Health policy: $130 billion in regressive health coverage subsidies

In the NYT, Eduardo Porter points out that the federal government hands out a hefty subsidy for private insurance, much of it going to people who don't need help getting health coverage. I get it, and you probably do, too. It's the deal where you and I get to pay our share of our employer-provided health coverage from pre-tax earnings. It adds up to $130 billion or so-- enough, Porter points out, to turn Medicaid into something very close to universal coverage.

It's another maddening example of tax policy that seems to turn good social policy on its head: let's say I make $40,000 a year and you're my boss you make $140,000 a year. We're both on the company health insurance plan, which costs each of us $2,000 a year. If I can pay my share from pre-tax earnings, my marginal tax rate is maybe 20%, so I save $400 in taxes I would otherwise paid on that $2,000. You, however, have a higher marginal tax rate, maybe 35%, so you save $700. Lucky you-- the government gave you the same subsidy as me, plus a set of golf clubs. Not to mention the carribean cruise you got in added tax savings from the mortgage interest deduction for your McMansion.

For taxpayers, a penny saved is a penny earned, but for the government, a penny in tax revenue forgone through a tax deduction or exemption is a penny spent. Are we spending these pennies wisely?

It's enough to turn a blue-stater into a flat-taxer.

Although subsidizing health insurance may seem a worthy effort, a positive contribution to the goal of universal coverage, it is among the most inefficient spending in the nation's fiscal arsenal. 'If you had $150 billion to play with, you could come very close to universal coverage,' said David Cutler, an economics professor at Harvard. One reason that we are 45 million people short of that goal is that the money isn't being spent on them.

According to President Bush's advisory panel on tax reform, about half of the tax break for health insurance accrues to families making more than $75,000 a year. More than a quarter goes to families making over $100,000. These families would surely hate to lose the subsidy. For a family making $100,000 a year in, say, Los Angeles, the tax break cuts the cost of employer-provided health insurance by about 35 percent in federal and state income taxes. On a typical family policy costing $11,500 a year, that is equivalent to some $4,000.

Health Care for All, Just a (Big) Step Away - New York Times