Every Time I Read about McCain's Health Plan I Get More Confused
So just yesterday I wrote an analysis of the impact of McCain's health reform plan on the tax bill of an average low paid worker who had employer provided health insurance. I said:
The McCain plan will offer us a stick and a carrot. Employer sponsored health benefits will be treated as income, subject to income and payroll taxes. Those who opt to continue with their employer plan will see their take home pay drop. Anyone not covered by their employer will get a payment from the government to buy health insurance — $2,500 per year for individuals and $5,000 for families.
Now the numbers: Employer provided individual health insurance costs about $5,000 per year. This would represent the average cost of providing health care and administering insurance policies for a group of working adults, some young and healthy and some older and not so healthy. Under the McCain plan workers could choose to pay taxes on this “income” or opt out of their employer plan and get the tax credit.
Workers at the lowest income levels probably pay about 20% of their income in taxes when we include payroll taxes. Under the McCain plan the average low income worker could pay $1,000 more per year in taxes to keep his employer health insurance or he could take the $2,500 tax credit and pay $2,500 more to buy his old plan as an individual.
For the average worker the best choice will be to pay the extra taxes and keep the employer health plan. Younger, healthier workers, however, will be able to find health insurance for $2,500 or even less. In the McCain plan, if they pay less than $2,500, they can put the surplus into Health Savings Accounts. The McCain plan will encourage these workers to leave their employer sponsored plans.
I wrote this because that is what seemed to make sense to my pedestrian mind.
So I read about a new interview with Douglas Holtz-Eakins in today's NY Times and suddenly I am at sea again. Mr. Holtz-Eakins would like to assure us that only workers in the highest tax brackets who get "gold plated" insurance policies — costing more than $14,285 per year for family coverage — will pay additional taxes as a result of this plan. Lower paid workers would not pay more because the tax credit — $2,500 for individuals and $5,000 for families would take care of their extra taxes.
So I am wondering how this tax credit thing works:
Does everyone just get the tax credit even if they have employer provided health insurance? That would mean that the covered worker in my example above, who pays $1,000 in taxes on his employer health coverage, will have $1,500 left over for his Health Savings Account while a worker without employer provided insurance will spend her $2,500 plus some additional amount just to get the coverage that the first worker enjoys. This wonk is thinking that would be an incentive to get employer provided health insurance.
Or does it work like this? The amount of your employer provided health insurance is entered on your W2. If it is zero then you get the full rebate and file the short form. If you have employer provided insurance then you get to fill out the long form with a new schedule — HI for Health Insurance? — that calculates the taxes on your employer provided health insurance. If your tax credit is greater than this amount, you don't pay any taxes on your employer health insurance but you don't get any extra money. If your tax credit is less than your health insurance taxes, you pay the difference between the credit and the taxes on your health insurance.
Take a deep breath now and ask yourself: Is this simpler?
But isn't the point here supposed to be to change the incentives that most people face? If only a very small percentage of us, members of the health insurance aristocracy like Wonks Anonymous, are going to pay more for our employer provided plans then how will this plan move America away from its weak reliance on health care paid for by others? If there is no substantial change in incentives, what is the point of subjecting taxpayers and the IRS to another set of elaborate and bizarre calculations and forms?
Wonks Anonymous has only one remaining theory that will explain these peculiar statements made on the Straight Talk Express: It is a well know fact that Senator McCain's economic advisors are all supply siders and, as Wonks Anonymous has often observed, supply siders do not recognize payroll taxes as "real" taxes. God know why but that is just the way that they are.
If McCain's advisors meant that there would only be a small increase in income taxes then the plan would still bring in ample revenue. If health insurance benefits were counted as wage and salary income then the government could still charge a bit less than 15% payroll tax on the value of the benefits — half would come from the employee and half from the employer. This would certainly discourage employers and employees from providing or taking a health insurance benefit. But, in the mind of your typical supply side economist, this would not be a "real" tax.
I do not understand this but I also have a hard time with Bill Clinton's definition of "sex".
Ladies and gentlemen of the press — if any of you ever read this blog — please, when you get a chance to talk to Mr. Holtz-Eakins ask him about this. Better still, ask him to explain precisely how the proposed plan would be implemented, get it in writing and forward it to chris@WonksAnonymous.com so that my confused mind can have some rest.
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