Current Events Health Insurance Taxes

The State of the Union

Yesterday, President Bush gave the State of the Union Address. In this post, I 1) analyze Bush’s new health care plan, 2) review some commentary from various blogs on the net, and 3) give a excerpt from the speech which directly relates to health care.

Healthcare Economist’s Analysis
The heart of the Bush proposal is as follows:

  • Families With Health Insurance Will Not Pay Income Or Payroll Taxes On The First $15,000 In Compensation And Singles Will Not Pay Income Or Payroll Taxes On The First $7,500.

On the positive side, since this is a fixed deduction regardless of the generosity of the health insurance, there is less incentive for individuals to purchase “too much” insurance. In the case where each dollar worth of health insurance decreases one’s tax liability, insurance only costs (1-τ)*A dollars per year with the tax deduction when the true cost to society is A. The proposal is also good in that it the tax break does not discriminate between employer-provided and individual-based insurance. This will help (somewhat) to reduce the phenomenon that individuals often choose their job based on the type of insurance offered rather than actual job characterisitcs or the wage offered. According to the President, the health insurance deduction will decrease the taxes for most available which will free up more disposal income for them to spend on other items.

On the negative side, the plan is very inequitable. Since this is a tax deduction, if you are poor and do not owe any taxes, you will not receive any financial help with the deduction. Since tax rates are progressive, the deduction is most valuable to individuals in the high tax bracket, the rich. Look at the example below for a single individual.

Taxable Income Deduction Value Marg Tax Rate Deduction Value
$5,000 $5,000 10% $500
$10,000 $7,500 15% $1,125
$35,000 $7,500 25% $1,875
$10,000,000 $7,500 35% $2,625

We can see that the value of the health insurance tax deduction is worth more than 2x the value for the individual making $10,000,000 as for the person making $10,000.

Other problems with the proposal is the possibility of ‘fake’ health insurance. It seems that the government does not establish a minimum level of health insurance. Thus, someone who wants the tax deduction, but does not want to buy health insurance could buy a policy for $1 which pays for all medical expenses over $1 trillion. Of course, the person will never be able to use this policy but since they technically have insurance, they will receive the deduction. If the person gets sick, however, they can still go to the emergency room and get free care, paid for by the American taxpayers. Thus, some level of minimum insurance should be established in order to qualify for the deduction.

Also, while treating the employer-provider and individual-based insurance groups equivalently may be more fair, it may exacerbate the problem of adverse selection in the individual markets. People with pre-existing conditions may find it even more difficult to afford insurance in the individual market under this reform.

Overall, I think the plan does little to help those who need insurance most. The dollars saved from eliminating the deductibility of employer-provided health insurance could be used in a much more productive fashion to provide health care to more Americans.

Around The Blog-o-sphere
Below I have tried to give a diverse review of some early feedback about the SOTU plan from around the blog-o-sphere:

  • “Maybe I’m missing something here, but this just seems laughable. The idea of a deduction for the uninsured is silly: the value of deductions increases with tax rate, and most of the uninsured either don’t pay income taxes or at the lowest bracket.”
  • Cato-at-Liberty: “the president’s proposal mirrors the proposal for “large HSAsâ€? that I introduced.”
  • Managed Care Matters: “But it won’t do anything to fix the underlying problem – people who need insurance can’t get it, and if they can, many can’t afford it, leaving the rest of us to pay for their health care.”
  • Paul Krugman at Economist’s View: “…the actual plan is to penalize workers with relatively generous insurance coverage…”
  • The Heritage Foundation: “It would treat all Americans equally by ending the tax discrimination against families who buy their own health insurance, either because they do not have insurance offered by employers or because they prefer other coverage.

Below is a transcript of the section of Bush’s State of the Union speech which refers to health care. The full transcript is available at the White House website and there is a section on the Bush health care policy initiative as well.

A future of hope and opportunity requires that all our citizens have affordable and available health care. (Applause.) When it comes to health care, government has an obligation to care for the elderly, the disabled, and poor children. And we will meet those responsibilities. For all other Americans, private health insurance is the best way to meet their needs. (Applause.) But many Americans cannot afford a health insurance policy.

And so tonight, I propose two new initiatives to help more Americans afford their own insurance. First, I propose a standard tax deduction for health insurance that will be like the standard tax deduction for dependents. Families with health insurance will pay no income on payroll tax — or payroll taxes on $15,000 of their income. Single Americans with health insurance will pay no income or payroll taxes on $7,500 of their income. With this reform, more than 100 million men, women, and children who are now covered by employer-provided insurance will benefit from lower tax bills. At the same time, this reform will level the playing field for those who do not get health insurance through their job. For Americans who now purchase health insurance on their own, this proposal would mean a substantial tax savings — $4,500 for a family of four making $60,000 a year. And for the millions of other Americans who have no health insurance at all, this deduction would help put a basic private health insurance plan within their reach. Changing the tax code is a vital and necessary step to making health care affordable for more Americans. (Applause.)

My second proposal is to help the states that are coming up with innovative ways to cover the uninsured. States that make basic private health insurance available to all their citizens should receive federal funds to help them provide this coverage to the poor and the sick. I have asked the Secretary of Health and Human Services to work with Congress to take existing federal funds and use them to create “Affordable Choices” grants. These grants would give our nation’s governors more money and more flexibility to get private health insurance to those most in need.

There are many other ways that Congress can help. We need to expand Health Savings Accounts. (Applause.) We need to help small businesses through Association Health Plans. (Applause.) We need to reduce costs and medical errors with better information technology. (Applause.) We will encourage price transparency. And to protect good doctors from junk lawsuits, we passing medical liability reform. (Applause.) In all we do, we must remember that the best health care decisions are made not by government and insurance companies, but by patients and their doctors. (Applause.)