Tax Analysts Blog

Jobs and Con Jobs

Posted on Jul 30, 2009

A fundamental flaw with America’s healthcare system is its tangled relationship with the job market. Lose your job, lose your health care. Really, why should that be the case in a system heavily subsidized by the government? But union-backed Democrats are strongly inclined to perpetuate this flawed system. As a result we now see Democrats making arguments that to economists sound like fingernails on a blackboard.

First, Democrats support requiring employers to shoulder the lion’s share of employee health insurance cost (so called “play-or-pay"). Like most well-intentioned job market regulations (e.g., the minimum wage) it's a good thing for workers who have jobs but makes those jobs harder to get. Today’s Wall Street Journal lead editorial got it exactly right. Citing the Congressional Budget Office, it argued that the employer mandate would reduce hiring of low-wage workers.

Second, most Democrats oppose any cap on the exclusion for employer-provided health care. The Washington Post did its readers a disservice today with an article conveying the impression that there is a real debate among economists about how this tax subsidy contributes to rapidly rising health care costs. Not true: only far left-leaning analysts defend the indefensible exclusion. The following remarks, from M.I.T.’s Jonathan Gruber, is one of the least controversial statements you’ll find in the economics profession: “This tax subsidy makes health insurance, which is bought with tax-sheltered dollars, artificially cheap relative to other goods bought with taxed dollars, leading to overinsurance for most Americans.”

Of course, Democrats are not the only ones who like stretching the economic truth. In the healthcare debate the most nettlesome argument from Republicans is that the House-proposed income surtax on high-income households is a job-killer. Their line of reasoning goes something like this: small businesses are the engines of job creation; small business owners pay income tax and often they pay these taxes at the top personal tax rate; so taxing the incomes of small business owners at higher rates will destroy jobs.

I will list just a few of my objections: Most income subject to tax in the highest brackets is not small business income. Many small business owners have no employees. In the cases where small business employers are subject to higher tax, reducing employment is only one of a large variety of behavioral responses to the tax. Other responses include: cutting non-labor costs at work, spending less at home, and working harder (to make up for the lost income). See Pulitzer-prize winner Steven Pearlstein's column yesterday for more along these lines.

Of course, no taxes help employment. But if there must be a tax increase there is no reason to single out higher rates on high-income households as being particularly harmful to jobs. Stripped of this economic argument, the path would be wide open for liberals to make the plain and simple argument that we should tax the rich more because they can most afford it. While July poll results show that Republicans are still losing the battle (50-44 in favor of higher taxes on the rich to pay for healthcare) they are gaining ground (56-37 in April). They are unlikely to concede this point anytime soon.

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