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Tax break? Not for me and maybe not for a whole lot of others

Senator Barack Obama took a swipe at a new tax policy being proposed by John McCain.

(CBS) It's one of the most explosive and important political charges of the election: "He wants to tax your health benefits," Barack Obama said.

Obama's charge was that that John McCain wants to tax the health insurance benefits Americans buy through employers, CBS News correspondent Wyatt Andrews reports.

"That's a $3.6 trillion tax potentially increase on middle class families," Obama said. "That will eventually leave tens of millions of you paying higher taxes."

John McCain wants a multi-trillion dollar tax on the middle class? Here are the facts.

Obama has the tax part correct, but the impact on the middle class is exaggerated - most people will see tax cuts.

McCain has proposed to end one of the largest tax breaks in the entire economy. Some 60 million Americans buy health insurance thru employers tax-free, and McCain would indeed begin to tax the value of the benefit.

However McCain also proposes to give the money back as a tax credit, $2,500 for individuals, $5,000 for families.

"Let's give them a $5,000 refundable tax credit to go out and get the health insurance of their choice," McCain said.

"It's mostly a tax break," said Len Burman of the Tax Policy Center.

The non-partisan tax policy center says except for the very richest Americans, most people buying insurance will see a tax cut.

I don't say this all that often, but Obama has something right for a change.

My health insurance premiums, paid by my wife's employer the Diocese of Palm Beach, run $117 a week. If there five paychecks in a month, the fifth has no premium paid. So we're talking 48 weeks of premiums to be paid.

48 X 117.00= 5,616

5616-5,000= 516 more taxable income for me. The premiums for our health insurance increase every year as would the taxes we pay. Before some nut tells me the wife and I should go shop around for cheaper insurance, I'd remind them I'm battling Stage IV cancer at the moment. No insurer would ever sell me a policy.

Is what I'm paying out of line with other Americans? Read this from Kaiser Daily Health Policy Report.

Annual premiums for family coverage averaged $12,106 in 2007, with employees on average paying 28% of the cost, or $3,281.
$12,106- 3,281= $8825.

Bottom line- That isn't any tax cut. Try again Senator McCain.

Hat tip- Andrew Sullivan who writes It's a little complicated and Obama slips in that "potentially" to avoid a Palin-style lie, but it's still clearly fear-mongering and unfair. Really Andrew? Review my calculations above. The tens of millions isn't likely to be far off, if it is at all.

Update- A wizbang reader informed me this was a tax credit, not deduction. They're correct and I made the mistake in the above. However is the McCain policy a good idea or not?

In exchange, he would give people a $2,500 tax credit for individuals who buy health insurance and a $5,000 tax credit for families that do so.

The tax credit could help people buy insurance through their employer. Many would also use it buy coverage directly from insurers in the individual market. They could select from insurers licensed in any state. With more competition, costs would fall and quality would increase, McCain reasons.

Analysts writing in the journal warned against that approach.

They said employers would be less likely to offer coverage if they knew their workers could get it elsewhere. In all, the authors projected that 20 million people would lose their employer-sponsored insurance under McCain's plan, while 21 million people would gain coverage through the individual market _ little more than a wash.

The scenario of employers discontinuing health insurance coverage for some or all workers, because of the change I think is very real. Businesses are always looking at ways to cut expenses. Remember this also, if the formerly tax deductible premiums become taxable, that means their subject to SS and Medicare tax. Which employers pay half of.


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Comments (20)

My family's health care pre... (Below threshold)
Mike:

My family's health care premium is currently a little over $800 a month. For a mother/father/three young kids, that number is not far-out for good coverage (BC/BS in our case). If we assume a 50/50 benefit split between the employer and the family, we are talking $4900 a year, which a $5000 tax cut barely covers. If an employer pays more than 50% of an $800+ monthly premium, then most working families would see a net increase in taxable income, even with the $5000 tax credit. You're also right about the fact that McCain's plan does not include an explanation of how it will account for yearly premium increases, which are usually around 5%. Also, as adults get older, premiums rise. My wife will turn 40 this month, so our insurance premiums for October on will be about $35/month more than we pay now.

