Friday, October 24, 2008

Taxing Health Insurance Benefits

On October 10, 2008, the New York Times campaign blogposts published an interesting aticle about taxing health insurance.  This is an issue that McCain and Obama have been debating - should the tax-exemption for health insurance be eliminated?  Here is an excerpt from the article:

This tax deduction is not free. Tax deductions are subsidies. This one costs more than $210 billion per year. It is the single largest tax break in the United States and dwarfs the mortgage interest deduction. Make no mistake, when the Treasury collects less taxes in one area, it must make up for it either in higher taxes somewhere else or in more debt on our children and grandchildren.

Thus, John McCain’s proposal to eliminate the tax exemption for health insurance is good policy. (About a year ago, President Bush made the same proposal.) The problem is having built the whole health care system around tax exemption, we simply can’t get rid of it without combining it with some other policies. And, as Mr. Butler acknowledges, this is where John McCain’s reform proposals — and President Bush’s proposal earlier — gets it very, very wrong.

First, every dollar collected from capping or eliminating the tax exemption on health insurance must be directly linked to providing health coverage for the 47 million uninsured Americans. I propose beginning with uninsured children and their families. The Congressional Budget Office recently estimated that if we limit the tax exemption to the average cost of a family health insurance plan, about $12,000 per year, (so anyone with insurance worth say $20,000 would pay taxes on the extra $8,000) the federal government could reap more than $25 billion. This is a great and equitable financing mechanism. A lot better than payroll taxes for instance. Mr. McCain does not propose such a mechanism.

For the entire story, see "The Problem with Tax-exempt Health Insurance" in the October 10, 2008, issue of the New York Times campaign blogposts.


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