Our mantra is “Broaden the base and lower the rates.” Broadening the base means getting rid of the endless special breaks — the targeted deductions, credits, exclusions and other features — that have accumulated on the tax code like barnacles on a boat. They’re a main reason the tax code is so staggeringly complex, longer than “War and Peace” and impossible for anyone to comprehend fully.
But they do much more damage than just adding complexity. They cost a ton. These breaks, which policy wonks call tax expenditures, totaled about $1.2 trillion last year, according to federal budget documents. That’s more than the revenue brought in by all individual income taxes.
Further, by making various favored activities less expensive for individuals or companies, special breaks distort economic incentives, drawing money away from other activities. And because special breaks let some people and companies pay less tax, rates have to be raised on everybody else. Broadening the tax base by wiping out special breaks — including the very favorable treatment investment income gets — exposes more taxpayers to the same rates, which can thus be lowered substantially while still bringing in the same revenue — in a simpler, fairer way.
Here’s what we’d get rid of: (Be warned that every change gores somebody’s ox, which is why, as we’ve said, the ancient art of political horse-trading has to be rediscovered in Washington.)
The exclusion for employer-sponsored health insurance
The fact that employees pay no income tax on the value of health insurance they get from their employer is the biggest, weirdest break of them all, originally created by employers who found a loophole in World War II–era wage and price controls and used “free” health benefits as recruitment tools. This bizarre break cost the federal government $177 billion last year and makes no economic sense. It makes health insurance more expensive for people who have to buy it on their own. Because it’s a tax break, it’s more valuable to high earners than to low earners — an odd way to subsidize health care. And because it’s a tax-free element of pay, employees tend to want (and employers tend to offer) more compensation in the form of health insurance than they otherwise would, encouraging overspending on health care.
The Affordable Care Act includes provisions meant to counter some of those effects. But why tinker? Let’s expose health care to more economic reality while leveling the field for people who buy health insurance.