The Right Way to Pay for Health Care

by Fred Siegmund

Paying for Health Care

The health care bill that finally passed the U.S. Senate has many differences from the bill that passed the House of Representatives, but both bills have additional taxes designed to close certain revenue shortages.

In the House bill, some of the finance for expanding coverage to the millions without health care comes from an income tax charge on incomes over $500,000 ($1 million for joint returns). In the Senate bill, there is a 40% excise tax on health care plans that cost over $8,500 for a single plan (over $23,000 for a family plan).

These are the so called “Cadillac” plans.

In the complicated and tortured processes of America?s bi-cameral legislature, the difference of taxation will be one of many differences that must be eliminated in the final bill.

Excise vs. Income Taxes: Who Pays?

Arguments for one tax over the other highlight the conflict between raising tax revenue and changing behavior. Business and individuals can be counted on to economize given the right incentives, but economizing in health care will reduce excise tax revenue.

For a $28,000 a year health plan, a 40% excise tax on the amount over $23,000 will bring in $2,000 of tax revenue. The business could pay the tax, or have employees pay the tax through payroll deductions: shifting the tax burden to their workforce.

Either way, there is little ability for employees to do anything except complain to their employers. Because employers negotiate and buy health care on behalf of their employees, their only choice is to buy their own health care at much higher prices, accept whatever their employers finally decide, or lobby their employer.

With an excise tax, employers have the ability to pass the entire tax to their employees, so business incentives to save appear weak, but they may not want to shift the excise tax burden for the same reason they provide health care programs: it is a competitive advantage attracting excellent employees.

Instead of shifting the tax burden, businesses could pursue benefit reductions with their health care provider in exchange for lower health care premiums, limits to service coverage, or a combination.

They could question health care costs and include cost cutting discussions in their negotiations.

Increased Taxes Discourage Taxable Transactions

Whatever businesses negotiate, the more premiums of excessively generous health care plans decline toward $23,000, the less tax revenue for the government.

The excise tax proposal illustrates an immutable law of taxation. Taxes discourage the economic transactions that generate tax revenue.

Of the two proposals, it appears quite likely that the excise tax on premiums above $23,000 could discourage all, or nearly all, such plans. Revenues could end as little or nothing.

If Congress is really serious about generating the additional revenue necessary to expand health care to millions more people, they will opt for the income tax on high incomes.

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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