Jul 8 2009, 12:42PM
Daily Chart: Who Gets The Health-Care Tax Benefits? Part Two
Roll Call and others are reporting that Senate Majority Leader Harry Reid has urged Finance Committee Chairman Max Baucus to drop his proposal to tax employer-sponsored health benefits and stop chasing Republic votes. For fans of a strong public option, this might be a good thing: less compromise means the center of gravity shifts left. (Of course, it might be a bad thing too: a shift to the left means a greater chance of a bill not passing.)
But dropping the idea of taxing health benefits is undoubtedly bad. I understand that the idea, as the New York Times reports, "is largely opposed by organized labor groups, a crucial Democratic
constituency, because many unionized workforces enjoy generous benefits
packages that would be in danger of exceeding the limit." But the original Baucus plan would have excluded preexisting union contracts! What more could they want?
Anyway, what's most embarrassing about this situation is that the Democrats are favoring union interests over an idea that is plainly progressive in nature and would raise a huge amount of revenue ($246 billion annually, says the CBO). I've made this point in various forms elsewhere. But since the point is still (alas) correct, here is another take on the distribution of current healthcare tax benefits:
So two-income couple, each in the $50-75K bracket, get hit with a tax on $3000 of income, say $1000 each, or $2000 total. To get (at best) the same health insurance they have now.
This is your idea of fair, and politically possible?
Mathematically challenged Beltway journalist, exhibit number 3,742,518.
While I actually personally favor the idea of taxing benefits, this is a brain-dead way of justifying it. One of the big problems with taxing benefits is that it is inherently regressive as you'll see when you re-calculate your numbers as PERCENTAGES. The approximately $600 benefit to someone on a $10,000 AGI is six percent. The approximately $4,500 benefit to someone in the 100-199K bracket -- let's say the average of all individuals in that one is about 130K -- comes out to about 3.5 percent. The average benefit for the $500K+ category is by definition less than one percent.
This is, in other words, as regressive as a sales tax. It would have to be offset elsewhere in the tax code, in ways such as expanding the personal exemption.
The main justification is not that something so obviously regressive is "progressive", it's that it goes with the time honored principle of lowering the tax rates, broadening the base and getting the heck out of the way. In other words, the current system is privileging the health care sector at the expense of the rest of the economy. And taxing health benefits but offsetting that with a boost in the personal exemption would mean that the government is no longer picking the health care sector as a winner over other sectors of the economy, thus ending a practice that is highly economically inefficient.