funds from three sources: (1) an employer contribution, (2) an employee contribution and (3) a government tax subsidy. The McCain health plan is based on the idea that the first two contributions should be determined by individual choice and competition in the marketplace. The government's contribution, however, would be the same for everyone: $2,500 for every adult and $5,000 for every family.
Problems with the Current System
Including state and local government, tax subsidies for private health insurance exceed $200 billion a year. The distribution of these dollars is arbitrary, unfair and wasteful:
- Arbitrary: How much help a family gets from government depends on such factors as its tax bracket, the type of health plan the employer chooses, health costs in the city where the family lives, and state and local tax rates.
Example: An upper-income family living in a high-cost, high-tax city could realize an annual subsidy of $10,000 or higher, while a low-income family living in a low-cost, low-tax city could receive a subsidy of $750 or less.
- Unfair: According to the Lewin Group, families earning $100,000 a year get four times as much tax relief as families earning $25,000. We give the most encouragement to those people who least need it and who probably would have purchased the insurance anyway.
Example: A $10,000 health plan purchased by an employer for a family in a 50% tax bracket gets $5,000 of tax relief. The same plan for a family in a 15% bracket gets $1,500 of tax relief.
- Wasteful: People can always lower their taxes by spending more on health insurance and there is no limit to how bloated a health plan can be. Theoretically, the plan could cover marriage counseling, over-the-counter purchases of aspirin or anything else the IRS consider a medical expense.
Example: Some companies have generous, first-dollar coverage for executives and their families (all subsidized through the tax code), while the rank-and-file workers have deductibles, copayments and a more limited range of benefits.
Special burdens for people who must purchase their own insurance. Four in every 10 employers do not offer health insurance to their employees. Yet when these workers purchase insurance on their own they must pay with after-tax dollars. For a worker facing a 15.3% (FICA) payroll tax and a 15% income tax rate, the after-tax cost is almost 50% more.
Special burdens for part-time workers. About one in every five workers is part-time. Often employers do not offer these workers health insurance. And federal law makes it difficult, if not impossible, for employers to give them a choice between wages and health insurance. If they buy insurance on their own, they must do so with after-tax dollars.
Special burdens for the self-employed. The self-employed are now able to deduct health insurance costs on their income tax returns. But, unlike other workers, they get no relief from the 15.3% payroll tax. For many, the payroll tax bite is larger than the income tax.
Special burdens for women. Because women move into and out of the labor market more frequently than men, they are more likely to purchase insurance on their own. They are also more likely to work part-time and increasingly they are self-employed.
How the McCain Tax Credit Solves These Problems
The McCain Plan is Fair. Everyone is treated alike, regardless of income or job status.
The McCain Plan provides much more help to low- and average-income families than the current system. For the first time since World War II, low- and moderate-income families would get just as much tax relief as the very rich to purchase health insurance.
Relative to his Democratic rivals, the McCain plan is much better for the middle class. Hillary Clinton and Barack Obama would continue the current practice of giving the vast bulk of federal help to the rich (through tax subsidies) and the poor (through spending programs). By contrast, the McCain tax credit gives the most new tax relief to the broad middle class.
The McCain plan would end discrimination against people who must buy their own insurance. People who must purchase their own insurance (including part-time workers and the self-employed) would get just as much tax relief as people who obtain insurance through an employer.
The McCain plan encourages all Americans to control costs. The McCain tax credit subsidizes the core insurance that everyone should have. It does not subsidize all the bells and whistles, as the current system does. Since employees and their employers will be paying for additional coverage with after-tax dollars, everyone will have an incentive to compare the value of extra health benefits to the value of other things money can buy.
Attractive Features of the McCain Tax Credit
The McCain plan not only offers all Americans the same tax relief, it does so in a way that makes it as easy as possible for people to acquire insurance.
- The Credit is Refundable. People can apply $2,500 per person or $5,000 per family to the purchase of health insurance, even if they do not owe any income taxes.
- The Credit is Advanceable. Families will not have to wait until April 15 the following year to get their credit. They can obtain the subsidy in the year in which the insurance is purchased.
- The Credit is Transferable. Insurance companies and other intermediaries will be able to help families obtain their credit and apply it directly to the health insurance premiums.