The president’s plan would extend the tax exemption for health insurance to 18 million Americans who now buy coverage on their own, and to as many as 46 million more who have no insurance at all. It would let individuals deduct up to $7,500 per year in medical expenses, and families to deduct $15,000.
People without employer-provided coverage now pay for insurance with post-tax dollars. That means, in effect, that they pay taxes their neighbors don’t.
Suppose Ms. Smith buys a $10,000 health plan for her family, while her neighbor Mr. Jones gets a $10,000 health plan from his employer. If, like 41 million other Americans, Ms. Smith’s tax rate is 30 percent (including the 15 percent payroll tax for Social Security and Medicare), that means she pays almost $4,300 more.
(Yes, Mr. Jones’ employer pays for the coverage and gets the tax break, but it’s part of Jones’ total compensation package — he gets the benefits, and would expect higher pay if he weren’t getting it.)
President Bush plans to put an end to that. By giving Ms. Smith the same tax break as Mr. Jones, the president’s proposal would save her $4,300 per year.
As it stands, the tax code also encourages Americans to consume more health care than they otherwise would. Employer-provided health insurance isn’t taxed as income, so workers have an incentive to demand ever more generous health benefits. That’s one reason why Americans are so heavily insured. For every dollar we spend on health care, on average we pay only 14 cents directly. (That makes us even more heavily insured than Canadians, who pay 15 cents on the dollar directly — and their socialized system is supposed to pay for everything.)
The incentive to demand more coverage often causes us to consume more health care than we need — which, in turn, drives health care prices and insurance premiums skyward.
The president’s plan would encourage responsibility by limiting the amount of health insurance we can deduct from our taxes each year. The tax break for employer-provided health insurance is now unlimited, and workers can lower their taxes by demanding unnecessary coverage, which makes them less responsible as consumers.
According to White House estimates, the 20 percent of workers with the most expensive coverage would no longer be able to deduct their full health-insurance premiums. This would reduce the incentive for them to demand excessive coverage, which would help contain overall health care costs.
Bush’s proposal will be controversial. Opponents will scream that it would destroy employer-based health insurance. What those opponents actually mean, however, is that they don’t think workers should be free to choose where they purchase their health insurance.
And the proposal isn’t perfect. We should do more to give workers control of the money that employers spend on health benefits. Unless workers “own” those dollars, they might have to take a pay cut to exercise their new freedom to choose, which doesn’t seem like freedom at all.
But such details shouldn’t obscure the fact that this is a step in the right direction. Whatever else you may think about President Bush — and believe me, I have my share of gripes — he’s the only prominent politician taking health-care reform seriously. For that, he and his team deserve praise.
