What are the consequences of eliminating the business tax deduction on healthcare


“To pay for those large tax cuts, the administration is looking at eliminating both the deduction for state and local taxes, and the business tax deduction for employer-sponsored health insurance. That would raise nearly $926 billion over five years, according to White House and congressional documents.”

I don’t know much about this issue but I know it was talked about a bit here.


So what is the business tax deduction on healthcare? What is this tax break exactly, and what are the consequences of repealing it? How much does it save the average employee a year? If it saves $926 billion every 5 years that is $185 billion per year or roughly $2000 per employee who gets healthcare through his job per year assuming 100 million people get theirs through their job.

As i recall, employers can currently deduct the costs of the percentage of health insurance premiums that they pay. I know small business owners can deduct their own healthcare premiums (and I wonder if this is included). Scrapping this seems very odd if Bush is trying to be pro-business/pro-hiring; it seems like it will hurt businesses. And it doesn’t seem like it will help employees, since it will discourage employers from offering healthcare or even hiring–employees will suddenly now cost an additional 10000 or whatever that you can’t even deduct from your profits.

Unclear phrasing above, so to clarify: It’s the “deduction” that employers suddenly do not get. Obviously the employers have been paying healthcare before.

This is a necessary, although painful, reform that has to be made. If you look at the how this practice came into being in the first place:

There are three significant negative aspects of this system:

  1. Insurance costs more since insurors aren’t stupid. They take the tax deductibility inot account, and raise premiums accordingly. You can’t just offer a tax deduction on a good or service and NOT expect the cost of that service to rise. It’s simple economics.

  2. People who DO have insurance provided by their employer (and subsidized by other taxpayers, btw) don’t have an incentive to take cost into account when they access healthcare coverage. In reality, of course, most people do pay some of the cost, so it’s probably more accurate to say thats there is less of an incentive, but the principle is still the same-- taking cost out of the equation distorts the market.

  3. Your healthcare coverage gets locked into your job, and you have to start all over again when you change jobs. This is much more of a problem today than it was in the past since people change jobs more frequently. The whole issue of pre-existing conditions would be dramatically minimized if you stayed with the same healthcare insurance provider over your adult life (or only changed when YOU wanted to change).

If you think about it, there is simply no reason to tie healtcare to your job. Is there any other good or service that is linked to you place of employment like this? Imagine if you had to change auto insurors everytime you changed jobs.

Well, I don’t know that this will make employers suddenly drop healthcare coverage–that’s pretty established in our culture right now. It just makes it more of a burden on them.

I don’t know that things being tax-deductible will always make the prices rise. Lots of things provided by an employer are tax-deductible–paper, computers, supplies, etc. and yet I don’t think they are more expensive because of that. Employers are not the only market for health insurance: lots of people are self-insured. Besides, shouldn’t the “invisible hand” of the market have produced a low cost insurer since all the rest of 'em elected to raise their rates above what they had to charge for a reasonable profit? :wink:

Ah…Could you please explain to me how the whole issue of pre-existing conditions would be dramatically minimized?

What would likely happen is that some people would be virtually unable to obtain insurance in the first place. When I was in grad school, the grad student policy had a $50,000 cap on what they would pay, so a bunch of grad students organized for the company to see us an additional policy with a $50,000 deductible that would then cover us up to like $1 or 2 million. When I went to see the guy and told him I had had a kidney stone, he said that would be excluded for 2(?) years as a pre-existing condition. He then added, “You had just one right.” I said, no, I had another several years earlier. He looked up in his book and it said “NCA”…no coverage available. He told me that all he could do is write me an accident-only policy. Welcome to the real world; all libertarians please check your fantasies at the door.

How did this imbalance come about? As John Mace said, businesses started offering health insurance primarily as a non-wage inducement to recruit workers – he noted the wage and price controls of the 40’s, but there were earlier instances where the company could provide the benefit at a substantial discount to the private market price or provide it where it was wholly unavailable at any price – part of the “company town” concept.

The deduction for medical expenses isn’t a “special” deduction. Since businesses are taxed on net profit, all business expenses are deductible unless Congress specifically decides that they are not. Amalgamated Widget takes deductions for the steel that goes into their widgets, for depreciation on the big Widgetmaking Gadget, for the salaries of the widget makers and for their benefits, including health care.

People, on the other hand, are taxed on their gross income. Nothing is deductible unless Congress specifically decides that it is.

So you can see where an imbalance would arise. And outside health care, it did indeed arise for exectutive-types and Congress has from time to time addressed it. Companies used to routinely pay for club memberships and deduct the cost. Now it’s rarer for them to do so, as it’s no longer deductible (depending on the “club”). Same with commuting expenses and whatnot.

