The President’s New Slapdash Health Insurance Tax-Cut Plan
by sarabeth at 11:11 am on January 21st, 2007 in Bush Man Date, Health CareFirst of all, I don’t see how it can be called a health insurance plan. So I wish Reuters would stop calling it that.
President Bush is selling his proposal as a way to make more Americans afford basic health insurance without raising taxes:
“We must address these rising costs, so that more Americans can afford basic health insurance. And we need to do it without creating a new federal entitlement program or raising taxes,” Bush said in his weekly radio address.
That may not be what this plan will achieve, help more Americans to afford basic health insurance. And it certainly isn’t what this plan was designed to achieve. (Or if it is, it’s even more poorly designed than Bush’s initial Iraq war “strategyâ€.)
What President Bush is proposing is the following:
· Taxpayers receive a health insurance standard deduction of $15,000 for families or $7,500 for individuals
· For employer-provided health insurance plans, the amount contributed by the employer towards the premium becomes part of your taxable income
The size of a taxpayer’s benefit will depend on each taxpayer’s individual circumstances. Any taxpayer without employer-provided health insurance will see their taxes go down. Any taxpayer with employer-provided health insurance whose employer pays more than the standard deduction towards the premium will see their taxes go up.
It can be said that the plan will make health insurance more affordable for the nearly 47 million Americans who lack it. Which sounds good, and allows for some mighty fine rhetoric. However, the fact is that the plan just puts money in the pocket of every taxpayer who doesn’t have an employer-provided health insurance plan (as well as most who do; see below). That money does not have to be used to buy health insurance. There’s nothing in the plan to ensure that it will be. You use the money as you like.
And even if some of the 47 million Americans who couldn’t afford health insurance before decide to try and use this money towards health insurance, it is far from clear how many of them will still be able to afford it. So the plan could help some of the people who are currently without health insurance, but it is far from clear how many.
What is very clear, though, is that the plan will put extra money in the pocket of almost every taxpayer who already has health insurance. In fact, in most cases, these people will receive more money than someone who doesn’t have health insurance.
Which is a very strange way for a plan to work if the purpose of the plan is to help more Americans afford basic health insurance.
Of course, if the purpose of the plan is just to give a tax cut to most people, but call it something else, it manages to achieve that very handsomely.
Let’s flesh out the argument with some simple examples.
The average cost of family health coverage is $11,500 per year. Let’s assume that someone who can’t afford health insurance would be looking at some bargain basement health insurance plan that runs $400 a month for a family, or $4,800 per year. The reason that you currently don’t have health insurance is that you can’t afford that $4,800 price tab. Since health insurance is such a major worry for those who don’t have it, presumably you weren’t within shouting distance of that $4,800 either, or you would probably have scrimped and saved somewhere, somehow and squeezed out $4,800 for the premium. So let’s see what President Bush’s plan might do for you.
Suppose your tax status is married filing jointly and your taxable income is $10,000. Your tax (using 2006 tax rates) is $998. The president’s plan will drop your taxable income and tax to zero. This frees up $998 in disposal income, since you get the tax deduction whether or not you actually buy health insurance. You can use it towards health insurance, or you can use it for any other more urgent needs. If you use it towards health insurance, it drops your cost from $4,800 to $3,802. So you might move from no health insurance to health insurance, if you can afford to pay $3,802 and if you decide not to use the thousand dollar windfall for something else.
Suppose your tax status is married filing jointly and your taxable income is $15,000. Your tax (using 2006 tax rates) is $1,498. The president’s plan will drop your taxable income and tax to zero. This frees up $1,498 in disposal income. If you use that towards health insurance, it drops your cost from $4,800 to $3,302. So you might move from no health insurance to health insurance, if you can afford to pay $3,302 and if you decide not to use the fifteen-hundred dollar windfall for something else. (Isn’t it funny how the family which needed more help got less? Maybe that’s how compassionate conservatism works?)
How about those taxpayers who already have health insurance? Suppose you buy your own health insurance, your tax status is married filing jointly and your taxable income is $50,000 Your tax (using 2006 tax rates) is $6,741. The president’s plan will drop your taxable income to $35,000 and your tax to $4,491. This gives you a nice little tax windfall of $2,250. (Hmm, you get even more than the two needy families above. Is it just me, or is there some kind of pattern here?)
Suppose you have employer-provided health insurance, your employer pays $10,000 per year towards your premium, your tax status is married filing jointly and your taxable income is $50,000. Your tax (using 2006 tax rates) is $6,741. The president’s plan will drop your taxable income to $45,000 and your tax to $5,991. You end up with a tax windfall of $750.
White House officials have been happy to point out that almost everyone benefits under the plan:
This is essentially a standard deduction for health care, and the size of the deduction ($15,000 for families) will be significantly higher than the cost of an average policy ($11,500 for a family),” said a senior White House official. “Because of this, about 80 percent of people with employer-based plans will see their tax liability fall because their insurance policies cost less than the deduction.”
