McCain

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McCain and the Tax Deductibility of Health Insurance

October 24, 2008 in Current Events, Health Insurance, Taxes | 3 comments

What are the tax implications of John McCain’s health care proposal?  The key components are that health insurance will no longer be tax deductible but individuals will receive a $5000 credit of purchasing health insurance.  Let’s work out some simple math to see how this will impact the life of a typical American.

Example with Max, Rob and Rich

Currently, the deductibility of employer provided health insurance is highly regressive.  Let’s look at 3 individuals.  One is middle class and his name is Max; the other two are rich and their names are Rob and Rich.  Middle class Max has a 25% tax rate, while Rob and Rich pay a 40% income tax rate. Rob has the same $12,000 health insurance package as Max, but Rich has a more generous $16,000 plan.  Let’s see how this affects their tax bills.


Max Rob Rich
Tax Rate 25% 40% 40%
Health Ins. Cost $12,000 $12,000 $16,000
Health ins. tax liability
 $3,000 $4,800 $6,400
Tax liability if ins. tax-deductible
 $0 $0 $0
Net taxes w/ $5000 credit -$2,000 -$200 $1,400

The tax system as it currently stands is very regressive.  Max, Rich and Robert pay the same $0 taxes on their health care benefit regardless of their income and regardless of the size of their health insurance benefit. If health insurance was taxed, then middle class Max will pay less taxes on his health insurance than rich Rob and rich Rich because Max has a lower marginal tax rate.  On the other hand, individuals with more generous health insurance packages get a larger tax benefit when health insurance benefits are tax deductible.  Even though Rob and Rich are in the same tax bracket, Rich saves more money than Rob when health insurance is tax deductible, since Rich has a more generous health insurance plan.  Tax deductibility encourages people to buy more generous health insurance packages at the expense of the taxpayer.

The McCain plan.

Will the McCain plan lead to higher net taxes?  In my example, Max and Rob save money under the McCain plan. Only Rich owes more taxes since he is in a higher tax bracket and has a more generous health insurance plan.  Of course, health insurance costs will increase over time, so McCain may want to index his health insurance credit to inflation.

Individuals are also worried that if they pay for health insurance themselves, this is a pure transfer of cost.  If I support McCain, will my health insurance costs go up by $12,000?  or $7000?   In reality, if employers stop paying for health insurance and transfer the burden to employees, in a competitive market employers will increase wages to compensate for the loss of the health insurance benefit. Most economic research has found that the cost incidence of employer-provided health insurance appears almost 100% through lower employee wages.

We do have to worry that as individuals start to pay for individual health insurance plans, the problems of adverse selection may worsen.  Further, non-group plans are more expensive to administer than group plans.  Thus, the shift in the type of plans individuals select may affect the cost, but the direct tax effect of the McCain plan will lead to a reduction or small increase in tax liability from health insurance benefits.

Effect on Employers

Some individual believe that the McCain plan would increase taxes for business.  This is incorrect.  If health insurance businesses were taxed, individuals would pay the tax.  For businesses, health insurance still counts as a labor cost and would reduce their profit and thus tax liability.  If individuals would receive a $12,000 health insurance package from work, currently they do not owe any taxes on this benefit.  If individuals were taxed on  this benefit, then an individual in a 25% tax bracket would owe $3000 in additional taxes.  If you are in the 40% tax bracket, you will owe $4800.  This means on net, the McCain plan would decrease your taxes by $2000 for the 25% tax bracket and $200 in the 40% tax bracket.

Also, even if the employer paid for health insurance for a group, each individual would be taxed according to the average cost of the health insurance plan per worker (likely weighted by whether it was a family or single plan).

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Economists favor Obama

October 3, 2008 in Current Events, Economics - General | Permalink

The Economist magazine took a poll of academic economists working at NBER to see who they would vote for.  Barack Obama came out as the favorite.  Even though 46% of academic economists list themselves as Democrats compared to only 10% who claim to be Republican, Obama came out overwhelmingly ahead.

Seventy percent of economists would rather work for Obama than McCain (compared to 10% for McCain).  Eighty percent of economists believe Obama has a better economic team.

“John McCain has professed disdain for ‘so-called economists’, and for some the feeling has become mutual,” says Erik Brynjolfsson, a professor at the Massachusetts Institute of Technology Sloan School of Management.

