Why No Health Tax Reform? A Conservative’s Inside View

Mr. Wulsin has done a great job of explaining the pernicious effects of the current exclusion of employer-sponsored benefits from taxable income (which I also addressed in an earlier contribution). Mr. Wulsin and I are hardly the only ones who have noted this. Last June, MIT economist Jonathan Gruber told the U.S. Senate Finance Committee [PDF] that “no health expert today would ever set up a health system with such an enormous tax subsidy to a particular form of insurance.”

And yet, we have been stuck with it for decades, and it increases the number of uninsured. The political reasons are not difficult to decipher: when Senator McCain proposed eliminating the exclusion of employer-based health benefits, and replacing the benefit with a $5,000 tax credit that would help every American family buy health insurance of its own choice, then-Senator Obama responded with effective ads claiming that Mr. McCain was planning to tax health benefits for the first time.

We all know how well that worked. And yet, reports from inside the Beltway suggest that the Democrats will use the tax code to finance their health reform, likely by capping the exclusion of employer-sponsored health benefits. It makes sense: the Chief Executive of a Fortune 500 company can fly to the Mayo Clinic for an annual physical, and his firm can pay the entire cost. However, if an uninsured person pays $50 for a prescription, he uses after-tax dollars.

On the other hand, I doubt that the Democrats’ tax reform will end up giving more dollars to American families to buy health insurance of their choice. Instead, it will give more money to the government to give us health insurance that it chooses. The idea of giving people, instead of corporations, tax benefits for buying health insurance has been around for a while in “conservative” circles. Indeed, I have a book in my shelf that reports the proceedings of a 1996 conference on the subject. Within the self-styled conservative movement, however, it has not yet succeeded in gaining full acceptance for three key reasons, in my opinion:

First, most conservative leaders undoubtedly subscribe to the widely held view that individual health insurance cannot pool risk as effectively as employer-based insurance, despite contrary evidence and theory by scholars such as Professor Mark Pauly of the University of Pennsylvania, and Professor John Cochrane of the University of Chicago.

Second, interest groups, which compete for the attention of the same politicians as conservative activists, largely benefit from employer-based health insurance. Big business lobbyists, for example, believe that it gives employers’ competitive advantage. A more valid interpretation is that it empowers them to force employees to buy from the “company store.” Health insurers largely support the employer-based exclusion because their businesses are built on economies of scale in distribution and contracting with providers.

Third, conservatives are rightly concerned primarily with the tax burden. It is very difficult to change the exclusion of employer-based health benefits in favor of a tax credit or deduction for families that does not look like a tax hike when “scored” the way they do in Congress. That scares away a lot of self-styled conservative politicians.

Liberals have their own reasons for not advocating this type of tax reform, but I’m sure the liberals here can explain them better than I can!

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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