Who pays? If you trust the White House’s math, the tax cuts above will be paid for by the other 20% of people with employer-based plans, the folks whose employer subsidy is more than the standard deduction. This presumably includes the fat cats who pay huge amounts in taxes and who have hitherto reaped huge amounts from the President through tax cuts. The tax cuts that the President has been urging Congress to make permanent. President Bush’s so called health insurance plan just undercuts those tax cuts. Some might even go so far as to say it reverses them.
Me, I don’t want to go so far. In fact, I don’t want to say anything at all. I just want to ask a bunch of questions:
· Does Dear Leader really not understand what this plan does?
· Or does Dear Leader understand it very well thank you, he just thinks that we are really not going to understand what this plan does?
· Why on earth has Dear Leader decided to float this proposal in the first place?
· Why on earth is he trying to label it a health insurance initiative?
· Did he just get sick and tired of being kicked around over Iraq, and decided to give everyone something else to kick him around over?
Oh, one last thing. The President’s plan gave us some more gobbledygook that I haven’t addressed yet:
Bush said the current tax code unfairly penalized people who buy health insurance on their own while steering some toward “gold-plated” plans that drive up the cost of coverage.
Remember that the President is trying to bring down the rising costs of health insurance. There’s nothing this free market president won’t do to achieve this Noble End. Including some distinctly socialist policy prescriptions. If your employer gives you a gold-plated plan, your employer is paying a huge premium to provide you with a high-benefit plan. The good news for you is that the President is trying to make you and/or your employer cut your benefits (using only free-market mechanisms, mind you). Because as the president learned in Health Care 101, better coverage is more costly, so reducing coverage reduces the cost of coverage. The good news for the rest of us is that if the president manages to make you abandon your gold-plated coverage, it does nothing to reduce health insurance premiums for the rest of us. In other words, your health insurance declines and nobody else benefits from it; because you cut your coverage instead of paying higher taxes, you don’t even subsidize everyone else’s tax cut. Oh dear! If the President’s plan works and steers fats cats away from gold-plated plans, the tax cuts everyone else gets won’t pay for themselves. How could they have made such a basic screw-up?
Ken Houghton wrote:
Currently, there are three possible situations: (1) employed, with employer-sponsored health care, (2) self-employed, buying health care, or (3) unemployed/self-employed, not buying health care.
Currently, if one is employed, the employer can deduct their portion of the health-insurance payment. The employee portion may (I’m not certain) be counted toward the $7,500 base before which medical costs are deductible from income.
Currently, if I were self-employed, I could buy health-care for myself and my family, and deduct that total cost from my business income. (The last time I did this, several years and one child ago, the cheapest policy around was just under $1,000/month—$12K/year—out of pocket; I doubt it is less than $1,250 now, so any excess cost would leave me SOL.)
Currently, if I am unemployed or self-employed but without health insurance, I cannot deduct anything, but in the latter case I have made a conscious decision on an after-tax basis (see above).
So it is only the unemployed who have a clear “benefit” from the tax-shifting plan—I suggest politely that most of the unemployed will not find the tax benefit worth the trouble.
In all other cases, either people, the Treasury (which means taxes in other areas required), or both will be worse off—what’s the opposite of Pareto-optimal?
Posted 29 Jan 2007 at 11:36 am ¶
sac wrote:
Two other scenarios:
1. Employee with no health insurance
2. Employee buying private insurance.
I would say the vast majority of the uninsured are in the first scenario, as there are less self-employed people than there are people employed by others.
Doesn’t really matter, though, this plan doesn’t help these people either.
Posted 29 Jan 2007 at 11:52 am ¶
sarabeth wrote:
There’s also “employed, without employer-sponsored health care”. Unfortunately, all employers don’t provide health benefits.
And there’s also “self-employed, uninsurable under private health plans” (due to pre-existing conditions), but of course the Bush proposal doesn’t address this at all.
And there may not be many people in this category, but there is also “unemployed, buying health care”. (In fact, that’s my situation right now.)
I’m pretty sure it counts towards that qualifying limit (after which medical costs are deductible from income, if you itemize).
I wasn’t thinking of self-employed people at all. (And I didn’t realize that you could deduct health care for the entire family from business income.)
I must confess I don’t know much about how tax returns work for self-employed people. If you have other employees, do you file a separate return for the business and a separate individual return? If you are the sole employee, do you file a regular 1040 return? Even if you do, the $15,000/7,500 limit may not apply to you, since your health care costs classify as a business expense and are deducted from business income?
Not at all. Everyone in the “employed, with employer-sponsored health care” category will benefit if the employer subsidy is less than $15,000. The White House has said this is 80% of people in this category. (I think this is the most important fact abut Bush’s proposal; see today’s post).
Someone who was self-employed and chose not to have health insurance before, if they file a regular 1040 return they can now pick up a mickey mouse policy and then utilize the $15,000/7,500 deduction, and benefit mightily.
Similarly every taxpayer who is employed without employer-sponsored health care would benefit. Either they now get a deduction for health care they were buying anyway, or they now buy real health care and benefit, or they buy mickey-mouse health care and benefit.
Posted 29 Jan 2007 at 12:17 pm ¶