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Wednesday, October 15, 2008

McCain's Stupidest Tax Proposal

I'm not following the campaign very closely. One of John McCain's tax proposals is really stupid. He wants to start taxing employer-paid health insurance.

After World War II, it became commonplace for corporations to give health insurance as a perk to employees. This was not declared as taxable income, so it was a way to give employees a tax-free benefit. The tax law actually was unclear, so it was retroactively amended to make employer-paid health care explicitly tax-free.

Employer-paid health insurance is a great way to tie workers to their jobs. If you lose your job, you lose your health insurance.

Since most people have employer-paid health insurance, doctors and hospitals assume by default that patients have insurance. If you are hospitalized and lack health insurance, you pay 5x-10x more than an insurance company would pay for the same treatment. Effectively, this forces everyone to have health insurance.

If you purchase an individual health insurance policy, you're paying with *POST-TAX* income instead of a pre-tax benefit. This effectively doubles the cost of owning an individual policy. If my health insurance premium is $400/month, then I need $800/month in pre-tax income to pay for it. If my corporate employer gives me health insurance as a benefit, it's not taxable income and my employer can write it off as an expense. Similarly, COBRA payments are paid out of pre-tax income. (There are some tax writeoffs for individual health insurance, but the details are complicated. There are restrictions, such as the expense must be at least 7.5% of your income.)

Group employer rates are much cheaper than individual policy rates. Since everyone working for a corporation joins the health insurance plan by default, the employer qualifies for cheaper group rates. If you have a job, you're probably healthy. If you're unemployed and healthy, you may choose to forego health insurance to save money. Only someone who is unemployed and sick will purchase an individual insurance policy. Laws prevent insurance companies from charging sick people more than healthy people, so the incentive is for healthy unemployed people to be uninsured.

This also means that individuals don't negotiate their own health insurance contract. They merely accept the group plan offered by their employer.

If health insurance were taxed, then there would be no benefit to joining your employer's plan. People would purchase individual policies instead. Then, people would not be saying "OMFG!! I need health insurance!!" whenever they lose their job.

You might believe "It's good that employer-paid health insurance is tax-free." Looking at it conversely, "People who don't get health insurance though their employer pay higher taxes." For this reason, employer-paid tax-free health insurance is a huge market distortion.

Employer-paid health insurance is an excellent way to force wage slaves to keep their job.

1 comment:

Anonymous said...

I'm confused. You say the current (tax exempt) situation is a huge market distortion. You say it's a way of forcing wage slaves to keep their jobs. And then you say applying regular tax is a stupid idea. Are you for these distortions or against?

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