  • Note: The Healthcare Economist website has not endoresed either candidate

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Obama vs. McCain health care policies

August 18, 2008 in Current Events, Health Insurance, Public Policy | Permalink

Barack Obama and John McCain both believe that they know how to improve the American health care system. A policy brief by Michael Tanner has nice summary of the two candidates policies. I will review some of this paper today.

Obama’s general health care policy

Obama goal is to expand government provided health care and create a form of “managed competition” originally developed by Alain Einthoven. Obama supports expanding SCHIP and Medicaid eligibility. Although Obama does not support a health insurance mandate for adults, he does support a mandate for children and young adults (any one 25 or under). Obama’s goal to increase health care access, he would support a “pay-or-play” mandate. All but the smallest employers would be required to provide health insurance; those who didn’t would be compelled to pay into a national fund covering these uninsured workers. The mandate would likely require a minimum benefits package. Overall, Obama is pushing towards more government provided health care and more regulation.
McCain’s general health care policy

Compared to Obama, McCain is generally against more government participation and regulation. Instead of moving the U.S. to larger risk pools (e.g., government insurance, employer insurance) that are more severely regulated, McCain want to move the U.S. towards more individually provided health insurance. McCain’s main policy initiative is a $2,500 health insurance refundable tax credit for individuals ($5000 for families). The goal is to make health insurance more affordable, but make individuals incur the full cost of “better” health insurance at the margin. McCain is also considering risk-rating these vouchers so that individuals with severe health problems will receive a larger voucher. McCain would also allow individuals to buy health insurance from any state.

Side-by-side comparison

Obama McCain
Community Rating Yes No
Guaranteed Issue Yes No
Drug Reimportation Yes Yes
Expand SCHIP/Medicaid Yes No
Pay-or-play mandate Yes No
Government direct negotiations with drug companies? Yes No
End tax-exempt status of employer health insurance benefits? No, but capped Either eliminate or cap
Health Insurance Vouchers No Yes
Purchase out-of-state health insurance? No Yes
Allow non-traditional organizations to buy insurance (e.g., churches, professional organizations)? No Yes

Commentary

So whose health insurance plan is better? If you are in favor of more government involvement in health care, you should support Obama. In the Audacity of Hope, Obama states that “the market alone cannot solve our health care woes–in part because the market has proven incapable of creating large enough insurance pools to keep costs to individuals affordable, in part because health care is not like other products or services (when your child gets sick, you don’t go shopping for the best bargain).” While Obama’s proposals will decrease insurance choice, increase regulation, and increase public funding of healthcare, Obama’s proposals are likely more progressive than McCains and will create larger risk pools. Obama’s plan is likely much more expensive. Further, an employer mandate may lead to higher unemployment levels (see Baicker and Levy paper).
If you are in favor of less government involvement, McCain is your man. McCain rejects “coercion and the use of state power to mandate care, coverage or costs.” The voucher system is similar to the one proposed by Victor Fuchs, and fairly similar to the Swiss managed competition system. A shift to individual–rather than employer-provided–health insurance accompanied by a decrease in regulation should: 1) reduce health insurance costs, 2) increase employment relative to Obama’s plan, 3) give insurance companies the incentive to create innovative products, 4) give workers more choice of their health insurance plan, and 5) be more fiscally sound for the government.

On the other hand, McCain’s plan will be more regressive and can adversely affect the ability of individuals with pre-existing conditions to buy health insurance (unless risk rating the voucher payment occurs). The McCain plan can only be successful if risk pooling can occur on the individual level. This is happening in Switzerland, but in Switzerland there is a standard benefit package which makes shopping for insurance coverage easier.
Additional Comment

Both candidates have proposals with respect to improving how medical care is delivered. Increased preventive care, EMR, and P4P are all popular measures. However, the NEJM states “Our findings suggest that the broad generalizations made by many presidential candidates can be misleading. These statements convey the message that substantial resources can be saved through prevention. Although some preventive measures do save money, the vast majority reviewed in the health economics literature do not.” The ability of any President to directly affect the quality of medical care provided to the patient is likely small. P4P initiatives are good in theory, but since most of medical care involves unmeasurable outcomes, or outcomes which depend on multiple causal factors (e.g., the quality of medical care, baseline patient health, patient behaviors), it is very difficult to implement them on a large scale.

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