Saturday, March 21, 2009

Obama flip-flops as a hypocrite-- into a tough political position-- but finds the best economic answer!

Wow...what should I root for here?

I'll root for his new-found embrace of the best position!

From the New York Times via The Weekly Standard (hat tip: Hoosier Pundit), we learn that the Obama administration is considering a tax on health care benefits.

By far, the #1 problem in health care and health insurance is the subsidy of health insurance by the federal government. (It is subsidized since it is an untaxed form of compensation for workers.) The result is "too much insurance" and a problematic connection of health insurance to one's place of employment.

The best solution, in terms of economics, is to remove the subsidy-- to treat all forms of compensation the same in terms of tax liability. But this a very difficult position politically. On top of that, Obama attacked McCain for the very same position during the 2008 campaign.

Here's one of the several health care ads Obama put up during the campaign lambasting the idea of taxing health care benefits. Note the quotes from Joe Klein, who will no doubt soon charge in to criticize Obama's audacious reversal. Another ad, featuring Obama attacking the issue in his own voice, can be found here.

Then, there's this from the editorialists of the WSJ. They point to Obama's underlying motive-- to raise tax revenues. But a far more important by-product would be achieved by his avarice for your money.

The worst-kept secret on Capitol Hill is that Democrats have always planned to tax health benefits to pay for their "universal" health-care plans. Now White House aides are whispering that they're also open to the idea. Maybe they will all now apologize to John McCain for trashing his proposal to do the same thing in the Presidential campaign.

Democrats are desperately searching for the $1.2 trillion and more they'll need to subsidize middle-class health coverage. With deficits already at epic levels, more spending is politically a harder sell. So they're now circling the tax deduction that employers receive to offer insurance to their workers for the same reason that Willie Sutton robbed banks, because that's where the money is.

Most likely, Democrats will cap the exclusion by income or cost of the health plan, so that those with the most gold-plated benefits pay more for the privilege....


At March 21, 2009 at 9:53 PM , Blogger Jay225 said...

Wow interesting material Mr. Schansberg, a good post. Politicians say anything to get into Office...I was expecting this during the campaign in 2008.

Isn't Obama's budget around $634 billion?...estimated cost of Universal Health Care being around 1.5-1.7 trillion I believe. While I do hope Obama's presidency is a successful one, I don't agree because taxpayers will be making up for this!

At March 22, 2009 at 6:03 PM , Blogger Unknown said...

Some how I don't think you've really thought this through.

While I agree that subsidizing health insurance is not a great thing, there's some really serious downsides to this proposal.

While subsidizing creates incentives, taxation creates disincentives. So lets say this goes through as a tax that corporations pay, in order to try to hide the pain from workers. As you and I both know, that pain will be passed on in some way. And, if universal "health-care" is being provided and the economy continues to squeeze businesses, they will simply cancel their policies. Why pay for it when it's being provided for free?

Some of the best companies will continue to try to use it as an incentive, something not everyone is providing anymore, but as more and more people get the lowest-common-denominator coverage, they'll not want to bother with the hassle of it being connected to their workplace. Which means the only people attracted to that option will be those least desired by the insurance company, causing skyrocketing premiums and further hastening the demise of privately funded health-care.

Further, you have to pay for a portion of the health care in your check for most companies, so there's a disincentive there for most people as well, at least until they actually NEED health care, and would give up their own kidney to deal with an HMO let alone a GOOD insurance company.

If they pass it off to workers it's the same story just different actors and choices. If you're paying for part of it, and start getting taxed, and can get it for free if you just stop taking health-care as a benefit, what do you think people are going to do? We've already been driven to the point where the women in most of our families HAVE to work. Some families have to have their teenagers work just to make it. Now they're going to tax health-care benefits? They'll be looking for any way to cut costs they can.

Once this happens now what? Now what do they do to fund the health-care system? Where do they go to get the money when there's no longer any health benefits to tax?

Same problem as sin taxes. If you actually succeed in lowering the usage, suddenly you don't have the money for whatever bogus government program you were funding with it, and now you have to either raise the taxes more until it dies a thousand deaths or find some other place to tax people.

No - this is a bad idea. Get rid of the subsidy? Fine. Tax health care benefits, no way.

At March 22, 2009 at 11:10 PM , Blogger Eric Schansberg said...

Shamgar, thanks for your thoughtful comments. A few thoughts in reply...

First, I probably should have been more explicit. But a tax on health insurance (or other fringe benefits) would ideally imply lower taxes elsewhere. Of course, with Obama and the Dems, they're just looking to increase taxes. So, if they're going to increase taxes, this is preferred to other methods.

Second, to be clear: health insurance is currently being subsidized-- which creates as many (albeit different) inefficiencies as a tax.

So, what should we do about the current subsidy through the lack of taxation for that one type of compensation? A tax on that form of compensation would merely "even the tables"-- simply treating all forms of compensation equally in terms of taxes. Putting it another way: Why tax wages and not tax fringe benefits?

You raise a valid point about the manner in which the tax is imposed. If the tax is imposed on firms, some/much/all of the burden will be passed along to consumers and especially workers. Let's say that firms drop health insurance coverage. Then, they will have to offer something else-- most likely, higher wages-- to attract workers.

Most individuals would still choose "true" insurance. High co-pay, high deductible, minimum coverage-- i.e., coverage for rare, catastrophic events. Such coverage would resemble typical insurance (for, e.g., fire and auto) and be quite inexpensive compared to the status quo.

The market is limping that direction now; a tax on fringe benefits would rapidly accelerate the pace of that move.


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