Health care and taxes

The US is able to run large budget deficits for the moment, because the entire world is currently willing to fall all over itself to lend us money at phenomenally low interest rates.

This is not sustainable indefinitely. The day of reckoning will come when the rest of the world decides there are better places to invest its wealth.

Whether or not the US decides to extend universal coverage, it needs to get its fiscal house in order, and health care costs--even under existing programs--are the biggest single issue contributing to expected future deficits.

According to the CBO:

The federal government’s budgetary commitments to health care (including both spending programs and tax preferences) total more than $1 trillion in 2009.

That's one trillion dollars of government spending on health under EXISTING laws. (And that doesn't even count the large amounts of state and local government spending on health care. Our county, Schenectady, for example, spends over 10% of its budget on its share of Medicaid costs alone.)

Where's it going?

The US has three big federal government expenditure programs to provide and/or subsidize health care.

Two of them are highly visible "entitlement" programs: Medicare and Medicaid. Medicare provides coverage for the elderly. Medicaid provides coverage for the poor.

The third big program is not very visible to most people: its what the CBO calls a "tax expenditure." It's an implicit subsidy of roughly $250 billion per year that goes to people fortunate enough to have employer-paid health coverage, and most of the benefits go to the highest bracket taxpayers.

Especially in the current economy, an increasing number of people DON'T have employer-paid health benefits. Many people who had employer-paid coverage have lost it. Some have lost jobs that had benefits and the only stop-gap jobs they've been able to find do not include benefits. Some might have kept their jobs but had their hours cut to the point where they no longer qualify for benefits.

Consider two families, the Jones family and the Smith family.

Mr. and Ms. Jones have a combination of jobs that earns them $90K in cash wages as well as a family medical insurance policy provided by Ms. Jones' employer. That policy might cost her employer $10K per year, due to group discounts, etc.

Let's compare them to Mr. and Ms. Smith, who have managed to cobble together a patchwork of multiple jobs without benefits that earn them $100K in cash wages per year, but no benefits. In our state, the cheapest HMO policy available to a non-group purchaser will cost over $25,000 per year in premiums. No matter where they live, it's virtually a certainty that their non-group policy will cost more than $10K for coverage comparable to what the Jones family gets from its employer, so the Smith family is considerably worse off than the Joneses.

But even though the Smiths are much worse off than the Jones, their tax bill will be much higher.

To keep things simple, let's assume both couples have two young children and take only the standard deduction. We'll also assume they have no other income aside from their wages, so the Jones AGI is $90K and the Smith AGI is $100K.

We can use the NBER TaxSim model to figure their tax bills for 2009.

The Jones family will pay $9,700 in federal income tax,

The Smith family will pay $12,300 in federal income tax.

Both of them are earning compensation that cost their employers $100K, but the Smiths are taxed on all of it, while the Jones are taxed only on 90% of it. And, to add insult to injury, if the Smiths want the same health care coverage the Jones' family has, they will have to purchase it on the much more expensive non-group basis.

Bottom line: the Smith family is considerably worse off than the Jones family, but the Smiths face a federal income tax bill which is 27% per cent higher than the Jones family's bill!

To add further insult to injury, the Smiths will also pay higher payroll taxes (Social Security and Medicare) and, in most states, higher state income taxes as well.

Our current system of taxation is asking families like the Smiths to bear a much larger share of the burden of federal taxes than it asks of the Jones family.