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Another gem from Paul Starr’s book, Remedy and Reaction:

Medicare and Medicaid [wintercow: because they are entitlement programs] are not the only federal health care obligations with no annual limit on costs. Tax expenditures on health insurance — that is, taxes foregone because of medical deductions and the exclusion of employer contributions from taxable income — also have no budgeted limit.

He of course continues on to say that these tax expenditures chiefly benefit the private insured, and that the [evil] Republican congress in 1995 did nothing to limit these. So by Starr’s logic ANY item that is not subject to tax is an actual “tax expenditure?” The entire notion of a tax expenditure turns private property on its head. All of your income is actually the governments, and only that which it deems is appropriate shall be awarded back to you. By not taxing the payments companies make to you and on behalf of you for health insurance, folks like Starr equate that to a reduction in tax revenues, or an increase in government spending on some undesirable project.

Now, the price theorists in the room do have a reason to stop me in my tracks. If firms did not offer health insurance and nothing else about the labor markets were different, then take home wages would be higher, and indeed tax receipts would be higher. On the other hand, compensation packages are determined in a way that suggests that after-tax compensation is what matters to me, so I submit that not every dollar of health insurance premiums that are not paid will end up being paid out as cash.

The reason this thought is nominated for the Darwin award? By this logic, all internet commerce is a cost to the government and is somehow unjustly being funneled into the awful hands of the buyers and sellers on the web. And the more economic activity that happens on the internet (never mind the cost savings to buyers and the creation of manufacturing and shipping jobs) the worse it is from the standpoint of those who think of government blessings to not tax these transactions as actual government expenditures. By this same logic. my neighbor who watches our son for two mornings per week is costing the federal government countless dollars, and the fees that our kids pay to play hockey or do gymnastics escape direct taxation too. If you want to argue that our gymnastics registration fee was taxed when it was first my income or taxed when the proprietors ultimately spent it, then why wouldn’t you also argue the same for the “free” insurance premiums I am getting? Now, I find it just awful policy to treat employer provided health insurance differently than insurance provided outside of the group setting, but that is not the point I am making. Because by the logic of the above, our federal government is basically running a budget deficit that is $10+ trillion larger than the current estimates show. Does anyone believe that? (the government taxes about $2.5 trillion and spends $3.5 trillion out of a $15 trillion economy, so presumably it is “spending” almost $12.5 trillion in tax expenditures each year).

3 Responses to “Possible Economic Darwin Award Candidate”

  1. Rod says:

    One of the basic principles, at least according to me, of income tax is that you ought to get taxed on your net income, not your gross revenues before expenses. Also, anything that is taxable when you receive it ought to be deductible when you pay it, as in interest paid and received. Old Revenue Enhancer Bob Dole was a big proponent of disallowing credit card interest paid, and he was one of the first to call the deduction for credit card interest a “tax expenditure.”

    These days tax expenditures are standard in the “scoring” of any bill before Congress. The idea is that the government is giving you a really, really big frigging break when they allow a business to deduct the cost of employee benefits along with their other costs, like paying their accountant to figure out whether the business is in the black or the red. This is why every senator and congressman ought to be required to own and operate a business with at least 20 employees (so they would be subject to COBRA).

  2. Michael says:

    Basically, Paul writes a “heads I win, tails you lose” argument.

  3. In terms of “positive economics” the loss of tax expenditures is a useful construct. It is analogous to the “sinks” and “sources” in transistor electronics which allow us to consider electrons as the absence of positive charge. What is missing from the economic argument of course, and what has no bearing on electrons – is the moral dimension.

    By its nature, government must be a misallocation of resources because it has the wrong information system: power versus market. This point is the eponymous thesis by Murray N. Rothbard, but also has been made by Newt Gingrich. As government seems to be necessary, it is best to limit it, in order that it do as little damage as possible while carrying out its required tasks.

    Those required tasks are usually given as army, police, and courts based on the theory that government holds a monopoly on force. That idea, often attributed to Ayn Rand, actually originated with Max Weber, who, indeed, opened his essay, Politik als Beruf with a quote from Leon Trotsky at Brest-Litovsk.

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