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Mccain's Tax Increase On Health Care

It is an embarrassment to John McCain's advisors that they have sent him into battle with a tax agenda that costs trillions of dollars yet delivers no benefit to tens of millions of middle-class Americans. 

Since it's apparently too late to change course, McCain advisors Martin Feldstein and John Taylor take a different tack: they misstate what McCain's plan actually does.  In today's Wall Street Journal, Feldstein and Taylor try to manufacture a tax cut from McCain's health care plan.  While admitting that McCain’s plan would tax health benefits (which are largely tax-free today), they say that “the vast majority” of taxpayers would get a net tax cut because McCain’s new health insurance credit “exceeds the extra taxes on existing benefits.”  

They are wrong.  The first problem is that McCain aides insist their plan has no net cost to the federal budget.  This means that for every dollar in tax cuts, there must be another dollar in tax increases.  The existing tax benefits go to about 160 million Americans, tens of millions of whom would face higher taxes under McCain's plan.

The second problem is that, unlike existing benefits, McCain’s tax credit won’t keep up with rising premiums over time.  It is limited to the inflation rate – expected to be about 2 percent a year – while premiums will grow at 7 percent a year.  Before long, nearly all families would be paying higher taxes on their health insurance.  

You may wonder why conservatives would embrace higher taxes on health benefits.  The reason is that many conservatives believe that insurance plans today are too generous.  Minimal out-of-pocket costs lead to wasteful health expenditures, they say.  Making families pay more for their health care is a way to strengthen market forces.

There is a kernel of truth here: when insurance will pay for anything, sometimes patients choose very expensive treatments that are no better than cheaper alternatives.  But an indiscriminate effort to shift medical costs onto patients is a dangerous idea because people won't get care they need.  And it certainly isn’t a tax cut.

--Robert Gordon and James Kvaal