A Better Way Forward: Equalize the Tax Treatment of Health Insurance

A BETTER WAY FORWARD
EQUALIZE THE TAX TREATMENT OF HEALTH INSURANCE

Our health-care system is badly distorted by the way that federal tax law treats different kinds of health insurance.

Individuals who receive health insurance through an employer are able to exclude the amount spent on that insurance from their taxable income, but individuals who purchase their own insurance are not. The tax subsidy’s unavailability for the uninsured or for individual insurance purchasers has severely inhibited the development of an individual insurance market. That leads workers to avoid switching jobs for fear of losing their insurance, and it has constrained the wages of workers who receive insurance.

Our health-care system should not disadvantage people, who are not in a position to receive insurance through their employer, and should not encourage inefficiency and inflate costs by focusing exclusively on employer-provided insurance rather than a more robust individual market. A better system would treat all Americans equally, regardless of how they obtain health insurance, and would help everyone obtain the coverage best suited for them.

Key reforms for achieving that goal include:

• Replacing the existing open-ended tax exclusion for employer-provided health insurance with a universal exclusion, deduction, or tax credit that would provide roughly the same level of benefit regardless of how an individual or family obtains its health insurance.

• Providing an additional adjustable credit on a sliding income scale for lower-income Americans.

Reforms like these would ensure that every American has access to quality coverage at affordable prices. It could significantly reduce the number of uninsured Americans at a far lower cost than Obamacare, and without intrusive mandates, heavy-handed regulation, or bureaucratic price controls.