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).