Oh No! The Republicans Are Going to Tax Your Health Benefits!

If even the Wall Street Journal offers biased coverage on reforming the tax code to allow individuals to own their own health insurance (and it does), we have a bigger hill to climb before we can eliminate the discrimination against individually owned health insurance. According to the WSJ, Congressional Republicans are more gun-shy than ever of a reform that would give households tax credits to buy health insurance — a sensible alternative to the current policy of tilting the tax code in favor of employer-based benefits.

The Republicans’ political risk-aversion is a consequence of Obamacare causing millions of people to lose their health benefits. Although many of these victims have individual policies, many are also insured through their employers. Because President Obama’s guarantee that “if you like your coverage, you can keep it” has been exposed as false, Republicans have been freshly reminded how fearful people are of change.

This has pushed them back into a corner, prompting them to defend the tax discrimination that favors employer-based benefits and to oppose individual tax credits, according to the WSJ.

This is a real shame. Individual tax credits were a feature of Senator John McCain’s 2008 presidential bid and President Bush’s agenda in 2007, and were proposed as long ago as 1995 by John C. Goodman and Mark V. Pauly.

Tax credits should not be that hard to sell. I will offer a couple of very straightforward points, which any reformist politician should be able to transform into good sound-bites.

First, for the average family with employer-based benefits, tax credits would increase household money income by almost $12,000. This is money which employees never previously saw. (I calculated this from the Kaiser Family Foundation’s 2013 Employer Health Benefits Survey, which reported $16,351 as the average cost of family coverage, of which employees pay $4,565 directly.)

Second, for the average family with employer-based benefits, tax credits would increase after-tax income. This is because the current exemption of employer-based benefits gives a much larger benefit to higher-income households.

According to the Congressional Budget Office’s May 2013 estimate, the exclusion of employer-based health benefits (including long-term care premiums) from households’ taxable income will reduce federal tax revenues by $248 billion in 2013. It is, by a huge margin, the largest tax expenditure in the Internal Revenue Code. However, because of our progressive income-tax code, the lion’s share of this savings will go to the highest earning quintile: The top 20 percent of earners get 34 percent (over $84 billion) of the total value of the tax exclusion. The lowest-earning 20 percent get only 8 percent (about $20 billion) of the benefit.

Let’s imagine there were no Medicare or Medicaid or other health insurance to complicate the analysis. If the government taxed employer-based benefits and distributed the revenue equally to the population, the lower three quintiles would get more money than they currently do, and the top two would get less.

Every quintile would receive $49.6 billion. For the lowest, this would be an increase of 150 percent (almost $30 billion). For the second lowest, the increase would be 43 percent (around $15 billion). For the middle quintile, the increase would be 5 percent (around $2.5 billion). This middle quintile consists of individuals who earn between $38,500 and $55,099; or families of four who earn between $77,000 and $110,200.

Reformist politicians should be able to explain a health-insurance tax reform that clearly benefits the middle class, and most Americans. Now that Obamacare is on the ropes, the time is ripe to advance, rather than recoil from, such reform.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.


  • Catalyst
  • MyGovCost.org
  • FDAReview.org
  • OnPower.org
  • elindependent.org