The voices of Tax Policy Center's researchers and staff
Imagine you are a successful business owner confronting the House Democrats’ proposed tax rate hike. Your first question: How do I shelter as much of my income as possible? Will one answer be to buy the richest, most generous health insurance policy you can find?
It only makes sense. Why take cash compensation that could face a top rate of more than 45 percent when you could easily get more tax-free health insurance? Forget Cadillac plans. Now we’re talking Lamborghini coverage.
Most economists agree that these very rich plans are a large part of the health care problem, not the solution. They mask the true cost of care, which may encourage more needless tests and procedures, thus driving up overall costs. And the tax exclusion is hugely unfair, creating much bigger government subsidies for the rich than for the typical working stiff.
The big rate hike proposed by the House Democrats would only increase their subsidy. The math is pretty simple. If you are making $30,000 a year, the government will pick up 15 percent of the cost of your insurance policy. If you are a Wall Street bonus baby making $1 million-plus, Uncle Sugar already subsidizes 35 percent. With the new surcharge and other rate increases scheduled for 2011, Uncle will cover nearly half. Figure in state income taxes and the subsidy would be even higher. Such a deal.
Not everyone will buy more generous insurance, of course. The boss' interests don't necessarily drive benefit decisions. And. they'll be plenty of other ways to shelter income. Still, encouraging the very rich to purchase more insurance doesn't seem like a great idea.
The law of unintended consequences rears its ugly head, yet again.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.