Capping a Bad Tax Break
By Arnold Kling
Bush’s health-care proposal would use tax breaks to make it easier for people who do not have employer-provided health insurance to buy coverage on their own. The tax incentives would be similar to deductions used by homeowners for the interest on their mortgages…
The current health system relies primarily on employers to provide health-care coverage as a fringe benefit. Employees are not taxed on the benefits but the Bush plan would set a cap on the amount of coverage that could be offered tax-free.
Anything above that would be taxed as income
I would grade this as “A+”. The question is whether he can get any Democratic support. My guess is that some of the most extravagant health insurance plans come from unions. The fact that the President’s proposal is much more “progressive” than the status quo (as it stands now, the “rich” benefit the most from not having to declare the cost of gold-plated health plans as income) will not get any support from “progressives.”
What I love about it is that it takes away the childish illusion that health benefits are some sort of “gift” or “obligation” from employers. It treats them as compensation, which provides a much more grown-up basis for discussing health care.
By capping the deduction, it reverses the current situation, in which what I call “insulation” (see the current issue of Cato Unbound) is used instead of real health insurance. I believe that this has the potential to lead to meaningful reductions in health care spending for people under 65.
I would point out, however, that Medicare is still the biggest problem in health care policy today.