The Myth of the Tax Code

The tax code is a blunt instrument, not a laser. It cannot be used to solve every problem the country faces. This is especially true with health care, which is why the President's idea, which will be announced during tomorrow's State of the Union Address, to use the tax code to solve our health care crisis, is so ridiculous.

President Bush intends to use his State of the Union address Tuesday to tackle the rising cost of health care with a one-two punch: tax breaks to help low-income people buy health insurance and tax increases for some workers whose health plans cost significantly more than the national average.

White House officials say Mr. Bush has decided to forgo the traditional formula for the State of the Union — a laundry list of ideas, many of them dead on arrival — in favor of a more thematic speech that will concentrate on a few issues, like health care, immigration and energy, on which he hopes to make gains with the new Democrat-controlled Congress.

The basic concept is that employer-provided health insurance, now treated as a fringe benefit exempt from taxation, would no longer be entirely tax-free. Workers could be taxed if their coverage exceeded limits set by the government. But the government would also offer a new tax deduction for people buying health insurance on their own.

“I will propose a tax reform designed to help make basic private insurance more affordable,” Mr. Bush said in his weekly radio address on Saturday, “whether you get it through your job or on your own.” He did not offer specifics, but an administration official provided details of the plan.

The people that don't have health care right now are extremely likely to qualify for the Earned Income Tax Credit, or make so little money that they don't pay any taxes at all. So making their health care tax deductible will have no discernable effect. You fill out your taxes once a year. It doesn't keep money in your pocket throughout.

Furthermore, taxing workers for having health care that's "too good" is completely absurd. Price and quality of health care are only tangentially correlated. The taxation is at the upper limit of cost right now, but given how costs have skyrocketed over the past several years, and given that nothing in the President's proposal seeks to contain costs, where will we be five years from now, when employers will be looking to shave off their coverage to the most bare bones to keep under the taxation limit?

Ezra Klein seems to like this proposal:

Early response from many on the left is lukewarm, at best. And, to be sure, dismissing this as useless incrementalism is a fair attack. Bush's plan will do nothing to salve the deeper dysfunctions of the health care system. It will not keep insurers from discriminating on grounds of health and history, it will not subsidize low income workers, it will not create universality, or widen the risk pool, or aggregate buying power, or end the employer tie, or do most anything else that needs to be done.

But so far as incrementalism goes, this is supportable. The full deductibility of employer-based benefits has had nothing but pernicious consequences for the health system, creating and strengthening a structure that traps Americans in jobs, giving employers absurd control over their workforce's health security, and penalizing the entrepreneurial and unemployed alike. And every taxpayer, whether they have insurance or not, is forced to subsidize this unjust, inefficient structure. It's crazy. Progressives should indeed support efforts to sever the Gordian knot tying insurance to employment and, now, with Democrats in control of Congress, should see this proposal as a starting point atop which a yet-more progressive tax change can be constructed.

I cannot share his optimism. Workers have little control over the cost of their health plan, but will always opt for the better coverage that their employer provides. This would amount to a tax on the middle class to pay for the health care of the poor, with the winners in our society absent from the exchange.

If you want incremental change, expand the CHIP program, which Hillary Clinton promoted today as her first Presidential candidate legislation. Other than that, I think it's really dangerous to assume that tweaking the tax code is the great answer to all the worries of the country. The federal government has a leverage and an ability within the current revenue generation streams (aside from maybe letting the top-rate cuts expire) to do plenty of work.