Greg Mankiw and Arnold Kling discuss Bush’s health care proposal.
Bush’s health-care proposal would use tax breaks to make it easier for people who do not have employer-provided health insurance to buy coverage on their own. The tax incentives would be similar to deductions used by homeowners for the interest on their mortgages, Bush said.
But the program is intended to have no effect on government revenues because the cost of the tax breaks would be offset by changing the way health insurance is treated in the tax code, according to a senior administration official who described the proposal to reporters.
The current health system relies primarily on employers to provide health-care coverage as a fringe benefit. Employees are not taxed on the benefits but the Bush plan would set a cap on the amount of coverage that could be offered tax-free.
Anything above that would be taxed as income, the administration official on condition of anonymity.
When I first heard that Bush was going to be presenting a health care proposal during the State of the Union I was dreading that it woud be some sort of ginormous give away like the Medicare Prescription Drug Balck Hole. However, this is actually pretty good in that it looks at health care as an actual part of an employees compensation package and not some sort of freebie/obligation from/by employers.
The big question though is will it generate bi-partisan support? This is a test for many on the Left side of the political spectrum, IMO. Are they serious about addressing some of the problems with health care or are they going to become completely unhinged with “gotcha-politics”? After all, who is most likely to benefit from the currently tax-exempt statust of health care? Those who have “gold plated” health care packages, to use Arnold Kling’s term. And who is more likely to have such packages? Certainly not the insured poor, the uninsured poor, etc. That is, those at the upper ends of the income distribution.
My guess though is that the Left will fail on this one. Kevin Drum thinks this is puny, why? Who knows, probably because it isn’t “free” health care for everybody. The thing is that, the health care tax deduction for those who don’t have employer provided health care will work very much like the mortgage interest deduction. Thus, people who are currently deciding not to purchase health care may well decide to purchase it. Will it mean 100% coverage? No. Will it increase the percentage of people with coverage? Yes. Will it lead to more spending? Well…hopefully not. With Bush you never know, but this is supposed to be revenue neutral.
Further, the tax on those health care policies that are over the cap would mean that people with policies that cover things that shouldn’t really be covered would become more expensive. This could reduce health care spending on the under 65 crowd. What does this mean with an actual example? How about a health care policy that provides for child birth. Why is that part of any insurance policy? Insurance policies are supposed to be about protecting us from “the bad state”. Car insurance works that way. Your insurance doesn’t cover oil changes, tune ups, and new tires. What it covers are un-anticipated bad outcomes such as a collision. Having a baby isn’t usually thought in the same terms as a car accident. Arnold Kling calls these kinds of policies health insulation.
The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small.
Having child birth covered under a health insurance plan is basically a subsidy to have children. It spreads the cost of having children from those making the decision to have a child to those who decide not too. In short, child bearing becomes a kind of fiduciary externality. That is, another couple’s decision to have a child has an impact on a third party’s income. After all, employers are concerned about total compensation. When health insurance costs go up, employers are going to want to offset that with less of an increase in wages. Here is how Arnold Kling puts it,
Real insurance would pay for treatments that are unavoidable, prohibitively expensive, or for illnesses that occur relatively rarely. Instead, insulation reimburses even relatively low-cost services, such as a test for strep throat or a new pair of eyeglasses. Insulation pays for treatment even if it is commonplace or discretionary.
Part of the problem with health care is that we have to get away from the idea that health care/insurance is insulation, and instead return to the idea of it being insurance. Would it solve all of the problems? No, but it would be a step in the right direction. Bush’s policy, if this is indeed how it is to work, could be the first movement in that direction.
Update: Mark Thoma over at Economist’s View provides us with a sizeable chunk of Paul Krugman’s take on Bush’s plan. There is more discussion below the fold.
What is amazing is how much of a political hack Krugman has become.
Mr. Bush is also proposing a tax increase … on workers who, he thinks, have too much health insurance. The tax code, he said, “unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”
Again, wow. No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums. And look at the condescension. Will all those who think they have “gold plated” health coverage please raise their hands?
[…]
What’s driving all this is the theory, popular in conservative circles but utterly at odds with the evidence, that the big problem … is that people have too much insurance — that there would be large cost savings if people were forced to pay more of their medical expenses out of pocket. …
Really? How about we turn to Jason Furman, an economist and frequent advisor to Democratic candidates.
if your employer pays $1,000 in premiums to your insurance company, that money is effectively tax deductible to you. But if your employer raises your salary by $1,000 and you use the extra money to pay for medical bills, you generally will not get a tax deduction. As a result, many people end up with more-generous health insurance plans than they would otherwise choose to have. These plans have lower deductibles, lower co-payments, and lower co-insurance and are often focused around providing first-dollar coverage for routine medical expenses, rather than genuine insurance.
Why this Jason Furman must be nothing more than some sort of conservative pig-dog…if we believe Paul Krugman. In reality, Jason Furman was an economic advisor to President Clinton, he was the economic director for the Kerry-Edwards campaign and a senior fellow at the Center on Budget and Policy Priorities.
As to whether or not Mark Thoma accepts Krugman’s nonsense is unclear since he merely posted chunks of Krugman’s screed without comment.
