Tax Analysts Blog

New Twist on Healthcare Financing

Posted on Jul 23, 2009

The first neat thing they teach you in economics school about taxes is that it does not matter if tax is imposed on a buyer or a seller. It all comes out in the wash. For example, suppose apples sell for $10 a bag. If a $1 dollar tax is imposed on sellers, the market price may rise -- depending on market conditions -- to $10.75. The buyer gets $9.75 and the seller pays $10.75. If instead a $1 tax is imposed on buyers, the market price received by the seller -- under the same market conditions -- is $9.75 and the buyer pays that market price plus the $1 tax. The same outcome in both cases. For some reason (probably our distrustful human nature) this most basic of economics lessons is always lost on politicians and lobbyists.

According to the Wall Street Journal, the Boston Globe, and the President himself, it looks as though the Senate Finance Committee has found a way to take advantage of this ignorance to help cure one of its biggest headaches. Republicans and almost every living economist want to scale back the tax-exempt status of employer provided healthcare. The reasons: (1) it contributes to the rapid growth of healthcare spending; (2) it provides generous tax benefits to the wealthy while excluding the poor and the unemployed; and (3) at a cost of $250 billion per year, even partial repeal would be a huge source of revenue for healthcare.

Despite all those good reasons, unions who negotiated generous healthcare packages for their members are adamantly opposed. And backing them up are the President of the United States, the Speaker of the House, the Senate Majority Leader, and the Chairman of the Ways and Means Committee -- arguably the four most powerful politicians in the United States.

But other revenue raisers -- including cutbacks in the value of itemized deductions (proposed by Obama) and a surtax on the wealthy (proposed by Rangel) -- are unpopular with the rank-and-file. This is forcing the Finance Committee to look again at cutting tax benefits for employer-provided healthcare.

Enter John Kerry. The Massachusetts senator has come up with the politically ingenious solution of taxing the sellers of insurance instead of the buyers. His proposal would put a new tax on insurers who sell high-premium health plans. The president says the idea is "interesting."

Armed with our understanding of simple economics we know there is no real difference between taxing the sellers or buyers of insurance. But a lot of people don't. And there is a world of political difference -- particularly in this Congress -- between taxing unions and taxing big, bad insurance companies. Keep your eye on this trick. It may be just what the doctor ordered to break the logjam in the Finance Committee.

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