White House considers taxing health benefits

It might be simplest if the White House announced that all of its campaign rhetoric is “no longer operative.”  To wit: taxing health benefits, formerly the worst idea ever, is now under consideration. James Capretta explains:

Remember this devastating political ad from last year?

Many Americans probably do, as it represented a real turning point in the presidential campaign.

Aired in October, the ad picked up on an exchange from the vice-presidential debate between then-Senator Joe Biden and Alaska Gov. Sarah Palin. Palin had just explained that the McCain health-care plan would provide refundable tax credits of $5,000 per household to help families buy portable insurance. Biden, who had clearly been waiting for the issue to come up, responded with a scripted attack. What the McCain-Palin folks don’t tell you, Biden warned, is that they would — “for the first time in history” — tax your employer-provided health benefits.

The public, most of whom get their insurance from their workplaces, was taken aback and confused. Why would Republicans want to tax employer-sponsored health-care benefits? Aren’t Republicans for cutting taxes? Aren’t they for private, as opposed to public, health insurance? And how could a tax increase make anyone better off?

It was a devastating blow. The McCain campaign never adequately explained their plan or offered an effective counter-argument — and the Obama-Biden campaign never looked back. They rode the issue for weeks, airing millions of dollars in attack ads. Indeed, the effectiveness of the coordinated attack on the McCain health plan is surely one of the main reasons for Obama’s victory in November.

Well, guess what? Not five months later, having secured the presidency, President Obama has changed his tune. Taxing health-care benefits is not such a bad idea after all, he and his team now say.

If done properly, this could be a good idea.  The preferential tax treatment of benefits (principally health care) has distorted employee compensation, favoring benefits over wages.  In regards to health care, this has an important undesirable second-order effect.  When a large part of employee compensation can be spent only on health care, employees are encouraged thereby to spend more on health care. Supply and demand then tell us that, consequently, the price of health care and the quantity consumed will increase.

Of course, the new tax on benefits ought to be matched with a tax cut, in order to leave taxes unchanged overall.  This was John McCain’s plan.  Once people adjust to the new incentives, the end result is simply more money in your pocket to spend on whatever you want, rather than only on health care.  Unfortunately, President Obama almost certainly will not do it that way, because (unlike McCain) he sees it as a source of revenue, rather than a way to remove a distortion in the marketplace.

And so Obama’s true hypocrisy is revealed.  McCain never planned a tax increase levied on health-care benefits (attack ads notwithstanding).  Obama is considering exactly that.  Thus, the policy that Senator Obama attacked so effectively never was McCain’s policy, but it has now become Obama’s.

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