After spending millions of dollars during the election campaign attacking John McCain’s plan to trade the tax exclusion for employer-provided health insurance for a same-deal-for-everyone tax credit as a “tax on health benefits” and promising never to do the same, President Obama has now signaled he is open to a similar idea. [here] We applaud this move and hope it is the first of many abandonments of unwise and reckless electioneering promises.
Odds are that this will be mucked up, however. So let’s be clear. There is no good reason to tax the health benefits of high-income families to fund general government spending. There is a case to be made for rational reform (as previously explained here).
- Efficiency: The current system is an open ended subsidy that encourages overinsurance and overconsumption with the incentives getting worse as the tax bracket gets higher. A lump sum tax credit, by contrast, subsidizes core insurance we want everyone to have – letting them buy additional insurance with after-tax dollars.
- Equity: The current system gives five times as much assistance to families in the top fifth of the income distribution as it does to families in the bottom fifth. If you think society has a legitimate interest in whether people are insured, a same-subsidy-for-all tax credit makes more sense.