Tax Reform Must Be Part Of Health Reform

In the fall, the campaign of Barack Obama had harsh words for Senator John McCain’s health-care plan.

Obama campaign ads charged that the McCain proposal would result in the “largest middle-class tax increase in history.” Senator Biden warned that “for the first time in history” employer-provided health benefits would be taxed. Sen. Biden explained in a speech: “It will cost the middle class over $1 trillion dollars in additional taxes . . . you almost don’t believe what I’m telling you, because it sounds so wrong.”

Actually, Mr. Biden was wrong. Yes, the McCain plan would have taxed health benefits – and, yes, it would have been the first time in history – but the proposal also offered tax credits to families. By emphasizing the new tax and not the new tax breaks, the Democratic campaign was selective, portraying a tax reform as a tax hike.

That’s not quite an unfettered defense of the McCain health plan, which had its share of flaws. But it did have one significant strength: the recognition that paying for health insurance in pre-tax dollars must change.

Rising out of wage and price controls in the Second World War, the tax code offers advantages to employers for the purchase of health insurance. It’s an unusual arrangement: we don’t allow people to pay for food, clothing, or shelter in pre-tax dollars, why health care? It’s also deeply problematic since the resulting system is:

• Expensive. Today, the Treasury loses $200 billion a year to the employer health tax deduction.
• Regressive. As tax policy, this exemption favors the rich: a quarter of that total benefits those earning over $150,000 a year.
• Unfair. People working for large corporations get a tax advantage; the self-employed and the unemployed don’t.
• Perverse. Since others are paying for their health insurance, people don’t economize their decisions as they do for the other five-sixth of the economy.

And so, good news: the White House of Barack Obama isn’t ruling out tax reform as part of health reform.

For the past week, the White House has suggested that it may – just may – be open to reviewing the tax treatment of health insurance. As Peter Orzsag stated last week, it’s one of several ideas that “most firmly should remain on the table.” The New York Times ran an A1 story on Saturday with the headline: “The Administration Is Open to Taxing Health Benefits.”

On Sunday, the Obama team downplayed the idea but Christina Romer, Chairwoman on the White House Council of Economic Advisors, didn’t rule anything out. She noted that while the President is still opposed to it, Congressional approval could result in Presidential approval. She explained the contradiction with a Clintonian equivocation: “I think what [Obama] has said from the beginning is there is no such thing as Democratic or Republican ideas. They’re just good ideas. He will listen to good ideas. This is not one he has ever supported.”

One cheer, then, for the Obama White House as they mull a good idea.