Code Red: Two Economists Examine the U.S. Healthcare System

June 15, 2009

The Triumph of the Economists

Filed under: Health Reform — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 5:51 pm

David Dranove:


Senate Finance Committee chair Max Baucus is floating the idea of taxing health insurance benefits.  He won’t tax the entire benefit and will probably exempt low wage earners, but once the camel’s nose is in the tent there may be no keeping out the hump and head.  This may pave the way for Obama’s entire health reform package.  Jon Gruber testified to Congress that curbing the health insurance tax break was “clearly large enough to finance the subsidies needed for reform.”  I would have quoted Willie Sutton, who when asked why he robbed banks said, “that’s where the money is.”  If you want to pay for health care, the $225 billion insurance tax subsidy is where the money is.

Health economists (including yours truly) have long decried the tax subsidy for being inefficient and unfair, but the tax subsidy has always been the third rail of healthcare politics.  Even Ronald Reagan didn’t dare touch this huge middle class tax break and Barack Obama pummeled then candidate John McCain for his proposal to curtail the subsidy.  But the money has to come from somewhere and Barack Obama could probably double the tax on Mother’s Day cards and apple pie without slipping in the poles.

But I wonder if there isn’t a hidden threat here.  The subsidy helps keep low risks in expensive plans.  Without the subsidy, we might see more risk sorting, and, potentially, the complete demise of more generous plans.  I am not sure if that is such a good idea.


William White:


Like you, I have long found the notion of limiting the tax deductibility of health insurance appealing.  At the same time, I agree drastic cuts could well upset the apple cart and cause employment based insurance to unravel.  I am not sure, however, I buy the slippery slope argument that once started down this path, deeper and deeper reductions would be inevitable.  There are plenty of other deductions that remain alive and well despite caps (e.g. home mortgages).  If a cap was set at a level like the 75th or 85th percentile of employment based premiums, it seems unlikely this would cause a mass exodus from employment based plans, especially as the effects would be greatest on higher wage workers who I suspect will tend to be older and therefore more at risk.  The flip side is that limiting deductions could turn out not to be the piggy bank some have hoped.  At least, however, having to put down the value of health benefits on our tax forms might get us focused what they really cost—do you know the cost of your plan?


1 Comment

  1. David, the following just corrects 2 typos and adds my name.
    Hi David and Will,
    Ted Frech brought the following statement to my attention: “Even Ronald Reagan didn’t dare touch this huge middle class tax break . . .” It wasn’t for lack of trying.
    To set the record straight, those of us in ASPE at the time worked up a tax cap proposal that was included in the Reagan budget and legislative proposals in FY 2004 and 2005. It was a relatively simple (that is, simple compared to all the variations the Senate seems to be considering today) tax cap proposal set at approximately the 85th percentile of health insurance premiums. The cap was to be indexed to CPI in a deliberate attempt to have it become more binding over time.
    After two years, it was bargained away by OMB (with no consultation with HHS) to gain support from one Democratic senator for the 1986 tax reform bill.
    If you or anyone would like to see the paper we wrote to defend our tax cap proposal, just let me know.
    One request: would you please use the term tax exclusion rather than tax deductibility. The latter is too easily confused with a limit on tax deductions, especially limits on the business tax deduction. The media and many politicians are already confused enough about health and tax policy without adding to it.
    I am in agreement with Will’s statement that a tax cap would not cause employers to drop coverage. My case is in a short piece on the AEI site under the title, “Taxing Health Insurance: A Tax Designed to be Avoided.”

    Comment by Robert Helms — July 3, 2009 @ 2:14 pm

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