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I just dug up a paper written by a colleague of mine before I arrived at U of R. Here is an excerpt from the abstract:

This study assesses the consequences of altering the favorable tax treatment of health insurance, and addresses the question of why it seems so politically difficult to accomplish this type of reform. To summarize the results briefly in anticipation of the detail, this study finds: (1) Special tax treatment of health insurance (compared with full taxation) has increased the aggregate health insurance premiums by at least 40 per cent for every year since Medicare was introduced, and by at least 50 per cent for every year in the last decade.

it seems unlikely that the Congress would adopt this type of major tax reform.

That was from Charles Phelps. Let me repeat his result. When workers receive health insurance benefits from their employers, the value of those premiums are not taxed to either party. This results in people consuming a heck of a lot more insurance than they would choose on their own (among other problems). If we simply do away with this (fatuous) tax preference, health insurance costs would fall by nearly fifty percent. Of course, this does not mean the rate of change of health care or health insurance costs will change from what it is today, which means these gains might be “lost” in just a few years, but I would bet such a simple reform would, in fact, “bend the cost-curve” as wonks in DC like to say today.

There ya have it folks – this is a tax increase I would support. I am positive that the welfare impacts of such a change would be much larger than any short-term tax increase. If this proposal came along with meaningful reforms of the health insurance industry, even better. But politicians are both sides of the aisle are unserious. I’d bet a toe or two that this idea never sees the light of day (I do remember President Bush floating it during his second term though).

4 Responses to “The Federal Budget and the Health Care “Crisis””

  1. Economic reality is that our present healthcare payment system is fiscally unsustainable. The math is unambiguous.

    Political reality is that any fix put forth which can address this economic reality is politically untenable. No one who values their political hide wants to lead of follow on this.

    Both are true statements. Ergo, in order to address the upcoming fiscal calamity, it must be addressed outside of the political realm.

  2. Harry says:

    After seventy years of employers passing on a tax deductible fringe benefit, I guess I agree.

    When I was in my twenties, single, and had no cares whatsoever, I never bothered caring about fringe benefits. If I had a medical problem, which I had once then, I went down to my uncle, who was an MD, and had him remove a sebaceous cyst; it never occurred to me to file a claim, since that was what you did when you went to the hospital.

    For fifteen years, maybe more, I had zero appreciation that I was insured, even though all the time someone else was paying the bill. I can understand how our Yuppie generation thought of this as an entitlement not from the government, but by merely being employed.

    Thus people regarded medical care as cheap to them as water, after the employment contract was signed. Get a sex-change operation, see a shrink or chiropractor for four years, every visit is $5. Is that soup to nuts? Meanwhile, employers had to pay insurance companies for disability insurance and pay state and federal disability taxes, all of which were generally unnoticed by their employees. The idea that one would pay the doctor for routine services vanished, along with all of the services doctors did for the poor pro bono. The pro bono caregiver became the emergency/outpatient department at the hospital.

    Wintercow is absolutely correct that our tax code and our already socialized system has bid up the price, much beyond our getting older and technological advances. That subject is for another day.

    I do want to ask Wintercow about a similar subject, however. Does not this same line of reasoning not apply to municipal bonds? When the state or municipality gets cheap credit, does that not encourage them to borrow stupidly?

    And a collateral tax question, one I have thought long about — do these tax-free entities have a bias for high marginal rates? The higher the rate is, the better the after-tax return. If marginal tax rates fall by half, muni bond investors get screwed, and the municipalities have to be more careful about their finances. Tell me if this is good or bad, and whether Tim Geithner would have sympathy for any bondholder.

  3. Harry says:

    Eighty years, WWII, the economy under the direction of Harold Ickes, one of the window breakers, and ration coupon issuer.

  4. antiboss says:

    Things will never change until there is actual violent resistance – which is extremely unlikely to happen.

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