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.)    


Presented by

Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism. He was previously a fellow at The Atlantic and an editor at The Guardian. More

Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism, an economics blog that was recently published in book form by Simon and Schuster. He was previously a fellow at The Atlantic and an editor at The Guardian. He is also on Twitter.

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well. Bestselling author Mark Bittman teaches James Hamblin the recipe that everyone is Googling.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well.

Video

Before Tinder, a Tree

Looking for your soulmate? Write a letter to the "Bridegroom's Oak" in Germany.

Video

The Health Benefits of Going Outside

People spend too much time indoors. One solution: ecotherapy.

Video

Where High Tech Meets the 1950s

Why did Green Bank, West Virginia, ban wireless signals? For science.

Video

Yes, Quidditch Is Real

How J.K. Rowling's magical sport spread from Hogwarts to college campuses

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

More in Politics

Just In