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State of the Union: Post Mortem
Bush's 2007 State of the Union address, annotated by James Fallows.

State of the Union speeches are traditionally short on substance and long on pantomime—am I the only person to find all that jumping up and down absurd?—but this year's address vied to set a new standard in pointlessness. Everybody knows that George W. Bush and his administration are going be judged on, and long remembered for, just one thing: the outcome in Iraq. Only an optimist would dare to say that there is even a chance that Iraq will turn out well, and who is any longer an optimist? But in any case the president had nothing to add to his earlier broadcast on the planned "surge." He dwelt on Iraq at surprising length on Tuesday night, but added nothing at all to the earlier announcement. It is hard to believe that the mind of one American was changed by what he said.

The domestic agenda for the remainder of this crippled administration obviously matters less to the country and to history than Iraq does, but the domestic policy part of the speech at least offered something both new and, believe it or not, well thought out. I am not talking about the laughable call for a balanced federal budget—a demand that will be accorded all the respect this president is entitled to on that topic. I am not thinking of the call for comprehensive immigration reform—a good proposal, in fact, and one that stands a fair chance of being acted on, since Democrats are better disposed to it than are members of the president's own party; but this is an old idea. And I am not referring to Bush's canned declarations on energy independence, which have been included, it seems, in every one of his State of the Union addresses, and which call for policies that are either beside the point or undesirable or both (ethanol subsidies). The interesting new thing was what he said about health care.

Democrats, following the prompts of House Speaker Nancy Pelosi, stayed mostly seated during that section, of course. (Health care, stand up; president's proposal for health care, sit down.) Both before and after the speech (this part had been much trailed in advance), they deplored the president's new plan every which way. They should think again. What the president suggested—who knows, perhaps there was some kind of mix-up—is exactly the kind of health care initiative Democrats themselves could and should be advocating. They ought to legislate this new proposal without delay, and demand that the president sign it into law.

What the president wants to do is cap the tax deductibility of the more expensive employer-provided health insurance plans and use the proceeds to provide a corresponding tax deduction for workers who buy their own insurance. Individuals could deduct $7,500 a year from their taxable income to offset the cost of health insurance, and families $15,000 a year. Employer-based plans worth more than that would be taxed on the excess. The White House says that about 20 percent of taxpayers, those with unusually generous plans, would be hit by the new cap on deductibility: They would have to pay tax on the difference between the value of their policies and the new deduction. On the other hand, the new deduction would make insurance cheaper for taxpayers whose employers do not provide it. For some low-income workers, it will make the difference between being able to afford insurance and not.

Plainly, this plan is not in itself a comprehensive solution to America's health care problem—nothing like it. But it is a really useful step in the right direction, and in many ways a surprising one for this president, in particular, to suggest. The underlying idea, to repeat, is to increase taxes on the better-off in order to support an expansion of health insurance coverage for the lower-paid. Now, which part of that, exactly, don't the Democrats like?

The idea addresses what is, in fact, one of the most outrageous anomalies in the American tax code—namely, that employer-provided health insurance is tax-deductible whereas individually purchased health insurance is not. This is unfair, not least because it discriminates against the poorly paid (who are more likely to work for firms that do not provide employer-based plans). This makes the tax system more regressive. A more subtle and even more important point is that they tilt the whole health insurance market, and hence the character of America's entire health care system, in a very undesirable way.

The tax preference for employer-based insurance separates the actual consumers of health care—the people being treated, not the firms paying the premiums—from the costs. Under this system, patients have less need to economize, and providers less reason to strive for efficiency. The incentives that a system based on private insurance would otherwise create are suppressed. This goes a long way toward explaining why American health care is the most expensive in the world. A vicious circle then kicks in, because the resulting inflation in health care costs puts privately purchased insurance out of reach for more and more Americans. By making individually purchased schemes less economical, the tax break for employer-provided plans also exposes workers to extra risk: If you lose your job, you lose your health insurance, too. There is no doubt, in my view, that this crazy arrangement adds a lot to the anxiety that so many American workers complain of these days.

Add all of these factors together and the full cost of this indefensible tax anomaly—even leaving its basic unfairness out of account—is just enormous. Unfair and inefficient: That takes some doing.

The intelligent criticism of the president's proposal is not that it is wrong in principle, as the instant Democratic response said, but that it is too timid. Roughly half of Americans without health insurance pay no federal income tax and would therefore gain nothing from the new deduction. (To help the very low-paid, and for those who are not employed at all, Bush did call for more federal money to be given in support of state schemes that pay for the health care of the poor and uninsured—but that, so to speak, is a Band-Aid, not a remedy.)

Democrats—unfortunately—are wrong to see the plan as a conscientious attempt to dismantle employer-based health insurance. That would indeed be a worthy goal, for all the reasons of equity and efficiency just mentioned. Under the rules the president is proposing, it is unlikely that more than a handful, if any, employer-provided schemes will be withdrawn. Yet their withdrawal ought to be encouraged. In truth, it would be better to level the playing field between individually purchased and employer-provided insurance by ending health insurance deductibility outright. In a well-designed system, employers would pay what they now spend on insurance premiums as wages, and workers would take those extra dollars and buy their own insurance.

To cut the overall cost of health care for the nonpoor, reduce the tax subsidy and confront users with the cost. To meet the needs of the poor, guarantee basic coverage to all, regardless of income. To finance it all, use the extra revenues that would flow from ending deductibility. It is a shame that the president's proposal does little to advance this much bigger idea—but, as far as it goes, the plan is good.

Apart from seeing a plot to end employer-based insurance altogether, the Democrats oppose the idea as a new tax on "the middle class." This reflex response, this endlessly repeated mantra about advancing the interests of "the middle class" (which evidently extends well into the top fifth of the income scale) is now bordering on the infantile. In an admittedly small way, Bush is proposing to make health care more affordable for the less-well-off, at the expense of post-tax incomes for the 20 percent highest-paid. It is intellectually bankrupt to oppose that as an assault on the middle class.

Democrats long to believe that the budget can be balanced (they sprang to an ovation for that part) and every social injustice remedied, all by raising the taxes of owners of private jets. I don't know which would be worse—that they believe this, or that they know it is nonsense but keep saying it anyway.

Combining universal health care coverage with an affordable market-based system (the only kind that gives consumers a wide measure of control and the only kind that most Americans want) is an eminently worthy goal for liberals to embrace. Even before you start thinking about balancing the budget, however, that goal calls for higher taxes—not just on plutocrats, but on most working Americans. If the middle class wants universal health care, the middle class is going to have to pay for it. For as long as Democrats continue to delude themselves and the country about this, I will find it difficult to take them seriously on health care.