Eight Questions You Should Ask About Our Health Care System (Even if the Answers Make You Sick) by Phelps Charles E

Author:Phelps, Charles E.
Language: eng
Format: epub
Publisher: Hoover Institution Press

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1. One caveat: if the worker’s wages are at or near the legally mandated minimum wage, it’s impossible to have wages fall sufficiently to offset costs of health insurance premiums paid by the employer. The consequence then is often a loss of jobs in the market rather than offsetting wages.

2. “Tax expenditures” are defined as reductions in tax revenue by legislative reduction in taxation rates (possibly to zero) on certain revenue categories. The largest three are exemption of contributions to retirement plans, lower rate of taxation of capital gains, and exclusion of employer-paid health insurance premiums.

3. Other estimates almost double this number (Helms 2008, Figure 2.5). This estimate includes standard “tax expenditure” calculations of the Joint Committee on Taxation, but also includes amounts not included in its earlier estimates. The difference centers on interpretation of Section 213 deductions (medical expenses above 7.5 percent of income). Earlier estimates presumed that disallowance of the employer premium payments would still allow individuals to deduct the costs under Section 213. The new estimates note (correctly) that full repeal of the exemption would not permit such a deduction under Section 213, hence increasing the estimated tax expenditure from earlier estimates.

4. The recession will cause much larger deficits for 2009, and probably 2010 and 2011. But the 2008 figure gives a reasonable (perhaps low) assessment of the steady-state story.

5. This estimate calculates the average of each taxpayer’s marginal tax rate (MTR) and uses that to estimate each person’s taxes saved by having income in the form of employer insurance payments rather than cash. Here’s how the calculation works: the MTR is the proportion you pay of the next dollar you would earn. If you are in a 15 (or 22 or 28 or 33) percent federal income tax bracket, that’s part of your marginal rate. But the complete MTR includes not only the federal income tax rate but also state and local income taxes, social security taxes (employer and employee contributions), and the 1.5 percent Medicare tax. The complete MTR averages to about 33 percent in the U.S. population (Congressional Budget Office 2005). If you get $1,000 as employer-paid insurance rather than cash, you save $1,000 times your marginal tax rate. So, on average, the tax subsidy saves people about one-third of the cost of their health insurance.

6. Economists widely accept the notion that economic activity (measured by taxable income) expands when marginal tax rates fall. The debates center on how large the effect really is. If large enough, income tax revenues actually increase as tax rates fall (the Laffer Curve effect). Most current estimates suggest that the effect is not large enough to actually increase revenues with a marginal tax rate cut (Giertz 2009), but that’s not the issue when the tax rate cut is combined with an increase in the tax base through elimination of the employer-paid insurance exclusion. If Congress were to repeal that exclusion, an appropriate cut in marginal tax rates and the expanded taxable income base would assuredly both expand tax revenues and increase economic activity.

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