Good catch, Bill. I'll have to stop now, because talking about health insurance is bad for my blood pressure.

Sorry, but you have your he... (Below threshold)
Doug Ridley:

Sorry, but you have your health insurance comparison a bit mucked up. You would pay additional tax (if in the 25% bracket) of $1,404 and get a tax CREDIT of $5,000. Sounds like a net tax cut of $3,596 to me. As so many people do, you have confused a deduction with a credit. Deductions reduce taxable income and credits reduce the tax.

let me clarify- are we talk... (Below threshold)
kevin:

let me clarify- are we talking about a $5,000 deduction or a $5,000 credit? A $5,000 credit seems like alot.

Lets say I'm receiving free health benefits from my company and the premiums the company pay are $1,000/mo. This means my gross income is adjusted up $12,000.00. The additional income tax on that would be, maybe 15%(I have no idea) or $1,800. If it is a deduction of $5,000 per family that they are offering, I am screwed because that means that we are only adjusting my income down by that amount and I am actually paying taxes on an additional $8,000 of income. If it is a tax credit, I am happy because even though my taxes are increased by $1,800.00, I get to lower my taxes $5,000 for a net benefit of $3,200.00.

So tax credit versus deduction is an important distinction. Which one is it?

From McCains web site it is... (Below threshold)
185C:

From McCains web site it is a credit - "every family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance"

I simulated this for each of my employees and, (unless I misinterpreted the Plan), this does indeed work out to an effective tax cut.

Additionally, even if the c... (Below threshold)
185C:

Additionally, even if the credit only applies if an employee comes off the employer plan and they then have to buy their own, I would re-introduce the money I spend on each employees health insurance to them as income. Yes, their taxable income goes up, but the credit more than washes away the increased income tax.

Don't count on the value of... (Below threshold)
Brian:

Don't count on the value of the credit, though. One wonders how many employers will increase the employee-paid portions of their plans because of this. If some determine that all of their employees are receiving a $2000 health care bonus from the IRS, many would likely put more burden on employees to pay for the plan.

All of you lucky people who... (Below threshold)
Sharon:

All of you lucky people who have employer supplied health insurance have no right to complain. As a self employed person, I have to pay the full cost of my health care policy, almost $12000/yr. In addition, I have no prescription drug coverage,no dental and higher copays for outpatient hospital and regular visits. The real kicker is I have to pay self employment tax on this amount making it even higher while employer paid amounts are not subject to social security. A $5000 credit would be really,really helpful. Employees of most organizations get a lot of benefits tax free that I am not allowed to deduct pretax such as life insurance and disability insurance even though such a situation puts my whole livelihood in jeopardy. I am really tired of government trying to protect me by instituting more and more requirements on insurers and giving more and more free benefits under these plans which cost them less because of the size of their groups and making the cost of my healthcare more expensive. I asked for all my bills paid by the insurance company a couple of years ago and they paid out less than 25% of what I paid them and had an additional $5000 in copays and uncovered medical costs. AND, my policy still went up the following year. The system needs to be fixed so competition comes back into the equation. I am totally against government run health, but I want the same options as everyone else with the same tax benefits. McCain's plan at least uses the private sector to start this process.

Brian- I can only speak for... (Below threshold)
185C:

Brian- I can only speak for small biz owners (as I am one), but I would be more likely to take the money I spend on my employees health insurance and give it back as income (somewhat reduced after figuring out how much the increased SS and medicaire is) rather than just "take it away" If they want to shop around for a better or cheaper plan, then fine. They'd be more than happy with the cash plus the $5000 credit. Unless they need to buy the most expensive plan available, they will come out ahead.

"little more than a wash" ... (Below threshold)

"little more than a wash" Not entirely true. It allows a lot of people the opportunity to get a plan they like more than the one their employer locks them into. Also, it is, perhaps, a beginning to fixing the cost disaster that employee-paid health insurance has made of heath care. Check out the John Stossel column I linked to in my name.

