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Tax Reform You Can Believe In, Part I



Health care will become a universal entitlement sometime this year.

The only question now…is how to pay for it.

My proposal is hardly original.  It was, in fact, a cornerstone of the McCain campaign last year.

And that would be to tax health care benefits paid to employees by their employers.

Since fairness is the dominant theme in this era of “eat the rich” rampant populism, the question arises…how is it fair that such a large chunk of employee compensation escapes the clutches of the tax collector? an era when the Feds are trying to figure out how to tax personal use phone calls on company provided phones…and your local grocery store will soon be tasked to put a tax on high calorie sodas and snack foods.

Of course, it is a relic of World War II wage and price controls, allowing a de-facto wage increase to sneak in under the radar in the guise of a non wage benefit.

Not only would taxing health care benefits help pay for much, if not most of the cost of bringing coverage to the uninsured, it would also rationalize health care spending going forward.

First, because employees will be flummoxed when they learn that their employer has been footing nearly $1,000 per month for an employee with spousal and minor children coverage.  All employees see, or even comprehend, is their monthly contribution, as well as the deductibles and copays.

It might then dawn on many such workers that they would be better off with a stripped down, catastrophic coverage plan (very high deductible) costing maybe a third of what the gold-plated plan offered, and then transferring the savings to higher wage income.

Which leads to another blinding moment of insight.

It will then become clear that what we carelessly call health insurance is in fact an amalgam of insurance with prepaid health care.

Nothing will cut the Gordian knot of health care reform unless we can involve consumers in the bargaining and negotiating involved to rein in our runaway spending.

We do not ask our employers to pay our auto or homeowners insurance…and have learned through trial and error, by increasing deductibles or reducing the scope of coverage, how to control such expenditures.

I am convinced that much of the stonewalling by the insurance carriers opposed to reform is their desire to continue the rickety machinery of third party payment, so as to obscure the true cost of their services.

Of course, the government will fail the test if it also continues the third party payment model, as it currently does with Medicare, where it blindly pays for services without regard to successful outcomes.

We will know we have succeeded in health care reform, when all medical service providers aggressively price and market their services in a competitive marketplace, as is now the case with Lasik eye surgery and cosmetic surgery…submarkets that compete for discretionary consumer spending…and which are not distorted by the third party payment diversion.

Don’t hold your breath while waiting for such logic to prevail.

1 Response to Tax Reform You Can Believe In, Part I

  1. Toli

    Such a tax reform step would indeed be sensible.

    Another reason is that, if I don’t get my insurance through my employer — many employers no longer offer health benefits —, then I have to use after-tax money to pay for it. Why should some employees use before-tax income for health insurance premiums, but other employees or unemployed people have to use after-tax income?

    I also agree with the personal responsibility implication when one pays for insurance coverage themselves. COBRA allows an employee to pay (on their own) to be covered by an employer’s plan after termination of employment. Most employees are amazed at the cost of COBRA when they see it: clearly, they had not realized the cost of the insurance premiums until that point, as it was obscured in the manner Richard described. Having the deduction be an after-tax deduction should incite the employee to pay more attention to their health insurance options.

    There is a catch though: if this tax reform happens, it’d be important to make sure that there are more coverage options. (Even plain vanilla catastrophic) health insurance offered through an employer has (in my experience) been larded with benefits useless to young people, and it has been much more expensive than insurance one can buy independently. So it would have to be made crystal clear to employees that they may opt for any health insurance plan available to anyone, and not blindly sign up for whatever plan HR chose to offer the company employees.

    In fact, health insurance should be like auto and home insurance in general: decoupled from employment altogether. This becomes much easier when there’s the safety net of universal coverage; that’s because a key benefit of an employer-sponsored group plan, namely that individuals with preexisting conditions cannot be excluded, becomes irrelevant if there’s the fallback of universal coverage. Further, once employment and health insurance are decoupled, one can tailor their choice of plan based on cost and need, and carry coverage across employers.