Monday, January 10, 2005

An idea for President Bush's tax reform panel

If President Bush's tax reform commission is looking for good ideas, here is a bit of light reading that they could start with:
Tax Policy for Health Insurance
BY: JONATHAN GRUBER
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
(Full text is $5 for non-NBER subscribers)
ABSTRACT:
"Despite a $140 billion existing tax break for employer-provided health insurance, tax policy remains the tool of choice for many policy-makers in addressing the problem of the uninsured. In this paper, .... I find that every tax policy is much less efficient than public insurance expansions: while public insurance costs the government only between $1.17 and $1.33 per dollar of insurance value provided, tax policies cost the government between $2.36 and $12.98 per dollar of insurance value provided. I also find that targeting is crucial for efficient tax policy; policies tightly targeted to the lowest income earners have a much higher efficiency than those available higher in the income distribution."

If anything ought to be on the tax reform agenda, this is it. As a rough back of the envelope calculation, the infinite horizon revenue estimate for repealing what is now a $140 billion annual tax break, growing at the same rate as the economy (although presumably it is actually growing even faster) might be about $7 trillion. In other words, about 70 percent of the infinite horizon Social Security gap.
The fiscal benefits are much larger than this, however. Glenn Hubbard, John Cogan, and Daniel Kessler, in Brilliant Deduction, recently argued that people with catastrophic health insurance coverage should be allowed to deduct all of their medical expenses. They estimate that, even though this would expand total tax breaks for healthcare, it would actually reduce people's healthcare expenditures by 6% annually by eliminating the current tax incentive to over-insure routine expenditures and thus engage in wasteful consumer spending. Taxing employer-provided health insurance would address this as well, while also eliminating the tax preference that Hubbard et al would retain in favor of one form of consumer spending (healthcare) over others. So we get a better proposal than that of Hubbard et al (who I would guess were moved by concerns about political feasibility), while raising rather than losing revenue.
Since we want people to have catastrophic health insurance coverage, both paternalistically for their own good and because we might end up paying for their critical care otherwise, we might want to continue offering tax benefits for that, at least with targeting (such as to low-income workers) as Gruber recommends. This would admittedly cut the direct revenue gain a bit, but probably not much. And keep in mind that reining in lack of cost-consciousness in the healthcare sector, which partly results from tax-induced over-insurance, might also yield indirect fiscal benefits to the government via Medicare and Medicaid, since expenditures in those two programs are presumably influenced by healthcare industry norms.
A whole lot more worth spending "political capital" on than Social Security privatization, wouldn't you say?

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