Employer-sponsored insurance tax subsidy facts

Some don’t think the way employer-sponsored health insurance premiums are not taxed counts as a subsidy. I’m not that interested in semantics, more interested in facts. Here are some:

  1. Total compensation for employment is set in the marketplace. As much as they may like to, employers don’t (usually) choose it unilaterally.
  2. Health insurance premiums comprise a portion of total compensation, along with wages and other deferred compensation and perquisites of the job.
  3. As the health insurance component of compensation goes up, wages must go down or not rise as fast as they otherwise would, holding all other forms of compensation constant. (It’s simpler to think of compensation as health insurance plus wages, which is good enough for this post.)
  4. We can compute the cost of a dollar of employer-sponsored health benefits in terms of forgone wage. Here’s how. Doing so, we find that it takes far less than a dollar of forgone wage to “buy” a dollar of employer-sponsored health insurance. An average value is about 60 cents. The difference is untaxed compensation. Had the compensation been entirely in wage, it would have been taxed. The government would have received (taken, ripped from the hands of hard-working Americans, whatever) about 40 cents in revenue. (This is for a typical taxpayer. Your results may vary).
  5. Thus, a dollar of employer-sponsored health insurance costs the government 40 cents. Some call this a tax subsidy. Some call it a tax expenditure. I don’t much care what it is called. It’s a fact the government doesn’t receive the 40 cents and the employee doesn’t get it in wage either. It goes to health insurance premiums, which most feel are too high.

Though I may not care much what we call the 40 cents, I am somewhat bound by convention and the desire to be understood to use what has become standard terminology. Thus, I have called it and will call it a tax subsidy or tax expenditure. If conventional terminology changes, I will adapt accordingly.

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