In the case of health care, it creates a whole raft of perverse incentives even outside the tragedy of the commons problem which is much discussed. For one thing, the imbalance turned a powerful recruiting tool into an almost insurmountable retention tool for some people. The Clinton administration did a lot to lessen the insurmountability of this barrier.

Now, we can’t know what the Bush administration’s proposal will be – the President hasn’t even named the members of his tax panel. But philosophically we can expect that it will try to reduce or eliminate the imbalance between private and corporate health insurance. One way to do that easily is to make medical expenses fully first-dollar-deductible for individuals. Another is to take away the deduction for businesses. I suspect that when all is said and done, the panel will realize that the dislocation that the latter change would cause is huge and sufficiently undesirable that it doesn’t justify the long-term goal. I think throwing this proposal out there is both a trial balloon and a way of signalling that the President is not screwing around here – that he wants big, systematic changes to the tax system and that his “ownership society” is not intended to be convention rhetoric but his lasting domestic policy legacy.

I don’t know how I can explain it any better than saying you would change insurance carriers less frequently. Maybe you misunderstood me. I wasn’t talking about anything somatic changing in people, but that the instances where it would arise as a factor for insurance purposes would be reduced.

See above if that explains it. Otherwise, I don’t see how your anecdote is particularly relavent. You actually DID have a pre-existing condition. Many people don’t, but most people will if they change insurance providers often enough.

Strawman. Nothing I talked about had anything to do with libertarianism. Just plain ol’ economics.

I don’t know that it would either, but it would level the playing field so that health insurance for those who don’t get it from work will not automatically be higher (because it’s not tax deductible).

I’d never say “always”, but it is a simple economic principle at work here. Think of it this way-- supposing the mortgage deduction were eliminated. Do you really thing that housing prices would NOT fall?

To the extent that employers are only part of the market, the effect will be lessoned. But it won’t disappear. And yes, the same principle applies to paper and computers.

I think that treating this entirely as a “market forces” issue is a mistake. First of all, saying that the current deduction makes insurance cost more ignores the fact that eliminating the deduction will also make insurance cost more to the people whose employers drop their coverage. I’ve shopped for private health insurance before, and it ain’t pretty. If we’re going to discuss this in terms of the cost of insurance, we had better make sure that any savings actually work their way down to the people who use the insurance. But just dropping the deduction will only result in the costs of insurance being shifted from businesses and government onto employees.

manhattan’s addendum to the idea is a good start: allowing individuals to deduct the cost of health insurance will help. But note that the people who will be most affected by this will be workers at the low end of the skill spectrum: workers whose labour isn’t in high enough demand to change jobs at the drop of a hat. A lot of those people are also at the low end of the income spectrum, where tax deductions aren’t as big a concern as day-to-day costs, so they’re still going to be in a hard spot even if manhattan’s suggestion gets adopted.

The second issue, of course, is that health care is not just a market. It has aspects of a market, but those aspects are already distorted since demand for health care isn’t solely a function of cost and availability. For that reason, I don’t want the health care system to be completely market-driven, and the idea that something distorts the health-care market doesn’t strike me as automatically bad.

A good point, but keep in mind that de-linking health coverage from employers wouldn’t automatically solve this problem either. Every time I’ve changed jobs in the last eight years I’ve moved out-of-state or out-of-country at the same time, and my health insurance providers haven’t always been available at my new location.

Not necessarily. I agree that it would be better than the current system, which is essentially a tax credit for having the type of job that comes with healthcare insurance. But if everyone gets a tax dedcution, that kind of defeats the whole pupose, since the cost will just rise for everyone (you just pay for it in other extra taxes on something else). And, as you noted, it’s really a subsidy for the more well off at the expense of the less well off-- the tax break is more valuable for the former than it is for the latter.

Tax breaks are generally terrible public policy because they shift the price burden around in upredictable ways. It looks nice on paper because you can see who gets the cost savings, but it’s almost impossible to figure out who ends up paying more taxes elsewhere. Better to keep the price mechanism driectly tied to the purchase of the good or service.

John: if not making health insurance tax-deductible for individuals, then what? It still seems that eliminating the business deduction in isolation will only make the cost of health insurance to the end-user increase. You say that the business deduction increases the cost of insurance. But if eliminating the deduction only causes the costs of health insurance to be offloaded onto employees, without some mechanism in place to drain those costs away somewhere else, then the cure will be worse than the disease: we’ll be adding more low-skilled and low-income workers to the ranks of the completely uninsured, for the sake of making a market more efficient.

How can we ensure that low-income and low-skilled workers will still be able to afford health insurance if the business deduction gets eliminated?

