Why Taxing Health Care Will Lower Spending

There were two interesting pieces this morning on the question of whether or not we should tax employer-sponsored insurance (ESI) benefits -- they are currently exempt from income and payroll taxes -- to help pay for universal health care. The first is a great New York Times column from David Leonhardt; the second is a piece in the Washington Post that offers some reasons to be skeptical of the claim that taxing health benefits will lower spending. I've written before about why I think scrapping or capping the tax exemption is a wonderful idea (I made the longest version of the case here) and don't want to belabor those points too much. But I do want to wonder aloud about these paragraphs from the Post piece:

But even as consensus grows, others warn that the effect of taxing health benefits is being greatly overstated. They concede there is a case for limiting the tax exemption -- to raise money for universal coverage, as well as to equalize the status between employer benefits and individual coverage bought with after-tax dollars -- but say that move is not some kind of golden key for bringing spending under control.

[...] Steven Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees, was even more derisive. "Right. I have great chemo coverage so I think I'm going to go get cancer," he said. "This all starts with the economists -- they just apply traditional economic theory that if you give something preferable treatment in the tax code you'll get more of it. But health care is not a traditional good or service. It's a vital service."

Hmmm. This makes me think that it might be worth distinguishing between two claims that someone who supports changing the tax treatment might make. The first is that the preferential tax treatment is one of several things that causes people to overconsume health services and makes health care more expensive. A second claim might be that the tax treatment is the only cause of higher health spending, and that closing the loophole will be the silver bullet, "the golden key," the Pick Your Metahphor.

The Post piece starts with the assumption that the second claim is on the table. But look, no one is actually making the second claim. The second claim is crazy. The first claim, on the other hand, is obviously correct. If you get rid of a giant tax subsidy for health care, people will consume less in the way of health care. We can debate the degree to which limiting or eliminating that subsidy might bring spending under control, but there really isn't any debate that it will do something. Or at least there shouldn't be.

(A final note: The Post piece has some discussion of other factors that might shape higher spending -- pressure from producers, lack of information among consumers, etc. I think it's worth observing that these factors are also influenced by the tax treatment, which encourages consumers to be less information savvy and encourages consumers to develop high cost treatments that they know will be consumed with tax free dollars.)