Most Americans under the age of 65 are still covered by employer sponsored health insurance plans. Nevertheless, even though they are an integral part of Obamacare, s0-called progressives demand a “single-payer” plan that would abolish these employer sponsored plans. One of the objections to these plans is that they provide a greater tax break to high salaried corporate employees than to low income workers. Since the cost of each employee’s insurance benefit is not taxed as income, employees in higher tax brackets do get a better tax break.
For example, if the cost per individual is $10000, an
employee whose top tax bracket is 35% would save about $3500 per year in taxes.
But an employee whose top tax bracket is 15% would only save about $1500 per
year in taxes. A first glance this may seem like an inequity but let’s look a
little deeper and contrast the CEO making $1 Million per year with the
secretary who makes $40000 per year.
In the first place, the CEO’s annual federal tax bill is
probably about $300000, and so a $3500 tax saving shaves about 1% off his or
her tax bill. On the other hand, the secretary’s annual federal tax bill is
probably less than $4000, and so the $1500 tax saving shaves about 40% off his
or her tax bill.
Moreover, the employer sponsored medical insurance fringe
benefit is a great equalizer. Every employee, from the CEO down to the
mail-room clerk, gets the same plan. There can be no Cadillac plan for high
salaried employees alone. Also, when a corporation provides medical insurance
for the CEO, the cost represents only a tiny fraction of the $1000000
compensation plan. Adding a $10000 tax free fringe benefit to the secretary’s
$40000 salary represents a 40% increase in total compensation.
Finally, individual employees do not have to choose a
particular plan themselves. Company experts or consultants wade through the
variety of insurance offerings and options and pick the plan. Anyone who has
tried to pick from the various Medicare supplement options, or choose between
the gold, silver and bronze plans offered through Obamacare will understand how
difficult it is to assess these complicated plans.
From their beginning after World War II, the employer
sponsored plans were incredibly attractive to all concerned and sparked a
veritable revolution in health care in this country. Employers could deduct the
cost of their plans as an ordinary business expense while employees could rely
on their pre-tax medical insurance plan to cover major medical expenses. Since
these were group insurance plans all employees had to be covered even if they
had pre-existing medical conditions. Actually, increasing the employment rate
is a great way to provide for people with pre-existing medical conditions.
There were obvious problems, however, that needed to be
fixed. People would lose their coverage when they lost or changed their jobs.
People with pre-existing medical problems would find it almost impossible to
get coverage on their own once they left the group. Self-employed people did
not ordinarily have access to these plans, although they could become members
of groups that offered plans. Unemployed workers would eventually lose their
coverage.
Attempts had been made to deal with these problems but back
in 2008 critics of the system still insisted that over 30 million people were
without medical insurance. Even if this figure was correct, it still meant over
270 Million Americans had medical insurance.
Instead of trying to fix the problems in the old system,
proponents of the Affordable Care Act (Obamacare) sought to overhaul the entire
health care system in this country.
Now instead of using a tax break to encourage employers to
provide medical insurance, for their employees, employers would be forced to
provide such insurance or pay a penalty. Some employers have actually opted to
drop their plans and pay the penalty rather than be faced with uncontrollable
costs.
Advocates of the single-payer system think that Obamacare
did not go far enough and want to throw out the whole system that has worked so
well for the great majority of Americans. So far it looks like the Republican
plan that recently passed the House of Representatives will eliminate the employer
mandate but still retain the privileged tax status of these plans. We’ll have
to wait to see what happens.
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