Healthcare premiums are tax deductible for people who itemize if the premiums plus any other medical/dental costs are over 7.5% of your income (which is not really that hard if you’re middle to lower class and have a family) or they’re self-employed. I’m not sure if the proposed system will take away these deductions or not.

Housing is a lot less fungible than healthcare–I can switch insurance companies a lot easier than I can move to Toledo no matter how cheap the housing is there. Housing seems so dependent on local makets for its valuation that I’m not sure we can use it to draw decent analogies regarding other goods. Even so, since we haven’t seen the tax-deduction repealed so we can see what happens, let’s look at rising rates–they make housing cost more, but even in high rate times housing prices seem to only slow their gains, not reverse it, and even that not reliably. If average income in an area goes up people will drive prices up even if the rates are climbing.

If we’re talking simple economic principles, why hasn’t the “invisible hand” provided us with a decent low cost insurer? I know companies switch plans all the time and probably have the same unending sales calls from insurers pitching their rates that I get from printers and marketing companies. A decent low cost insurer could clean up.

First, you have to recognize that a tax break isn’t free, unless you expect NOT to collect that tax money elsewhere. The same for eliminating a tax break-- it allows you to reduce taxes somewhere else. You have to look at this in its entirety, and not just the effect of the one action on one area.

But I do agree that prices will rise if you elminate the tax break. That’s part of the purpose for doing it-- to tie the cost back to the item being consumed. The idea, though, is that people will be more judicious in using the healthcare system if the cost is part of the equation. This is not about doing something just for the sake of “market efficiency”, it’s about tapping into the market efficiencies to improve the overall system for everyone. Those market forces are there whether we like them or not-- we cannot ignore them by simply giving out tax breaks. We can either harness the market forces for our benefit, or suffer the consequences of trying to dodge them.

If poor people are unable to afford some necessity, it is better to directly subsidize them in the purchase of that necessity than to distort the entire market for EVERYONE.

I should add that, like **manhattan **said, we really don’t know any details about Bush’s plan. I’m not arguing either for or against it. In fact, I’m highly skeptical about any politician from either party doing anything other than screwing things up more trying to “fix” them. All I am doing in this thread is commenting on the single issue of allowing employer provided healthcare costs to be tax deductible.

Ah, but that’s just the catch-- “for people who itemize”. Most people who don’t own their own homes do not itemize.

None of these arguments is really relavent. All you are saying is that other factors also affect the cost of housing. I never said there weren’t. But tax subsidies are ONE OTHER FACTOR that affects the price.

The “invisible hand” does not hold a magic wand to make a scarce, valuable good or service cheap. It can only offer a very good, and proven method to make that good or service cheaper than it otherwise would be. Saying something to the effect of: “hey, this thing is expensive, so the market must not be working” is a mistatement of the economic principle of supply and demand.

Really? Sounds like a great business opportunity for you. Start one up and let us know how you do. Once again, I don’t say that to be snarky. I’m just not willing to accept that statement from someone unless they are willing to back it up with action, risking their own money in the process.

I’m not saying otherwise. But so far, the only suggested tax breaks that have accompanied this particular suggested tax hike have been tax reductions on investments, dividends, interest income, and so forth…tax breaks that are not likely to have a great benefit to the people who are likely to be hit hardest by eliminating the business deduction on health insurance.

As you say, we don’t know the whole picture yet since we’re arguing over what is likely (hopefully) a trial balloon. But still, nothing in the “big picture” currently allays my fear that this proposal, if implemented, will screw over a large class of workers.

How is discouraging the use of health care going to improve the system? One of the main arguments for reducing the number of uninsured people is that someone without health insurance is less likely to partake of preventative medicine (regular check-ups, for example) and are only going to use the healthcare system when medical conditions escalate into emergencies. That puts more of a burden on the healthcare system than if they had had regular access to it, not to mention depriving the rest of the economy of their input for the duration of such emergencies. So how is an action that will almost certainly increase the ranks of the uninsured going to improve the healthcare system as a whole?

Then let’s both hope that someone in the Bush administration comes up with such a subsidy and mixes it in to this tax plan before it goes any further.

Yeah, but you’re saying that stuff costs in excess of what it should because of the tax subsidies, NOT because healthcare is a scarce, valuable good. Even if deducting the costs of healthcare saves you $10 on the hundred, $220 still cost more than $200–would an employer choose the $220 plan instead? Do you think, for example, school vouchers will result in the costs of private schools going up? Do you have any real-life examples of the prices of a common service going down once it is no longer tax deductible?

That’s the planet that only has the one insurance company, right?

Er, in fact it’s the amount over that 7.5% level that is deductable (i.e. you have to get into double-digit percentages before this tax deduction becomes really significant).

Oops, you’re right.