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Whose Health Plan?
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By Ruth Marcus
Tuesday, October 7, 2008

The month before a presidential election isn't the best time for reasoned debate about complicated policy. Here goes, anyway.

Overall, Barack Obama's health-care plan is preferable to John McCain's. Obama's approach -- which would require employers to provide insurance or pay into a fund, subsidize those unable to afford coverage on their own and set up new purchasing pools -- would cover more people and would help those who have the hardest time obtaining insurance.

But McCain's plan is not the ill-intentioned monstrosity of Obama's ominous portrayal. In important ways, it would be an improvement over current law, making a health insurance system that is now tilted in favor of the rich significantly more progressive.

The central aspect of McCain's approach is to eliminate the existing tax preference for employer-sponsored health care. Under the current system, employees don't pay tax on the value of the health insurance they receive from employers, even though most individuals buying insurance on their own don't get that break and have to purchase insurance with after-tax dollars.

The existing arrangement is an irrational artifact of World War II wage controls, when companies competing for scarce workers dangled health insurance to lure them. The result is a tax subsidy that has ballooned to $200 billion a year. No one designing a health-care system from scratch would set things up this way. Tying insurance to employment makes little sense in a world where workers hop from job to job. Excluding the value of insurance from taxable income leads to overconsumption of health care, driving up costs. It favors better-off employees who, because they pay higher marginal rates, derive a greater benefit from not being taxed on their health insurance.

Eliminating this distortion -- if done the right way, and that's a big if -- could help more Americans obtain insurance, push down costs and reduce the drain of health-care costs on the federal budget. Don't believe me? Read Jason Furman, Obama's top economic adviser, writing just in April: "The most promising way to move forward in all three dimensions -- coverage, cost, and long-run fiscal situation -- is to replace the employer exclusion with a tax credit."

President Bush took a stab at dealing with this irrationality a few years ago, proposing to make employer-provided health insurance subject to income taxes but to give all taxpayers a big new deduction to cover the cost. At the time, prominent Democratic economists -- including Furman -- praised the impulse but criticized the details.

They argued that instead of a deduction, which is more valuable to those in higher tax brackets, the president should substitute a tax credit, which is of equal benefit to all taxpayers. Not only should there be a tax credit, they suggested, but it should be refundable; those who do not earn enough to owe income taxes should receive money from the government to buy insurance.

So what does John McCain's plan do? It has just such a refundable credit: $2,500 for an individual, $5,000 for a family. The Obama campaign tries to scare voters into believing that this is a terrible deal, noting that the average family policy costs about $12,000.

True, but if you get $12,000 in health insurance from your employer and are in the 25 percent tax bracket, you would owe another $3,000 in taxes. The credit would let you take $5,000 off your overall tax bill. You come out ahead -- unless your insurance is hugely generous, in which case it's serving to drive up everyone's health-care costs.

There are, certainly, serious flaws in McCain's plan. Younger, healthier employees would have an incentive to drop employer coverage and purchase cheap private insurance, driving up costs for companies left with the oldest, sickest workers. Eventually, many employers, especially smaller ones, would stop offering insurance. On the open market, McCain would leave insurance companies free to cherry-pick the healthiest enrollees.

In the face of these problems, McCain's plan does not do anywhere near enough to help those who face unaffordable premiums. Moreover, because the tax credit is indexed only to overall inflation and not to the faster increase in health-care costs, its value could erode significantly over time.

In a perfect world, the candidates could have a rational discussion about the merits of their two approaches. In this one, they are reduced to trading inflated charges about tax hikes and government-run health care.

marcusr@washpost.com

Read more from Ruth Marcus on washingtonpost.com's political opinion blog, PostPartisan.

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