• I bet you’re getting a subsidy for your health insurance, too – ctd.

    This post is co-authored by Aaron Carroll and Austin Frakt

    We’re getting a strange amount of pushback from people who deny that their employer-sponsored health insurance is “subsidized”. Some deny that a tax deduction is a subsidy. Some deny the existence of “tax expenditures” at all.

    So let’s try again.  Take this chart:

    The first column is the average employee contribution to health insurance. It’s the amount you see deducted from your paycheck every year for health insurance, if you’re an average worker.  The second column is the average cost for an employee sponsored premium. You see the dark blue part, which is your contribution, and the light blue part, which comes from your employer. So far, so good. You have a job, and you feel you earned that light blue portion as a benefit. If others want this awesome deal, they should get jobs, too.

    But here’s the thing.  That middle column is, currently, not taxed. No federal income tax, no Medicare tax, no Social Security tax, no State tax. No tax.

    If you buy your insurance on the street, you don’t get this no-tax deal. If you’re self-employed, you don’t get this no-tax deal. If your employer doesn’t offer insurance and you buy it, you don’t get this no-tax deal. Only employer-sponsored insurance receives such favorable tax treatment.

    If you didn’t get this deal, in order to afford the same insurance (if you can even find it at the employer-based price, which likely you cannot), you would need to make as much as in the right column, on average. It’s 37% more than the middle column. And that assumes an average federal marginal income tax rate of 20%, which is a bit low overall and certainly low for workers, on average. So, this is a conservative estimate.*

    You can choose to believe that this isn’t an “expenditure” and that you’re not getting a subsidy. But you’re getting a huge amount of extra money in your paycheck that a self-employed self-purchasing or unemployed person is not. Give us a good reason why that’s fair. If it’s not, then either we should eliminate the preferential treatment of employer-sponsored insurance or we should provide a similar benefit to those without access to it.

    The latter is not so terribly different in spirit from the types of subsidies that will be offered under the ACA or from Medicaid- or Medicare-financed coverage. Where these other government subsidies do differ from the employer-sponsored insurance tax subsidy is in their degree of progressivity. Is it wrong for the wealthier to pay more than the poor for decent access to health care? Is that the objection?

    In any case, we do agree that these subsidies — all of them, including the employer-sponsored insurance one — cost the government a lot of money.  The employer-sponsored health insurance tax subsidy costs about $240 billion annually. We bet many people think that per-person public spending on Medicaid is dramatically more than the average worker gets via the employer-sponsored insurance tax subsidy. But guess what? They’re not as different as you might think.

    Total Medicaid spending per person is about $6,300. Do you know what the average cost of the employer-sponsored tax subsidy is? You can read it off the graph above as the difference between the right-most and middle columns. It’s about $5,000. And, remember, this was a conservative (low) estimate.* Yes, it is lower than what is spent on behalf of an average Medicaid beneficiary, but not by as much as you might have thought. It’s almost like most workers are on welfare. We bet you never thought of it that way.

    * The actual average tax subsidy rate is about 40% (not 37%), making the average dollar amount in subsidy about $5,500 (not $5,000). The difference between this and what is spent on the average Medicaid beneficiary, $6,300, is only $800.

    UPDATE: And, if you’re concerned, it turns out that if you make a really nice salary, putting you in the top tax bracket, your subsidy is more than $6950. Which means that your subsidy is more than Medicaid.

    UPDATE 2: Fixed a point on self-employed people. If you file the correct forms, you can get the subsidy.

    • While I do not dispute any of the facts in this post, I do not agree that this must be considered a subsidy. This is a difference in conservatives’ and liberals’ worldviews. Liberals tend to believe that the money, by default belongs to the government while conservatives believe the money belongs to people. Before you respond to that, ask yourself is there any real difference in saying the baseline is a zero rate on all compensation with a penalty tax on monetary compensation versus using the prevailing tax rate as a base with a “subsidy” on compensational benefits?

      The government can choose to tax different forms of income at different rates, and the more lightly taxed types aren’t subsidized. Inheritance income, for example.

      All that being said, I think we’d be better off if the laws didn’t favor employer-based coverage over independent coverage, and if benefits in-kind were taxed at the same rate as income.

      • For better or worse, we tax income. If you exempt some kinds of income, you are subsidizing that kind of income. Someone else has to make up the difference in lost revenue.


      • Jeremy, have you really ever met a liberal who thought this? Or are you trying to pull a David Brooks here?

        In any case the point has nothing to do with metaphysical questions about who really owns your money. Suppose Bob and Fred both use the same barber (perhaps he’s the only barber in town). Suppose the barber charges them $30 for a haircut, but then one day he gives them each a special deal. He gives Bob a haircut for $20. As for Fred, the barber still charges him the full $30, but on his way out the door the barber hands him back $10. Question: is the deal Bob got better or worse than the deal Fred got? Obvious answer: it’s neither! They got exactly the same deal!

        Now, substitute the government for the barber. The government doesn’t give haircuts, but it provides all sorts of other services (roads, military, police, public schools, comedy by assorted members of congress etc.). The price for these services is called a “tax”. Suppose now that Bob and Fred consume the same in public services. Question: if Bob gets a tax deduction, and Fred a cash grant for the same amount, did one of them get a better deal? Obvious answer: no, it’s exactly the same deal! If you want to call what one of them got a subsidy, then you must call what the other one got a subsidy too.

        (In the real case, Fred would be getting a credit to use to buy health insurance, not cash; so it’s not *exactly* the same deal, but, if anything, it’s Fred who comes out worse.)

        The problem with your argument is just that you forget that teh guv’mint provides services that people use, and which cost something. That’s what taxes are; they are not a funnel down which money magically disappears.

