- The Washington Times - Wednesday, December 26, 2001

Greg Scandlen insists that if refundable tax credits for all those who have to buy their own health insurance coverage “isn't an idea that should appeal to conservatives, I don't know what is” (“Health care tax credit benefits,” Commentary, Dec. 13). He is half right. He doesn't know.

If the real policy goal is tax neutrality for government tax policy for health insurance, the solution is tax deductibility for all health insurance purchasers, not a mixture of deductibility for most employees of firms providing group insurance and a fixed dollar tax credit for buyers of individual insurance policies.

If the policy goal is to provide more of the current tax subsidy to lower-income workers, the real complaint is with the progressive marginal tax rate structure of the current Internal Revenue Service code. Until we move to a flat tax (the real solution), the value of any income tax deductions will always be greater for taxpayers in higher income brackets.

The current “entitlement” under the tax code for health insurance purchases is not limited solely to those Americans who obtain employer-sponsored insurance. The self-employed already can deduct 60 percent of the cost of their health insurance, and they will be able to deduct 100 percent by 2003.

Interestingly enough, even though the self-employed receive less generous tax advantages for health insurance purchases than other workers and they are less likely than wage earners to be covered by health insurance, this relative lack of insurance doesn't affect the health of the self-employed. Craig Perry and Harvey Rosen concluded in a recent study for the National Bureau for Economic Research that “for virtually every subjective and objective measure of health status, the self-employed and wage earners are statistically indistinguishable from each other.”

The dangers of most refundable tax credit proposals are three-fold:

First, they generally are designed to award tax “cuts” to individuals who pay little, or no, federal income taxes.

Second, they are politically prone to pay for increased subsidies to low-income workers by reducing the current health insurance tax benefits available to higher income Americans (in effect, increasing the latter's marginal income tax rates).

Third, they reinforce the mistaken precept that health insurance is a public good for everyone who cannot be financed adequately without even greater subsidies from taxpayers. Additional political conditions on how these tax subsidies for health insurance are to be spent will follow accordingly.

Refundable tax credits in fixed dollar amounts that are greater than an individual worker's federal tax liabilities (including payroll taxes) are bad tax policy, bad welfare policy and bad health policy.

Before we point the tax policy gun in a new direction, let's first make sure it's not aimed at our own feet.


Director of Health Policy Studies

Cato Institute


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