As Wonks Anonymous noted in the previous post Uwe Reinhardt has a problem with the exemption of health benefits from taxation. His main argument being the loss of revenue:

Under current law, employers can treat the contributions they make to the premiums for their employees’ health insurance as a tax-deductible business expense. On the other hand, employees do not pay income taxes or payroll taxes on this contribution, though it clearly is part of the employees’ total compensation.

In 2007, this tax preference reduced federal tax revenues by an estimated $250 billion or so. Estimates for 2010 have been as high as $297 billion.

Which we might just spend on health benefits for the uninsured, unless we have to save someone else from Radical Islam.

The Professor makes an efficiency argument which Wonks Anonymous discussed in his last post. He also argues that tax free health benefits are unfair to poor people:

Second, and much more problematic, in dollar terms the price reduction is larger for high-income employees in high marginal tax brackets than for lower-income workers.

In other words, the benefits of such “tax expenditures” (as the tax-revenue loss triggered by tax-deductibility is called) accrue disproportionately to higher-income groups. Very low-wage workers hardly benefit at all from the tax exclusion. Their bosses benefit handsomely. It can be asked why lawmakers favor this distributional effect.

In other words, because higher income individuals have higher marginal income tax rates, they get more benefits from the exemption than poor folks.

Because a data monkey Wonks Anonymous has a higher marginal income tax than a union medical office receptionist he is more favored by the exemption of medical benefits from taxation.

But Professor Reinhardt will first have to admit that, after we factor in the payroll tax and take into account the fact that all income over six figures is essentially exempt from payroll taxes, US tax rates are really not all that progressive. The additional benefits to the rich are not all that great.

And, rather than talking about tax rates we might want to ask this question: Who would be most hurt if we removed the exemption from health benefits? Wonks Anonymous or the medical office receptionist?

First consider that most companies offer more or less the same plan to all employees. Say that the price of the "generous" family plan is $15,000 per year. Say the receptionist makes $30,000 and Wonks Anonymous makes $100,000.

If the exemption is removed Wonks Anonymous and the receptionist will both see their take home pay go down. Maybe the receptionist will lose $4,000 in payroll and income taxes. Maybe Wonks Anonymous will lose $5,000. The receptionist loses something like 20% of her income. Wonks Anonymous loses something like 5%.

No one has really worked the numbers on this systematically. It would be a nice study for the Henry J. Kaiser Family Foundation, Wonks Anonymous would love to be paid to do studies like this. Wonks Anonymous would be genuinely surprised if a real study found that the benefits of the health insurance exemption were greater for the rich.