Advocates for Evidence-Based Health Policy Speakers
Unlearn What You Have Learned
The history of employer sponsored health insurance (ESI) is long and colorful. Given the chance, it is a story we would rewrite. Removed of our hindsight, might we actually arrive with a better health care financing system? Few would argue that we find ourselves in an ideal situation. Economists in particular tend to take issue with the tax exclusion for ESI—claiming that it creates an unfair, regressive tax. However, a recent analysis, argues the contrary.
A recent study points to the root of previous misguided analyses—a focus on the absolute amount, rather than the relative proportion, that tax exclusions for ESI save employees. The author suggests that arguments which claim that the tax exclusion for ESI is regressive, are motivated by a boarder argument. He argues that the economist who suggests caps or the elimination tax exclusions all together, do so from a belief that in general, tax exclusions create market distortions that alter consumer behavior in detrimental ways. The regressive tax claim, considered incorrect and misguided, is therefore made to justify an ideological, instead of a scientific, position.
The paper hits its inflection point with an excerpt from the Employee Benefit Research Institute, which states that “health benefits are a much larger share of total compensation for lower-income workers. Therefore, eliminating some portion of the subsidy will affect more of the income of lower-wage workers, and this income-share effect more than offsets the tax rate effect.” This piece complicates the regressivity argument by clarifying the importance of taking into account the impact of tax exclusion as a proportion of income. The value of the tax exclusion, when only looked at in relation to marginal tax brackets, only makes an absolute dollar amount comparison. It does not take into account the relative value that these exclusions have for earners in different income brackets, which is exactly the point of this new analysis.
The tax exclusion for ESI is not necessarily a regressive tax benefit. Therefore, doing away with the exclusion would not result in a “progressive” situation. Although ESI may not be the optimal manner to finance health care for our nation, in today’s market and political climate, it is the best option we have.
This Policy Prescriptions® review is written by Trevor Hadley as part of our collaboration with the Health Policy Journal Club at Baylor College of Medicine where he is a medical student.
Abstract
Conventional wisdom says that the tax exclusion for employer-sponsored health insurance (ESI) is “regressive and therefore unfair.” Yet, by the standard definition of regressive tax policy, the conventional view is almost certainly false. It confuses the absolute size of the tax exclusion with its proportional effect on income. The error results from paying attention only to the marginal tax rate applied to ESI benefits as a portion of income and ignoring the fact that benefits are normally a much larger share of income for people with lower wages. This article explains the difference and then considers other distributional effects of ESI. It suggests that ESI-for those who receive it-further redistributes toward those with lesser means or greater need. The most evident effect is by need, favoring employees with families over those without. Yet there is good reason to believe there is also a redistribution by income, with the package of wages plus benefits being less unequal than wages alone would be. Therefore reformers should be much more careful before criticizing either ESI or its subsidy through the tax code as “unfair,” especially as the likelihood of enacting something better in the United States seems quite low.
PMID: 28341637
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