The insurance industry has launched a media campaign to build pressure against the administration's tax-reform proposals. The insurance companies are afraid that if workers faced lower tax rates, but had to pay taxes on even part of their fringe benefits, they might decide to opt for higher salaries instead.
The insurance industry does not make its pitch in terms of its own financial stake. Instead, it focuses on the benefits of health and other forms of insurance and the extra taxes that, it claims, workers would have to pay. Insurance executives admit that letting some workers get tax-free benefits while others are taxed on their whole income may seem unfair. But, as William Raspberry reported in his column Monday, they dismiss that contention by observing that "it is also true some companies pay better than others. Is that unfair?"
The Treasury's proposal would actually leave all but the most extravagant forms of health insurance untaxed, so many of the industry's claims are simply scare tactics. But even so the industry's arguments are flawed. Of course health insurance is a valuable benefit, and, with today's medical prices, anyone who can afford it would be a fool not to buy it. The only issue is whether workers should be able to buy health and other insurance with before- tax rather than after-tax dollars. Remember that people have to buy even more basic necessities -- such as food and shelter -- with after-tax dollars. Why should health insurance be a before-tax item?
The industry also fails to point out that, even if workers had to pay some taxes on their fringe benefits, their total tax burden would almost surely decline. That's because the Treasury would use the money raised by broadening the tax base to give larger exemptions and deductions to families and to greatly reduce their tax rates. Most families would pay considerably lower taxes, and the system would be much fairer.
It is true that some companies pay higher wages than others, and no one thinks that's unfair. But the income tax system is designed so that workers with higher incomes pay a larger portion of those incomes in taxes. Excluding income received in the form of fringe benefits turns the tax system upside- down. The very lowest paid workers usually get no fringes at all, and hence all of their income, after standard deductions and exemptions, is taxable. The best-paid workers also get the best fringe benefits, many of which, such as life insurance and deferred compensation, increase with pay. As a result, higher paid workers may actually pay lower effective tax rates than workers with much less spendable income.
Taxes won't be fair until people start realizing that "tax-free" forms of income only mean higher taxes on wages and less take-home pay.