Issue #1, Summer 2006

Our Unhealthy Tax Code

If progressives want to cure what ails the health care system, they first have to put the tax code on the examination table.

American health care is beset by a well-known litany of problems. Forty-six million Americans lack health insurance, resulting in, according to the Institute of Medicine, 18,000 avoidable deaths each year. At the same time, the principal mechanism for providing health insurance, through employers, is unraveling: the number of non-elderly Americans without employer-sponsored insurance jumped by 15 million from 2000 to 2004. Health costs are also an increasingly larger share of the economy and rising rapidly. Premiums have jumped 73 percent since 2000 and aggregate health spending is projected to increase by another 49 percent by 2015, when total spending will reach 20 percent of U.S. GDP. We could, as a nation, choose to spend that much of our total income on health care, and one would expect that the country, in return, would enjoy some of the best health outcomes in the world. Unfortunately, that’s not the case. Not only do we spend more than any other country on health care, nearly 50 percent more per capita than the second-highest-spending nation, but citizens in 28 other countries have a higher life expectancy and 33 other nations have lower infant mortality rates.

If this were a government-run health care system, the voting public and policymakers would be up in arms. Yet, perhaps because health care is largely perceived as a private-sector concern, there is relative quiet: while voters tell pollsters that it is a top priority, there appears not to be comparable political pressure for serious reform or any fundamental change in the government’s involvement, either in the provision or funding of health care. This is in part because much of the federal government’s involvement with the health care system is through the hidden backdoor of the tax code. An important principle for modern progressives is that when the government has to intervene in the marketplace, it should not prop up failure. Yet the federal government is, in fact, deeply involved in perpetuating the current “private” health care system and all its flaws, spending approximately $200 billion annually in subsidizing employer-provided insurance. It is the single biggest subsidy in our tax system, more than twice as costly as the mortgage interest deduction. The only government programs that cost more are Social Security, national defense, and Medicare.

The fact that the tax subsidy, which supports the employer-sponsored system, is better than nothing is a feeble excuse for resisting any changes to the status quo. This massive program of tax breaks is ineffective and regressive, wasting money on those who have health insurance while doing little for those who can barely afford it and nothing at all for those without it. Precise statistics are not available, but a reasonable estimate holds that the tax subsidy pays for about $4,000 of the insurance premiums for a high-income family, compared with less than $1,000 for a low-income family and $1,500 for a middle-income family. For higher-income workers who would likely have purchased health insurance anyway, the $4,000 is a pure windfall. For lower-income workers, the $1,000 subsidy may not be enough of an incentive to purchase health insurance. This is part of the reason why workers with lower incomes are more likely to be uninsured and the firms that hire them are less likely to offer health insurance. The tax code also increases wasteful and unnecessary spending by subsidizing health insurance pland that discourage health consumers from being cost-conscious. In the final diagnosis, the tax code is literally making America sick–squandering taxpayer dollars on a health care subsidy system that is failing to provide quality health care to all Americans.

A single-payer national health care system would, by definition, remedy the problem, but it is unlikely to happen any time soon, if ever at all. Beyond the political limitations, it is also an open question whether a single-payer system would be the most efficient way to provide quality health care for all Americans. In the meantime, reforming health care will come down to a set of incremental changes that build on the current system. But that does not mean that change cannot be ambitious. As Massachusetts has shown, achieving a plan for universal health insurance coverage need not wait for the establishment of single-payer government insurance like Medicare or a national health care system like the United Kingdom’s.

In fact, if we turned our irrational health tax subsidies right-side up–by curbing subsidies for higher-income workers and those with more generous health insurance plans–we could raise tens of billions of dollars annually, money that could go toward increasing access to health insurance. Taking it a step further, we could scrap the current deduction altogether and replace it with progressive tax credits that, together with other changes, would ensure that every American has affordable health insurance. In either case, reducing subsidies for pricey plans would likely lead to a health insurance system that includes more cost sharing, promotes more consumer consciousness, and plays a modest, but potentially meaningful, role in restraining health spending. And, unlike President George W. Bush’s Health Savings Account (HSA) proposal, this cost sharing would not require regressive tax cuts and would not be based on a one-size-fits-all, government-prescribed high-deductible plan.

Tax reform is not all there is to health care reform. Many other elements are important, even essential, ranging from ensuring access to affordable health insurance for the chronically ill and small businesses to the promotion of prevention and health information technology. But tax reform is a critical missing link in the way most politicians–progressives and conservatives alike–have thought about confronting America’s health care crisis. When conservatives look at the tax code’s effect on health care, they all too often use the current crisis as a pretext to cut taxes and shift risk onto individuals; some even want to eliminate all the tax incentives for the employer-sponsored system without creating any meaningful alternative.

Issue #1, Summer 2006
 

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