With exams over less than twelve hours, I wasn’t planning on doing much thinking—who knows, after reading this you might conclude that I haven’t been doing much thinking—but this is an issue I care about. So I blog.
I read a proposal in the WSJ earlier this year, which has apparently come up again, about ending the tax deductibility of health benefits and was struck by how simple it is. I wish I still had the archive from my old site so I could find the original article.
Anyway, making benefits exempt from taxable income causes people to over-consume and employers will opt for more elaborate plans for more expensive workers. They’re the ones with the bargaining power. Will eliminating this distortion, by treating different forms of income equally, cause employers to abandon health insurance as a benefit? I suspect not for two reasons.
First is institutional inertia. Employees have come to expect employers to offer some sort of health benefit and it’s one of the first things employees think about when evaluating jobs. Employers will likely continue to offer health benefits simply because employees expect the benefits.
Another reason employers will continue to offer health benefits, even without the tax benefit, is because it’s something that they can offer relatively cheaply, as opposed to having employees get their own insurance. This won’t be true in every case, to be sure, but in general employers will be able to buy insurance at a lower rate than employees can alone, therefore adding more value to a compensation package from the employee’s perpective at a relatively low cost to the employer.
Will the benefit of eliminating the propensity to over-consume that’s built into the tax code outweigh the costs of disintermediation and other considerations? I don’t know, but on its face it doesn’t make a lot of sense to me to treat one form of income as preferable to another.
Update: click through the "here" links if you want to see actual numbers.