Should We Tax Health Care Insurance as Income?

October 3, 2012

Health care insurance benefits have been excluded from taxable income since 1943, when the National War Labor Board ruled employers, who were offering health plans as a way to attract workers without violating wartime wage-and-price controls, could deduct their cost as an expense without reporting their value as income for workers. As a result, employees get the benefit of the insurance without paying taxes on its value.

Workers weren’t the only ones who benefited from the ruling. Neither employers nor workers had to pay their half of the Social Security (and later Medicare) payroll taxes that would have been assessed at a higher rate, had it been paid as straight wages.Today, the ever-growing cost of health care has turned that little loophole into a subsidy program that costs the Treasury an estimated $240 billion a year. It is the single largest tax expenditure in the federal tax code.

Economists across the political spectrum are united in their analysis of its impact. It allows employers to spend more on health insurance than they otherwise would. It leads workers, especially if they are unionized and have voice in how any wage increases are allocated, to fight for lower co-pays and deductibles since those are paid with after-tax dollars. The two factors working in tandem encourage overuse of health care services, which drives up spending and eventually premiums.

“It turns into a vicious cycle,” said Paul Fronstin, an analyst at the Employee Benefits Research Institute.

The exclusion is also unfair in the same way that any tax expenditure becomes unfair under a progressive income tax code. A person in the 30 percent tax bracket who gets a $15,000 family plan at work gets twice the subsidy as someone in the 15 percent bracket that belongs to the same plan.

Given the magnitude of the revenue loss, politicians from both sides of the political aisle have eyed limiting the exclusion for decades. Read more »

On The Hypocrisy of Our Business Elite

September 30, 2012

Today’s must read is from Steve Pearlstein of the Washington Post. Read it here.

Medicare/Medicaid’s “Got His Back”

September 28, 2012

The Cost of Living in Fat City

September 20, 2012

Obesity rates have doubled over the past two decades and will almost double again over the next two decades unless the public comes to grips with its swelling waistlines, a new study says.

The rising tide of obesity threatens to send health care costs soaring. Already, the nation spends an estimated $147 billion to $210 billion per year on obesity-related diseases including Type 2 diabetes, hypertension, heart disease, and arthritis. Unless the projections are altered dramatically, additional medical costs associated with treating preventable, obesity-related diseases could swell by another $48 billion to $66 billion by 2030, the report said.

“We have this middle-aged cohort who are obese today and in the next 10 to 20 years will become quite costly,” said Jeffrey Levi, executive director of Trust for America’s Health, which co-authored the report with the Robert Wood Johnson Foundation. “They’re the really tough nuts to crack when it comes to combating obesity.”

About 35 percent of adults were obese in 2010, up from 15 percent in 1980. Obesity is defined as a body mass index (BMI) of 30 or higher. Nearly 12 million children ages 2 to 19 are now considered obese, triple the level of three decades ago, the study said.

Looking ahead, every state in the union will have an obesity rate above 44 percent in 2030, up from a nationwide average of about 30 percent now, the study said. Some states will top 60 percent. Its projections were based on the latest data from the Centers for Prevention and Disease Control.

A dozen states already have adult obesity rates above 30 percent and the ten states with the highest rates of obesity-related Type 2 diabetes and hypertension are in the South. Mississippi, with its 34.9 percent obesity rate, earned the title of fattest state in the land in the state-by-state rankings contained in the report. Twenty-six of the 30 fattest states were located in the South and Midwest. Read more »

Makers Are Takers, Too

September 20, 2012

Republican presidential candidate Mitt Romney’s impolitic comments at a fundraiser in Florida last May shed light on his attitude toward the 46 percent of the population that paid no federal income tax in 2011 (his 47 percent came from an earlier study by the Tax Policy Center, since updated). He called them “takers” and all but accused them of mooching off the rest of society.

As numerous news outlets have pointed out in the wake of those comments’ release, about half the households in the group paid no income tax because the standard deduction put them below the taxable threshold. Three-quarters of the other 38 million households were either elderly or in families that received refundable tax credits for their school-age children or as supplements to their income – the so-called earned income tax credit.

In other words, they paid no taxes because they benefited from tax expenditures, exclusions and deductions in the tax code that lower personal income taxes.
If that is “taking,” how does that compare with Romney’s 53 percent or, for that matter, with Romney himself?

The Tax Policy Center has a detailed study of the distribution of tax expenditures, which in addition to the earned income tax credit includes reduced tax rates on capital gains, exclusion of retirement savings and the deductions for charitable giving and home mortgage interest that reduced household federal income taxes by $1.08 trillion in 2011.

It found that the top 1 percent of filers earning over $400,000 raked in 23.9 percent or about $258 billion in reduced taxes through deductions and exclusions. The top 10 percent of filers took in 40.3 percent, or more than $435 billion.

On the other hand, the bottom 60 percent of tax filers, which includes more than 99 percent of the people who paid no income tax last year (the non-paying group also included 7,000 millionaires), grabbed just 20.1 percent of the tax reductions from deductions and exclusions. That was worth $217 billion or half of what was claimed by far fewer top earners in the U.S.

“If you counted tax expenditures as a form of spending, then the rich would be paying a lot more in taxes,” said Eric Toder, a fellow at the Urban Institute and co-author of a study on the distribution of tax expenditures. “If you didn’t have tax expenditures, the tax system would be more progressive than it is today.” Read more »

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