The new plan for health care reform

Replace the tax deductibility of health insurance for the wealthy and middle class with tax credits for low-income individuals to buy health insurance.

Andrew Samwick explains here and here, try this excerpt:

Who benefits from this deductibility [of insurance]? …the average family with $100,000 or more in income receives a benefit of $2,780. Compare this to an average benefit of $1,231 for a family with $30,000 – $39,999 in income. Because tax rates are higher at higher income levels, and those with higher incomes are more likely to have coverage, the benefit goes up with income…

The portion of this disparity that is due to the progressivity of the tax system is ridiculous. Subject it all to tax, and take some portion of the $100 – $200 billion saved and use it to provide refundable tax credits to purchase health insurance, whether through an employer or an individual policy. The credits should phase out at higher income levels. 

Brad DeLong signs on as well.  R. Glenn Hubbard and co-authors endorse a related but not identical idea in Wednesday’s Wall Street Journal.

The core rationale is simple.  Employers would substitute toward plans where beneficiaries care about costs at the margin.  At the same time, the uninsured would have a greater chance of receiving coverage.

My take:  Whether I press the "yes" button depends on what we compare it to.  It sounds like a good package deal, especially if done in revenue-neutral fashion.  The distributional change is compelling.  It looks less good when broken into constituent parts.

People at the upper end will face higher insurance costs; I suspect at the margin many will be pushed out of group plans into higher-premium private plans.  (I’ve never been convinced that the tax subsidy for insurance, while costly, is the fundamental problem in the health care market.)  Why should we favor this, except as a revenue-raising measure?  On this part of the plan I vote "no."

What about the newly created benefits at the lower end of the income distribution?  Well, I can think of many worse ways for the government to spend its money.  But for me the proposal is neither a first nor a second best.

Many of the uninsured are linked to recent immigration.  But if we are willing to spend money in this fashion (I am), I would rather spend the money taking in more immigrants.  That helps the people who need it most and brings significant health benefits to many, including the recipients of remittances.  (Admittedly emergency room budgets will take a whacking.)  I also would prefer a more targeted program to address the behavioral obstacles that keep many of the poor, insured or not, from seeking preventive care.  So on this second part of the plan I vote "maybe."  It is not my favored way of spending government money, though it is an above-average way of spending the money.

Nobody has a really good health care plan.  This idea remains in the running, and might make sense as a "best politically feasible package plan."  But it is not my first or second best choice, and as a blogger I will demand license to dream.


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