Reading over the liberal reaction to President Bush’s health insurance tax reform proposal outlined in his State of the Union Address, I noticed that the American Prospect’s Ezra Klein initially backed the idea. He later recanted, claiming he was confused about what Bush was proposing. I can’t fault him, as I was confused at first too.
Unlike Klein, however, I liked the plan even more after I fully understood it.
Bush’s plan offers a standard health insurance deduction of $7,500 for an individual and $15,000 for a family. You must buy health insurance to qualify for it, but you get the full deduction no matter what the cost of the policy. Buying a policy that costs less than the full deduction means that you would keep more money in your pocket that is income tax-free. In short, the President’s plan discourages over-consumption of health care by discouraging the purchase of expensive policies.
Of course, not everyone is happy about that. Here are the various objections:
Low-quality health insurance and the potential loss of health security: In his retraction, Klein claims that the purpose of the Bush plan is to “incentivize the purchase of low-quality, high-deductible care, particularly among the healthy, young and/or rich… To reduce coverage, costs and health security.” Perhaps quality is in the eye of the beholder. If one has a high-deductible plan with a health savings account, one does not have “first dollar” health coverage. However, one also has more control, flexibility and choice over his health care dollars. For example, one does not have to worry about whether an insurance company will pay for a doctor visit. Control, flexibility, and choice are not characteristics of “low quality.” It’s also hard to see how the President’s plan will reduce health security. If it reduces the cost of health insurance, more people will be able to afford coverage.
Over time, more people will pay taxes on their health insurance: Only about 20 percent of those with health insurance currently have policies exceeding amount of the deduction. But Brad Delong writes, “The deduction would indeed worsen the finances of only 20% of those with employer-sponsored coverage in 2009. But it would worsen the finances of about 50% of those with employer-sponsored coverage in 2019. And 90% of those with employer-sponsored coverage by 2030.” Delong’s numbers come from Treasury Department calculations, but those calculations assume that the cost of health insurance will rise at pretty much the same rate it has over the last few years. In other words, they assume that people will not change their behavior in response to the change in tax policy. Yet, if the amount of health insurance that is tax-free is limited, as it would be under the Bush plan, then people will have incentive to shop for lower-cost policies. That will bring costs down over time, meaning that fewer and fewer people will exceed the deduction.p> It will do little to help the uninsured: Karen David, president of the Commonwealth Fund, claims : br> /p>
Nor would the President’s proposal likely help those who are currently uninsured. According to the U.S. Treasury Department, some 3 to 5 million of the 47 million uninsured Americans could gain coverage. About 95 percent of the uninsured would not benefit substantially from the tax deductions. As described in a 2005 Commonwealth Fund report by Sherry Glied and her colleagues, more than 55 percent of the uninsured have such low incomes that they pay no taxes, while another 40 percent are in the 10 to 15 percent tax bracket.br> The amount of the uninsured that will be helped by President Bush’s plan will likely be much higher. A recent
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