Redistribution

The Obama campaign has been shamefully deceptive in describing the tax consequences of McCain health proposal. Because of the associated refundable tax credit, the net affect on most taxpayers will be a decrease in taxes, particularly in low to moderate income brackets. Only a few taxpayers with high incomes and very expensive plans are likely to suffer an increase in taxes.

This is, however, not a feature, but a bug. Tax revenues will fall significantly, and the government will not be able to make up the difference with money put under its pillow by the Unspecified Medicare Savings Fairy. The result will be substantial redistribution from future taxpayers (many of them currently too young to vote) to current citizens, disproportionately those of low and moderate income, and to those currently paying for their own insurance. This element is morally troubling. And since it’s a refundable credit, it would go to workers that don’t pay income tax, exactly the sort of transfer that enrages McCain when it’s part of an Obama proposal.

What would a similar plan look like if we weren’t asked to vote ourselves a subsidy to be paid for by our children? To be revenue neutral, the tax credit would need to be lower: perhaps $2,500 for a family. That would be approximately neutral for a median family that gets coverage through work, helpful for most lower income families, and be a significant help for families that currently pay for their insurance themselves. Taxes on higher income families would increase.

Note that both this variant and the current McCain plan make it more attractive for employers to offer group policies to low income workers than it is today.

The other benefits claimed by the McCain plan are grossly oversold. Proponents argue that there is significant over-consumption of health care because of the current tax subsidy. The reality is that most companies that offer health insurance don’t pay for all of it. Such companies have no reason to prefer paying for $8,000 of a $10,000 dollar policy to $8,000 of an $8,000 policy with high deductibles and copays.

On the average an employer can offer group coverage cheaper than the worker can buy it on the individual market with its high screening and marketing costs. Coverage through the employer will continue to be attractive for most workers.

Aside from the borrow and spend aspect, there are things to like about the McCain plan, but it’s silly to pretend that redistribution is something only Democrats do.

As one of my readers points out, all taxation results in redistribution. But I think one can draw valid distinctions among different kinds of redistribution.