The subsidies are also regressive. According to the Lewin Group, families earning more than $100,000 a year get nearly six times as much tax relief as families earning $25,000. We give the most encouragement to buy health insurance to those people who least need encouragement and who probably would have purchased it anyway.
In addition, people can always lower their taxes by spending more on health insurance, and there is no limit to how bloated a health plan can be.
Oddly enough, we place special burdens on people who must purchase their own insurance. Essentially, they must pay taxes first and buy the insurance with what's left over.
For a worker facing a 15.3% (FICA) payroll tax, a 25% income tax rate and a 5% state income tax, having to buy health insurance with after-tax dollars essentially doubles its cost.
Special burdens also are placed on part-time workers and the self-employed.
Consider that one in five workers is part time. Employers usually do not offer these workers health insurance. And federal law makes it difficult for employers to give them a choice between wages and health insurance.
The self-employed are now able to deduct health insurance costs on their income tax returns. Unlike other workers, they get no relief from the payroll tax, which for many, is a larger tax bite than the income tax.
These problems can be solved with an approach that treats everyone alike, regardless of income or job status. The McCain/Coburn approach (with my updating a bit) works like this:
• The current system of tax and spending subsidies would be replaced by a tax credit of, say, $2,500 per person or $8,000 for a family of four for the purchase of health insurance.
• The subsidy would be refundable; everyone gets it even if he does not owe any income taxes.
• Families could obtain the subsidy in the year in which the insurance is purchased and would not have to wait until April 15 the following year to get their credit.
• Insurance companies and other intermediaries would be able to help families obtain their credit and apply it directly to the health insurance premiums.
As a result, people who must purchase their own insurance (including part-time workers and the self-employed) would get just as much tax relief as people who obtain insurance through an employer.
The tax credit would subsidize the core insurance that everyone should have. It would not subsidize all the bells and whistles, as the current system does.
Since employees and their employers would be paying for additional coverage with after-tax dollars, everyone would have an incentive to compare the value of extra health benefits to the value of other things money can buy.