Health Care Reform: A Common Sense Approach Part II

In Part I of this article, I discussed who is eligible and how eligibility will be determined for government subsidized health insurance premiums. A correction is needed for Part I. I said, "tax deductions for incomes over $25,000," it should be a decrease in tax deductions for incomes over $250,000.

Part II examines the proposed funding sources for government subsidized health insurance premiums for health care reform. The three sources of funding under consideration for health care reform are a decrease in tax deductions for incomes over $250,000, surtax on large businesses, and a tax on employer-paid health care benefits.

To understand why these particular proposed funding sources are under consideration for health care reform, let us examine the reasons for taxes. A tax is a levy or fee charged by a government (federal, state or local) on goods and services, income, and activity to raise funds for common societal goals. There are two major principles of a tax: the benefit principle, and the ability to pay principle.

The benefit principle refers the amount of tax people pay should be based on the benefits received from the government provided goods and services funded by the tax. An example is Medicaid. According to the benefit principle, the poor should pay a higher tax then the rich because it is the poor who receives the most benefit from Medicaid. Of course this is contradictory because the poor does not have the ability to pay higher taxes than the rich. This is why the benefit principle is better for certain types of levies like the fee paid to enter the nation's National Parks.

The ability to pay principle states the amount of tax people pay should be based upon their ability to pay. The ability to pay is determined by income and a sense of social justice. People with higher incomes have a higher ability to pay a tax than people with lower incomes. The sense of social justice comes from the notion that everyone should have the same level of sacrifice and certain social values should be reinforced through the tax code.

An example of this is a luxury tax. Luxury goods have a higher sales tax because high-income earners can afford to pay a higher sales tax due to their ability to pay. There is a sense of social justice that the wealthy pay a higher tax on goods only they can afford to buy.

Why is all of this important for the public option and health care reform? It is important because a decrease in the tax deductions for people earning over $250,000 per year is an attempt at an equitable level of sacrifice and a measurement of the ability to pay for high-income earners. As will be discussed later, this is tied to the perverse consequences of employer-paid health insurance.

A surtax on large businesses to help fund health care reform is an attempt to control health care costs as well as establish an equitable level of sacrifice and the ability to pay. A government-imposed surtax on annual after-tax profits will give businesses an incentive to reduce health care costs - the reduction in expenses could translate to an increase in profits. The percentage of annual after-tax profits paid by businesses to fund health care reform, could be offset by lower premiums for employer-sponsored health insurance plans.

A tax on employer-paid health care benefits to help fund health care reform is the most sensible but politically fraught option. It is the most sensible option because employer-sponsored health insurance benefits have tax exclusion. Employer-paid health care insurance premiums are not tax as income from the standpoint of the employee. From the standpoint of the employer, health care premiums are considered a business expense, which reduces taxable income, and are excluded from payroll taxes.

What's wrong with the employer-sponsored health care benefit tax exclusion? Several things. Firstly, the health care benefit tax exclusion favors high-income earners. High-income earners (income over $250,000 per year) tend to have the most comprehensive health insurance with no or few co-pays and deductibles. Middle- and low-income earners tend to have health insurance plans with higher co-pays and deductibles than high-income earners.

Because the health care benefit tax exclusion favors high-income earners, it is regressive. The ability to pay is more arduous for middle- and low-income earners than it is for high-income earners. Additionally, high-income earners are receiving a greater benefit from health care services than middle- and low-income earners. This worsens the issue of social injustice in health care.

Secondly, the trade off between salaries and health care benefits. Most employees don't know the costs of their employer-sponsored health insurance plans. Employers are paying higher costs for health insurance premiums that are offset by limiting salary increases. Touting the rise in health care premiums can be used to keep salaries stagnate.

Lastly, the taxpayers are subsidizing employer-paid health care benefits through lost tax revenue. According to the Family Research Council, the U.S. Treasury Department estimates employer-sponsored health care benefits to be the "single largest tax expenditure in the federal budget." The subsidy for employer-sponsored health care cost the taxpayers $132.6 billion in 2006. Taxing employer-paid health care benefits would generate a significant source to fund health care reform.

This is politically fraught option because Obama opposed taxing health care benefits in his campaign. Now, he might have to reverse his opposition and risk losing supporters. Additionally, a tax on employer-sponsored health care benefits may be seen as a tax on working Americans. Capping employer-paid health care benefits and levying a tax above that cap, can help bend the health care cost curve.

Part III, the final installment of this article, will discuss the criticisms surrounding health care reform and the public option.

List of Sources

Klein, Ezra. Health Care Reform for Beginners: The Many Flavors of the Public Plan. The Washington Posthttp://voices.washingtonpost.com/ezra-klein/2009/06/health_care_reform_for_beginne_3.html

Nation, Joe. Health care debate misses issue of costs, 23 August 2009

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/08/22/INDR19B11F.DTL

Economy Professor http://www.economyprofessor.com/economictheories/benefit-approach-principle.php

Economy Professor http://www.economyprofessor.com/economictheories/ability-to-pay-principle.php

Family Research Council http://www.frc.org/get.cfm?i=IF07L01