      • Do you really think liberals believe that money belongs to the government “by default”?

        A portion of your income does belong to the government, it is a matter of law. This is not an ideological point of view, it is a fact necessary to fund a government established by the people. Ideology is not factor in the notion that money belongs to the government, it applies to the question of how much, something that is also a matter of law.

        Call the tax treatment of benefits whatever you like to make it sound better, but it will not change the fact that if you pay for your own insurance on the individual market you pay taxes on that money, if you get insurance through your employer, no one pays tax on that money. That’s what the “real difference” is! (you asked)

      • What I still can’t figure out is why the Tea Party Republicans don’t call for an immediate repeal of Medicare Part D? (BushCare) If the ACA is as catastrophic as TeaPublicans warn, then why is BushCare OK?

        Passed under what Bruce Bartlett called “the most extraordinary events in congressional history” at huge, unfunded costs with enormous payoffs to Big Pharma (and large numbers of those involved obtaining sinecures from Pharma thereafter). How is all of that OK, but the ACA is of the devil? Is it because AARP would kick some Tea Party @ss if repeal of BushCare were sought? Or because lots of Tea Partiers are themselves beneficiaries of BushCare’s largess, but don’t want those others getting some for themselves?

    • So let’s wipe out the regressive tax subsidy completely. I doubt you’d find many conservative health policy wonks who would disagree. If only there were a major piece of health policy legislation passed recently in which we could have done so…

      • @AB
        The tax on high cost health insurance is a de facto capping of the subsidy, so Dems have already voted for it. Just about all Repub plans have abolishing the subsidy. It is the logical next step if we are really interested in addressing health care costs. Who knows, maybe they will stumble into this weekend

    • I agree that things would be much better if the subsidy did not exist.

      But unfortunately it does exists and has existed, so that many people have made a choice of a career based on whether an employer offered this subsidized benefit. Many have taken lower paying more stable jobs with good benefits. It would seem to me unfair to simply pull the rug out from under these people that played by the rules of the game as they were and are.

      Maybe you could change the rules for all new hires or have some other phasing in the new rules.

    • I’ve been self-employed for decades, and no accountant I’ve ever used has shown me how to get full deductibility on insurance premiums. If you itemize you can write off total med expenses (including insurance) above I think 5% of AGI, but deducting all insurance premiums from income? Uh Uh. (Unless you start a small business and that business buys the insurance.)

      What forms are you talking about?

      • You can deduct health insuracne premiums if you are self-employed on page one (line 29) of Form 1040.

        • Geoff: “You can deduct health insuracne premiums if you are self-employed on page one (line 29) of Form 1040.”

          That only works if you itemize, and then only to the extent that your total itemized deductions exceed the standard deduction. For most people, it means you’re deducting little or none of your premium costs. Businesses expense it straight out of income — reduces their reported profits dollar for dollar.

          I’ve been feeling screwed by this for decades.

          Removing the business deduction for health insurance would encourage exactly what the Pubs say they like and want: people buying their own insurance on the open market, the theory being that it would drive down prices through competition.

          I tend to think that employers are probably much better and stronger negotiators, but on the other hand the end result is the crazy system we have, where if you get sick and lose your job, you lose your health insurance!

          For an idea of how we got that crazy system:


    • Also note that the average tax subsidy is higher that the exchange subsidies to be provided by the Affordable Care Act.

      CBO estimates that the average exchange subsidy will be $5200 in 2015.

      Neither type of subsidy will help the estimated 5 million unsubsidized exchange enrollees.

    • Health insurance is obtained through a business based contract and very often employees in a corporate entity are receiving different levels of coverage. This coverage is a benefit just like any other pay on all levels on the scale.

      We do not have a system whereby an employee is offered health coverage (mandatory or not) and upon choosing the level, is then granted a tax deduction or credit applied to the monies withheld to pay for his coverage. Coverage delivered based on the employers’ contract(s).

      The employer gets the tax relief as a cost, an expense and employees get “pre” tax benefits. What a collective! The higher you are in your collective the bigger the “pre” tax benes.

      Because of these benefits the insurance companies are able to provide services that are priced such that they are not entering the market place on equal footing with other services or even other insurance contracts that are not given tax preference. So the free market wheel already has a stick in it before it starts turning.

      Rather than “Conservatives” attempting to define Liberals and “Liberals” defining Conservatives, why don’t both sides of the coin remove the stick like the “Liberatives” demand. Let corporations create contracts with their masses like any other contract and offer their employed the participation of their choice. Give the employed individual the individual tax break. Do the wealthier get a better deal because they can buy more? Yes! Will the insurance companies gravitate to contracts only with wealthier groups? Yes. Why not? It is a free market. This is where the government can provide for those the insurance companies choose to ignore and do so with the tax benefits built in.

      The question here is do we allow the wealthy unlimited tax benefits for all the monies they can throw into their family policies? Or do we cap the tax benefits and tax the rest like we would any other income. And why should this be a debatable issue?

      So in this free market the corporation becomes only a bargaining unit for employee benefits and the insurance companies’ are no longer subsidized with government sponsored tax breaks for a certain group. The individuals that carry the tax load have the deduction/credit directly and those individuals the insurance companies choose to stay away from are covered by their taxing government.

    • Readers also shouldn’t forget that if we want to compare the general population (which has employer sponsored insurance) to Medicaid beneficiaries, that many Medicaid beneficiaries are elderly or have significant disabilities. These beneficiaries cost a LOT. If we were able to estimate how much it would cost to insure working age folks like me through Medicaid, I bet the per person costs would be less than the employer sponsored insurance subsidy cost.