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One Small Step for the Tax Code, One Giant Leap in Reducing Healthcare Spending January 22, 2007

Posted by federalist in Healthcare, Regulation.

One could argue that most of our country’s healthcare cost inflation is due to the third-party model of healthcare payment, and furthermore that that model is entirely a product of the disparate treatment of healthcare costs in the tax code: Healthcare can be purchased by an employer with pre-tax dollars, whereas individuals practically always have to purchase any form of healthcare with post-tax dollars.  Thus the optimal tax arrangement has employers contracting health management out to third parties, insulating the actual healthcare consumers from the costs.  This arrangement has become so commonplace that some people now think it is immoral for employers not to pay for healthcare.

President Bush’s initiative to remove this tax anomaly could do more to fix the supposed “healthcare crisis” than any government intervention.

Granted, when it comes to tax code the devil is in the details.  Bush apparently couldn’t just come out and exempt healthcare spending from taxation.  Instead taxpayers have to file for a refund, which in his proposal is limited to $15,000 for families and $7,500 for singles.  Guessing from the language of his proposal this would end up being implemented as an extension to the “standard deduction” (i.e., you would have to own health insurance to qualify for this higher standard deduction).  Which means it is probably subject to the AMT, and also that the benefit versus the current tax code could be reduced or eliminated if you itemize deductions.  So the proposal may remove a terrible disparity in taxation, but it doesn’t look like it will make the tax code any less complex.


1. federalist - February 8, 2007

Holman Jenkins summarizes this yesterday in his essay “The Biggest Secret in Health Care.” Highlights:

The tax code is the original hectoring mommy behind our health-care neuroses. It gives the biggest subsidy to those who need it least. It pays the affluent to buy more medical care than they would if they were spending their own money. It prompts them to launder our health spending through an insurance bureaucracy, creating endless paperwork. It prices millions of less-favored taxpayers out of the market for health insurance. It fosters a misconception that health care is free even as workers are perplexed over the failure of their wages to rise.

The oft-mouthed goal of expanding health insurance to the poor would be far easier to achieve if we stopped subsidizing overconsumption by the non-poor.

2. How Tax Policy Drives Quirky Compensation | Federalist - July 24, 2014

[…] But you don’t have to go to the Old World to see this. Distortions of healthcare markets by the tax code are something with which most Americans are famili…. […]

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