Monday, August 27, 2007
Republicans and Health Care
The republican candidates seem to all believe that extending the health care tax deduction to all citizens will solve all Health Care woes. Currently, if you work for a firm covered by ERISA or the government your health care is exempt from taxes thus allowing you to consume health care with pre-tax dollars rather than after-tax dollars. Now this is a great deal for upper income folks as they save $.35 for every $1 they spend on their health care premiums (the top marginal tax rate is 35%). The only people that will really benefit from the extension of the health care tax deduction are upper middle income folks who are self employed or that work for small businesses. Now it doesn't seem fair that you should get a tax deduction if you work for IBM but not if you work for yourself. So needless to say there are some unnecessary distortions. That said, though, it does nothing to address those on the lower end of the income scale. Arguably it is destructive to them as it encourages higher income folks to spend more of their money on health care than they would if they were doing so with after-tax dollars thus driving up the price for health care. The cost of this deduction to the federal government runs $200 billion a year. In order to make up this lost revenue marginal tax rates need to be higher. Instead of expanding the tax deduction how about we scrap it. You could use half of the increased revenue from scrapping the deduction to create a catastrophic reinsurance program so that the chronically ill don't get dumped from their insurance plans and give the other half back to the tax payer by reducing marginal rates.