NCPA - National Center for Policy Analysis


January 24, 2007

America's health care system is not a truly efficient market because current tax policy lets businesses -- but not individuals -- deduct the cost of health expenditures.  Thus most Americans with private insurance get it from their employers, which leads to inequities and insulates individuals from the real cost of their treatment decisions, says the Wall Street Journal.

President Bush's "standard deduction" for health care would move in the direction of solving both problems, says the Journal.  Instead of giving employers an unlimited deduction and individuals none, the President would give every family a $15,000 deduction ($7,500 for individuals) regardless of their insurance source.

That might mean a slight tax increase for those who currently have the most expensive insurance plans:

  • But the average employer-sponsored family plan runs about $11,500 annually, and about 80 percent of the 160 million employer-insured Americans would benefit.
  • All Americans with employer-sponsored insurance would have to report the value of their health benefit as income, but they could deduct the full $15,000 no matter how much their insurance cost.

The 17 million Americans who buy their own coverage would be big winners.  And because the tax deduction would apply to payroll as well as income taxes, the benefits would be large even for low-income earners:

  • So a family making $60,000 would wind up with a tax savings of $4,500, which would offset the cost of acquiring coverage in many states.
  • Meanwhile, a young person making $40,000 could buy a high-deductible plan for, say, $1,000 and actually get a tax break of $2,250 for doing so.

The Treasury estimates the new deduction would add at least five million Americans to the ranks of the insured, but according to the Journal, the number could be higher given the incentives all of this would provide for new private insurance products.

Source: Editorial, "Health and Taxes," Wall Street Journal, January 24, 2007.

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