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DR. MAULE AND THE BUSH HEALTH CARE PLAN

February 05, 2007

We'll celebrate Villanova tax prof Jim Maule's 3rd blogging anniversary by pondering his post on the President's health insurance proposals. The proposals would replace the current exemption for employer health insurance with a standard deduction for health insurance. The invaluable Dr. Maule finds this puzzling:

The plan would provide a "standard health deduction" of $15,000, with a smaller deduction of $7,500 for unmarried taxpayers with no dependents. The amount isn't critical to my question. By making the deduction "standard" the plan would not require the taxpayer to purchase health insurance.

I think Dr. Maule is mistaken here. The way I understand the plan, the standard deduction would only be avaiable for those with health insurance. It would be like the standard deduction for a dependent: yes, it's a standard amount, but you need a dependent to have one. That reading is supported by the White House fact sheet on the plan:

Under The President's Proposal, Families With Health Insurance Will Not Pay Income Or Payroll Taxes On The First $15,000 In Compensation And Singles Will Not Pay Income Or Payroll Taxes On The First $7,500.

Dr. Maule finds the concept of the standard amount troublesome:


What's to prevent a person from using the tax savings from the standard health deduction for something other than health care premiums?

As I read the plan, the answer appears to be: Nothing.

That's not a bug; it's a feature. By having the same deduction no matter how lavish the insurance, it will encourage taxpayers to shop around for cheaper insurance - insurance with higher deductibles and co-pays. In turn, taxpayers with higher deductibles are more likely to think twice before running into the doctor for a prescription, and more likely to shop around when they do.

The President's plan seems to borrow from concepts outlined in Arnold Kling's book Crisis of Abundance. Prof. Kling asserts that rising health care costs are driven by "premium medicine" -- which I'll greatly oversimplify as the tendency to consume more health care because somebody else - Medicare or the insurance company - is paying for it.

More from Dr. Maule:

Unless I'm missing something, a person who concludes that health insurance isn't worth it, who has other pressing financial needs, or who is irresponsible, will remain uninsured...I don't understand how the plan encourages purchase of health insurance by all of the people who need to do so. What am I missing?

He is missing something, I believe: you have to have insurange to get the deduction. The plan gives a tax break outside the employment market for health insurance, giving taxpayers an incentive to find low-cost, high-deductible health plan. Its backers hope the plan will create a market for high-deductible plans. Other parts of the proposals would attack state regulatory barriers to allow a national individual market in health insurance to develop.

And for the irresponsible - why is it the job of the taxpayers to protect them from their own folly?

Of course, there's no chance of the plan being enacted soon, but the proposals would be a big improvement over the current system.


Prior Tax Update Coverage:

TRY ON THE PRESIDENT'S HEALTH PLAN

STATE OF THE UNION HEALTH CARE PROPOSAL

WHITHER HEALTH INSURANCE TAX?

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