Sunday, October 05, 2008

Good Idea, Losing Message

The McCain health care tax credit plan is a good one insofar as a plan like this one goes a long way toward correcting the inefficiencies that have crept into the health care system without putting America on an irreversible path to socialized medicine. To the extent that one favors a single-payer plan anyway, well, there's not much here for you. (Sorry, Matt.)

Unfortunately, the merits of the McCain plan are falling on deaf ears and it is a losing political message because there is a substantial truth to the Obama campaign's attacks that the McCain plan taxes one's health insurance. Employer-provided health insurance emerged as an end-run around ancient wage caps because such compensation wasn't counted as "income" under the wage cap, the income tax code, or FICA. McCain's plan will count benefit compensation as income.

This is important for several reasons. Firstly, the current system distorts the income tax and FICA against lower wage earners by allowing better paid wage earners to shield greater amounts of their compensation from taxation. Tax-exempt employer health plans are a theoretically unlimited subsidy to higher compensated individuals while giving nothing for those without such benefits.

Secondly, the current system distorts the market for heath insurance. If an employee is given the choice between a $10,000 health insurance plan versus a $10,000 raise minus 15.3% FICA and minus federal, state, and local income taxes, the $10,000 health plan looks pretty good even if it isn't the right plan for that employee. For many people a lower-premium/high-deductible plan plus a Health Savings Account would be preferrable.

Thirdly, the current system ties heath insurance to a specific employer. Why does it make sense to change health insurance plans when changing jobs? Why should you automatically lose health insurance if you lose your job?

The McCain plan un-incentivises much of this distortion and normalizes a health care benefit across the wage-earning spectrum.

The Obama plan cements the insane connection between health insurance and employment, and it puts government in the business of heath care in a very big way. It mandates how health insurance works and it will eventually squeeze most private insurers out of the market, whereas the McCain plan humbly says, "here's some money, you go figure it out because we'll probably screw it up".

Sadly, Obama is technically right when he says McCain will "tax health insurance", and even people who resist a single-payer system will be moved by that message.

McCain has a good idea that will never happen.

1 comment:

Anonymous said...

John McCain kills puppies and eats baby eyes for breakfast.