Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Tax Deductibility of Employer-based Health Insurance
The Henry J. Kaiser tax dodge.

John Turner, CEO, Corporate Synergies

Two hundred, twenty-five employees help place $1 billion in annual premiums, with central office in Mount Holly NJ, and other offices in Wayne Pa, New York, Maryland.

John Turner has his home in Orlando Fla. Interviewed by Jane Van Bergen, his company's main effort is to clarify insurance issues, including health, for health benefits provided by state and federal governments. He employs a lawyer and three paralegals. At present, the main issue is all the current discussion of limiting the tax deductibility of employer-sponsored health insurance.

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Ever since Henry J. Kaiser introduced the idea, employers have given employees health insurance and taken an income tax deduction for it, while the employee takes a second tax deduction for the same insurance, in lieu of a reduction in paycheck. Non-employees are not entitled to the same deduction. Since 69% of health insurance among persons 18 to 65 is sold this way, and health insurance for persons of all ages, both below 18 and over 65 is directly or indirectly paid by working people on the behalf of others, it can be guessed that roughly 69% of all health insurance for people of all ages is subject to tax preference. Estimating the average tax to be 18% overall, the guess is a fair one that the government is contributing 23% of the cost of 18% of GDP. In view of the double-tax exemption affecting large employer groups at higher rates, it would not be extreme to guess the government contribution approaches 6% of GDP in this way. Congress feels the full contribution is more than the taxpayer can afford, so it borrows half of it from bondholders. The outcome thus approximates 3% of GDP for the taxpayer, and another 3% for whatever generation ends up supporting the debt.

Since one third of the working population is not entitled to this deduction, their contribution to their competitors is in the resulting wage differential which long ago was equalized by some combination of higher paypacket costs, or reduced benefits, or higher healthcare costs. The resulting distortion of the economy is undeniably quite large, resulting in a hidden cost which cannot be estimated.

Protection of foreign economies is not an assignment of our government, but minimizing international trade wars definitely is part of protecting the public welfare, and our government is impaired in its ability to protect the public, by the existence of this handicap. Whether stress is placed on this particular political argument or not, will depend on the vagaries of individual competition.

Those are the economic consequences, of what was once described to me as an effort spearheaded by Republic Steel eighty years ago, to persuade the steelworkers what a sweet deal it would be for them. And for a while the steelworkers resisted, following their instincts that anything proposed by a Steel Company vice president must contain hidden disadvantages for the working man. Eventually, the attitude that what's good for the steel company is ultimately good for the steelworker finally triumphed over attitudes traceable to Nineteenth Century Mollie Maguires. The result was eventually determined by the American Steel Industry vanishing to the benefit of foreign competitors. So the vindicated culture was that of economists, who warned that "if you cut the melon too thick for yourself, someone else will wind up with the melon."

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So, what is to be done about a law which is ultimately harmful to society, but temporarily protective of certain subgroups? It's hard to change, and procrastination is understandable, but to retreat into slogans like "creative destruction" is only useful against the weak. Someone must devise some destruction which is constructive. One step toward improvement would be to raise the benefit for the victims, well before you lower them for everybody. Eighty years seems like long enough to prove this problem will not solve itself. Its cost is just the cost of action.

 

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