• Why is Romney for more tax breaks on health insurance?

    On Tuesday, in Florida, Mitt Romney said,

    Well right now, most people get their insurance through their employer and the reason they do that is because their employer gets a tax deduction when they buy insurance for you. But if you’re a very small-business person—let’s say a one-person business—you don’t get a tax deduction for buying insurance. And if you’re an individual that’s not employed, you don’t get a tax deduction for buying your own insurance.

    Right. And, so, most economists and many policy wonks, as well as deficit hawks, advocate eliminating or phasing out the tax deductibility of employer-sponsored health insurance. Doing so would increase tax revenue by about $250 billion per year (pdf). It would also discourage overly generous health care benefits. Seems like a good idea to dump this tax subsidy. But, it looks like Romney is leaning the other way, because his next sentence was:

    What I would do is level the playing field and say individuals can buy insurance on the same tax advantage basis that businesses can buy insurance. [Emphasis added.]

    Can anyone tell me why Romney wants to expand the tax preferred status of health insurance? Doesn’t he believe we overspend on health care? Doesn’t he believe in the incentive effects of taxation? Isn’t he interested in reducing the deficit and/or cutting marginal tax rates? Why, then, would he want to create an even bigger tax expenditure? If Romney means something else (e.g., removing the tax deduction and offering a tax credit for group- and non-group health insurance products alike), then I’d like to know where he said or printed that, because his website doesn’t say it. Frankly, I’m puzzled.


    • Good questions. Wouldn’t Mr. Romney’s hope-for friends in the Tea Party be rallying for elimination for the tax deductibility of employer-sponsored health insurance?

    • Why do people assume that the only reason for the dominance of employer provided insurance is the tax deduction? It provides some very important other features.

      – Effective pooling of risks in such a way as to avoid adverse selection
      – Perception of it being provided for “free” by the employer strongly encourages people to participate who wouldn’t otherwise if they were writing the check directly, also a strong deterrent to adverse selection
      – Minimizes administrative costs associated with selling individual policies
      – Pools the negotiating power of the insureds to avoid being taken advantage of by the more powerful insurer. Insurers in the individual market don’t tend to care if an individual is dis-satisified because those people tend to be the high utilizers that they would just as soon get rid of. If the employer can threaten to move the whole group, they are far more motivated to treat the individual well.

    • Why “level the playing field” rather than develop policy that reduces the deficit and tries to control healthcare spending? Follow the money. This approach perpetuates the source of political contributions. Obamacare has too many unknowns that the industry does not want to deal with so this approach gives political cover.

    • “Isn’t he interested in reducing the deficit and/or cutting marginal tax rates?”

      On reducing the deficit? No, he isn’t interested. On cutting marginal tax rates? He will do it anyway, again, because he doesn’t care about the effect on the deficit.

    • How would tax breaks help if (as Republicans repeatedly point out) 50% of people don’t pay federal income tax ?

      K. Marq is correct and I would add the advantage that employers’ HR people are familiar with the misleading information about coverage provided by insurers as well as the various tactics (including intentional “mistakes”) that insurers use to pay less than the policies require.

    • Eliminating the employer exclusion woulfd be politically impossible because it would increase costs for both emplyers and employees. Not to mention that it’s a key factor in most union contracts. Giving similar tax treatment to individual buyers is at least politically possible, and if it’s done with some uniform limits on excludibility for both employee group and individual plans it makes a substantial step toward eliminating some of the incentive to over-insure.

    • Dear Austin,

      I assume your expressions of puzzlement are purely rhetorical. But just in case they are genuine, let me explain this to you . . .

      In the rough-and-tumble world of electoral politics, nobody cares what “most economists and many policy wonks, as well as deficit hawks” have to say. Professional politicians succeed by offering voters what they want, and voters have no taste for hard choices. Since there’s no demand from voters, politicians won’t supply any — that’s just freshman economics! And that’s the source of Dick Cheney’s notorious remark that “deficits don’t matter” — he wasn’t talking about macroeconomics (I doubt the subject has ever seriously crossed his mind), he was speaking about how the public decides to vote. Romney isn’t special in this regard — can you name one mainstream politician, Democrat or Republican, who has openly advocated for eliminating the tax subsidy for employer-based health coverage?

      I think there’s a pretty good chance that Romney’s proposal will become the accepted mainstream bipartisan position. As businesses cut back or drop their health plans, more and more people will have to purchase coverage on the individual market. Everyone agrees that there is a big asymmetry in the tax status between employer-based and individually purchased health insurance, and it’s clear that there are only two ways to resolve this disparity: either eliminate the subsidy, and thus effectively raise taxes on a large chunk of the middle class, or extend the subsidy to everyone, thus giving a tax cut to lots of people. Which option do you think EVERY political actor will favor?

      • Individually purchased insurance can be reimbursed under a pre-tax section 125 like plan. If an employee has individual insurance they can ask their employer to pay it with pre-tax income just like employer provided premiums. The employee and employer both would receive tax savings.

        The only individuals that don’t have access to pre-tax payment of insurance premiums are those not working and some business owners. This “issue” affects less then 1% of the population.

    • “Doesn’t he believe we overspend on health care?”

      Employers via their self funded plans do more in a day to reduce healthcare spending then the government and all the carriers do in a year.

      Self funded plans are the most efficient plans in the country

      Self funded plans have better trend then fully insured

      Self funded plans respond quicker to changes in market.

      Anyone claiming to be concerned about the cost of healthcare would start by pushing as many employers as possible to self fund, instead those pushing reform are doing everything they can to eliminate self funding and all the money it saves.

      Someone needs to force the liberal economist pushing this to answer a couple questions;

      First if your so against the high cost of this tax deduction why do you drive up premium with 100% preventive care and other benefits increasing the size of the deduction?

      If your against the deduction why have you made it illegal for employers to buy high deductible plans with very low premiums?

      Finally if your concern is revenue why do you propose taking away a tax deduciton then having government pay a majority of the premium? The subsidy proposed would cost far more then any additional tax revenue.

      The employer market is a huge exchange that cost the government nothing more then a tax right off. We should do away with that and repalce it with another exchange with even greater subsidies?

      This study also ignore the consiquences, how many billions in claims will go back to Medicare for the working aged if employers reduce coverage or eliminate it? Medicare, Medicaid, and VA have all spent years pushing peopel back onto private insurance plans, do they really want all that risk back?

    • Romney himself is just serving up some libertarian bromides……it is the old Jack Kemp/Arthur Laffer/Jude Wanniski theme song about how all social problems can be cured by lowering marginal tax rates.

      There is a grain of truth in this particular theology, but health insurance has bigger problems than tax rates, as noted in several posts above.

      Without employer plans, the percentage of Americans with health insurance would move down toward the percentage of Americans with long-term care insurance or individual disability insurance, i.e. less than ten percent. An aggressive tax deduction might push this number up to 20%.

      This would certainly lead to lower prices for health care, but the transition period could be an economic nightmare. Our overpaid hospitals and clinics would appear to be the last source of new good jobs in America, if you spend any time on the employment search engines.

      Neither Romney nor Obama has shown a mastery of what to do next regarding health insurance.