This scheme is entirely unf... (Below threshold)
bobdog:

This scheme is entirely unfair and biased towards Republicans and it's just a cheap political stunt. What about the sizable percentage of poor unfortunate Democrats that don't pay taxes? What about the poor disenfranchised Democrat illegal aliens? What's in it for them? Only the RICH will get a tax credit!

This is just another dirty partisan trick by the McPalin campaign!

My husband and I are also s... (Below threshold)

My husband and I are also self-employed and we pay about $1000 a month in premiums and we really like McCain's insurance tax credit. Our daughter has disabilities and the only treatment is therapy. Right now our current insurance company covers an unlimited number of therapy visits with a 20% copay; however, next year it's going to limit its coverage to 60 total visits a year. Right now my daughter requires 4 a week. Now, she's our daughter and we certainly don't expect others to pick up the tab of caring for her. We consider that to be our responsibility, but, man, we could really, really use that tax credit to off set the cost of her therapies.

Think of it a bit like old ... (Below threshold)
Jon:

Think of it a bit like old phone companies. The insurance companies are the big bells before deregulation. There is a bit more competition, because your company can do the shopping, but your choice is limited to what your company offers, and your other choice will be extremely expensive because there aren't a lot of choices for families (no margin).

Taking away the limited market and allowing more open competition will allow for more players in the market (not just Aetna, Cigna, BCBS, etc...) And the consumer can make a choice with more options, or even a MSA that allows you to save money away.

Ask yourself, what do the big insurance companies want? A bunch of little customers, or a possible shot at the hugest company of all the entire population of the united states. I'm sure Aetna, Cigna, et al would love to bid on that contract. They don't want to have to compete at the street level.


As a self employed and havi... (Below threshold)
mpw280:

As a self employed and having to mostly buy health insurance using after tax income, bring it on. If you pay income tax on your beni's then fine, I don't mind having to pay insurance with after tax income, but if you can buy it with pretax income then I want that right too. Best solution would be to make the insurance market transparent and transportable and purchased with pretax income for all. That goes double for the dimwhits in Washington who get all those great beni's tax free, the ones that the people who put them there can't get. MPW

For years we were on insura... (Below threshold)

For years we were on insurance through my wife's employer. They had a better plan and a lower employee contribution. My company gave me a check for $1000 for not being on their plan. Now we are on my employer's plan - and that is probably the only reason I haven't flipped them off and walked out the door.

Some companies would no doubt get rid of their insurance altogether - or limit its availability. Some would do so and keep the savings.

Others will see salary and benefits as a tool to attract good employees and will act accordingly.

But it would be their choice based on what they judged was best for their business.

Want a job with insurance - convince your employer to offer it, or convince someone who does to hire you.

First let me say I'm sorry ... (Below threshold)
Jeffm:

First let me say I'm sorry to hear you're suffering from cancer and I hope your treatments are successful and pray for your recovery.
But...
I've said for years I think the problem with our health care system is the employer paid health insurance plans. Unless you work for a large company you have very little choice in health care plans. Many companies offer only one or two choices, effectively giving a near monopoly for those employees to the company offering the plans. No competition = no incentive to keep costs down and health care costs skyrocket. Not only did you get the credit/deduction wrong in this article but you're also wrong about McCain's plan here (and I'm not a big McCain fan). This is a step in the right direction.

If employers drop health co... (Below threshold)

If employers drop health coverage, don't you also run into likely increased cost for individuals? One of the biggest advantages of employer-provided care is that employers, particularly large ones, buy the policies in bulk and thus have the leverage to extract better prices from insurers. Put people in the individual market, and that leverage is lost.

In exchange, he wo... (Below threshold)
Mac Lorry:
In exchange, he would give people a $2,500 tax credit for individuals who buy health insurance and a $5,000 tax credit for families that do so.

You have it almost right. It's a $2,500 tax credit for individuals to buy health insurance and a $5,000 tax credit for families to do so.

So your tax on $5,616 would be about $2020 (I assume the states will follow the lead and tax it also) for a net gain of $2,980.

