Health Care: Avoiding the Achilles Heel of Tax Reform
by Grace-Marie Turner on 02/12/2002
18 Pages
Current debate over tax reform has produced innovative ideas about simplifying and reducing the role of government in our daily affairs. There are practical alternatives to the United States' gargantuan tax code and government inefficiency. Yet even the soundest of tax reforms is bound to trip up on one major political and social issue-health care. This study examines a policy change that could accomplish much toward improving health care and simplifying the tax code.
Currently the United States tax code provides generous tax savings for health coverage-to the order of $130 billion per year. Yet this only comes in the form of tax exclusions and deductions for employment-based health insurance. In other words, the subsidy only reaches those fortunate enough to have full-time work that provides perks such as health insurance.
For many reasons, job-based health insurance does not work to the advantage of Americans. Workers assume that their insurance is "free"—a perk of the job. Many do not, therefore, make informed decisions about health insurance policies, and the costs and inefficiency of the policies continue to rise as a result of the lack of "shoppers." In the end, what is commonly viewed as a perk is really costing Americans both real cash wages and the access to affordable, competitive health insurance.
Furthermore, the system of deductions and exclusions leaves lower-income workers with almost no benefit. They are left unable to purchase health insurance and must depend on restrictive, inefficient and burdensome government health programs. The whole system is an obstacle to the quality and efficiency of private health care.
Advocates for tax reform must at some point wrestle with this out-of-date and burdensome public health care subsidy. The first move toward better health care actually coincides with a move toward fundamental tax reform. Government subsidies for private health care should be taken out of the sphere of employment. Just as we do not depend on our employers to mortgage our homes or insure our cars, we Americans should not have to depend on employers for health care decisions.
For a more equitable subsidy, tax deductions and exclusions should be changed to a straightforward system of tax credits, which could eventually become direct subsidies. This kind of direct subsidy would allow more people to purchase private health insurance that suits their needs. Giving tax subsidies directly to individuals would also prevent discrimination against those whose workplace does not offer affordable insurance.
Subsidies to individuals to make their own health care arrangements would inject new vitality into the market for individually purchased health insurance. Because more than four-fifths of Americans get their health coverage either through the workplace or through government programs, the market for individual health insurance is not nearly as vibrant as it could or should be.
Right now, almost all working Americans, whether rich or poor, are constrained in their health insurance decisions by their employment-based insurance or by a public entitlement program. This state of affairs prevents the conditions needed for a competitive market of low-cost health insurance policies that are tailored for individual needs. Tax credits for health insurance would bring more consumers into the market, and the possibility for competitive quality and costs could be realized.
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