When a Tax Break Is Actually a Tax Penalty
When is a tax break actually a tax penalty? When it’s the tax exclusion for employer-sponsored health insurance.
That’s what Michael Cannon, Cato Institute’s director of health policy studies, convincingly argues in his recent paper, End the Tax Exclusion for Employer-Sponsored Health Insurance. His paper is a compact lesson in the ways that some supposed tax breaks can effectively function as tax penalties, not only distorting markets, but invisibly penalizing people for their choices. And it’s a reminder of the ways that seemingly minor, offhanded policy decisions, made with little thought to long-term consequences, can exert a haunting influence long after they are made.
The tax exclusion for employer-sponsored health insurance is exactly what it sounds like: a carve-out for health coverage offered through the workplace.
If an employer were to pay an employee $10,000 in cash, that money would be taxed at an average rate of about 33 percent, meaning that the employee would only see about $6,666. If, on the other hand, the employer were to compensate an employee with $10,000 in health insurance purchased by the employer, the value of that plan would be exempt from federal income and payroll taxes. The employee would receive the full value of the plan.
This makes workplace health benefits more valuable, on a dollar-for-dollar basis, than cash compensation, and thus incentivizes purchasing more of it than if the tax treatment of cash and health benefits were equal. It acts as a subsidy.
In his paper, Cannon allows that “from an accounting perspective, the exclusion is a tax break: It reduces the tax liability of workers who enroll in employer-sponsored coverage.”
But he argues that, in practical terms, this tax b
Article from Reason.com