Tuesday, January 23, 2007


Equalizing Tax Deductions For Health Insurance

The Bush administration has made a proposal that could help equalize the burden of health care costs between those who get health care through their employer and those who purchase it privately. Currently, the cost of corporate health benefits is generally deducted from the employee's taxable income such that the employee is not taxed on their value. If you are in a 30 percent tax bracket, and the cost of your health insurance is worth $10,000 a year, that means the IRS is losing $3,000 in tax revenue. Bush's solution is to remove the tax exemption on corporate health benefits, and replace it with a general health care tax deduction that would be available to everyone, regardless of the source of their health insurance. I would like that, since I am a consultant and have my own health insurance. Maybe you would like it, too.

If corporate health insurance was taxed, many corporate employees might opt for less coverage. This might, in turn, decrease the demand for health care and at least slightly drive down the cost of health care for the privately insured. That's the theory anyway. The Washington Post warns that the plan has its weaknesses, and that Bush could have proposed something a little more robust. "Rather than embracing tax deductions, which are most valuable to people in high tax brackets, Mr. Bush could have made his proposal even more progressive by recommending a refundable tax credit that would be worth the same to everyone. Moreover, there's a danger that ending the tax privilege for employer-provided insurance will cause companies to discontinue coverage, driving more buyers into the individual market, where it's hard to buy insurance at a reasonable price, especially if you already have a medical problem."

The Bush plan undoubtedly has its potential flaws, but at least he's trying to think of something. Maybe he's started to listen to his Democratic Congress. On the other hand, what happens to your W2 if and when the cost of your corporate health care is no longer taken out before taxes? Will it suddenly appear as a bogus increase to your adjusted gross income? Would the Bush administration then spin the resulting false jump in income as a victory for wage earners in Republican America? I don't know, but I wouldn't put that past them.

"A Healthy Initiative" from The Washington Post

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