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InsiderOnline Blog: October 2008

Fixing Entitlements by Reforming Health Care

In today’s Wall Street Journal, Robert Carroll of the Tax Foundation points out that John McCain’s health care reform plan does two things progressives would normally cheer.

First, it redistributes the tax benefits that current law provides for the purchase of health insurance in a progressive direction. Current law excludes employer-provided health insurance from taxable income. That exclusion is unlimited, which means the more your employer spends on your health care, the greater the tax benefit. By ending that exclusion and replacing it was a refundable tax credit, McCain’s plan would give everyone the same benefit.

Second, Carroll notes that according to Tax Foundation calculations, McCain’s plan increases the tax benefit for health care, from about $3.6 trillion over the next 10 years to roughly $5 trillion. According to the Lewin group, the plan is expected to increase the number of people with insurance by between 15 million and 21 million.

So, more subsidies distributed in a more progressive fashion—you probably wouldn’t learn that from listening only to Barack Obama’s criticisms of the plan. Of course, the most important thing the plan does is to reduce the incentive to purchase gold-plated plans that provide first-dollar coverage for routine expenses. More cost-conscious consumers, says Carroll, have the potential to transform health care broadly:   

There is an enormous unfunded liability associated with the major entitlement programs of Social Security, Medicare and Medicaid. If left unchecked, the growth in these programs will nearly double the size of the federal government by 2040, consuming roughly 40% of the nation’s output rather than the 20% today. While the growth in Social Security is largely the result of demographics, the growth in Medicare and Medicaid is also driven by the rapid growth in health-care spending. This is where a proposal like Sen. McCain’s can be so important.

The elimination of the income-tax exclusion should reduce private health-care spending; to the extent this reduces the cost of health care, it should also put downward pressure on the growth of Medicare and Medicaid costs. Thus, by removing the tax bias for more generous health coverage, the McCain health credit also has the potential to provide important dividends to the entitlement problem down the road.

Posted on 10/27/08 05:48 PM by Alex Adrianson

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