That's assuming McCain's plan is that employees only pay taxes on the part they pay, not what your employer pays.

It's basically another shell game where the well off pay more so those not doing so well can pay less or even get money outright.

The choice is which shell game do you like more. I think Obama is taking a big risk with the health care that 260 million Americans already have. There have been a number of documentaries on the Canadian system showing people standing in lines two blocks long waiting to make a dentist appointment. It seems McCain's shell game will do the least damage while allowing earners with no or little insurance to get some or better coverage.

James: but insurance compan... (Below threshold)

James: but insurance companies make money by selling insurance. If their customers are suddenly individuals who are looking at their premiums every month and looking for a deal, NOT corporations or businesses that are looking to buy in bulk who are ALSO hiding much of the cost of the premiums from their employees (not intentionally, but because they're paying chunks of varying sizes), then they're going to have to sell plans at bearable rates. If they go to everyone and say, here ya go, same as you got now, $2500 a month, pretty soon they're looking for a new line of work.

that said, there is no easy solution, the question is how to make the tough change in such a way that things don't fall apart in the interim. ideally everyone would get rid of employer paid insurance at the same time, then everyone would be negotiating on equal footing (more or less), and could compare apples and oranges from a dozen providers. ALSO, doctors would probably be looking to renegotiate their reimbursement rates and might be firing a lot of clerical staff that do nothing but deal with forms all day because a lot of people would be buying high deductible plans and would want to pay cash for routine services...so a GP might totally revamp her price list and practices, while an oncologist maybe not so much. The shakeup would be massive. It's taken since the end of WW2 to get us where we are now, 60 years or so. We're not going to fix it overnight. for every question answered there's a dozen more raised.

with THAT said, there is also no chance that EVERYONE will go off employer provided insurance at the same time. For instance, can you see Congress giving up theirs'? Plus, think of how many municipal, state, and federal employees there are in this country. In a lot of cases their benefits are pretty good (comes back to that negotiation-by-size you mentioned), and a lot of them even give up some pay for better bennies at those jobs. If that bennie goes away? That's a huge shakeup.

Seems like someone thought this might be a first step to fixing that 60 year headache.

It's not clear if this will... (Below threshold)
Brian:

It's not clear if this will be an "up to" $5000 credit, or a flat $5000 credit. What difference would that make?

Falze:I don't thin... (Below threshold)

Falze:

I don't think that you really addressed the nub of my question, which deals with the bargaining power that each party has in the transaction.

If I am buying individual insurance, for example, the insurance company has far more bargaining power in the transaction than I do. The only real pressure I can bring to bear is to take my business (and my family's) elsewhere. That's very little leverage against an insurer that has thousands or millions of customers.

On the other hand, if I come to the insurance company negotiating on behalf of (say) a thousand potential subscribers in an "all of us or nobody" transaction, I have more leverage against the insurer. In your scenario involving individual insurance, I see that leverage disappearing and tilting the majority of bargaining power back to the insurers.

Additionally, I see a definite possibility of insurers refusing outright to insure people with costly conditions, or the potential to develop costly conditions. HIPAA is of limited assistance in this regard. It merely requires insurers to provide a plan, rather than one that is affordable. Again, you effectively price certain people out of the market.

On the other hand, a "take it or leave it" deal involving a large group provides enough of a risk pool that the insurer can better afford to insure the entire group ... AND makes health insurance more affordable for individuals with preconditions.

Keep in mind I'm not arguing in favor of universal government-provided health insurance. I really don't think that system would work well. I have no idea what system would be best.

I actually have my own idea ... disbursing federal block grants to all 50 states with a mandate to "reform health care." Each state would be free to create its own solution, whether free market, socialist, or witch doctor (Exile evil spirits! Spirit rattle and a $25 copay).

This has two advantages: First, it allows each state to tailor a solution that fits its particular needs. Vermont, for example, may have entirely different needs from California or from Wyoming. Second, it uses states in their traditional roles as "laboratories of democracy." If a state creates a program that works particularly well, other states -- or the feds -- can use the lessons learned from that program in formulating their own.




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