The President's Plan to help the uninsured: tax cuts for the rich

In his State of the Union Address tonight, Bush will announce a new "plan" to address the need for more affordable health care insurance. After reading the White House "Fact Sheet" on the plan, a phrase quickly jumps to mind - "dead on arrival." That one is quickly joined by others - "smoking crack," "bloody stupid," "give me a break," and "what mentally defective chimpanzee came up with this one?"

The funniest thing about this particular proposal is exactly how stereotypically Bush it really is. Stripped down to its bearest essentials, there are two parts to this health care plan. One part consists of taking federal money and giving it to the states to spend. The second part consists of - wait for it - tax cuts. Seriously. No, I'm not kidding. He really wants to address the health care affordability problem by cutting taxes.

I suspect that some of the other Sciencebloggers with more of a health care background than I have will weigh in on this matter later on, but there are a few flaws with this particular proposal that even a non-expert like myself can spot.

The biggest problem is that, predictably enough, the president's proposal simply will not help those who need help the most. Bush proposes making the first 15,000 dollars of income exempt from both income and payroll taxes. Here's a description of a hypothetical given by a White House flack:

Take a family earning $60,000 in the 15-percent income tax bracket, 15-percent payroll tax bracket, if they are currently uninsured and they go buy insurance, under the current system it costs them $5,200 today. Under this system in 2009, once it phases in, they get $15,000 of compensation tax-free. They're paying 30 percent marginal tax rate on that, so that's $4,500. That's a huge chunk of the cost of an insurance policy out there. So it makes insurance much more affordable for those people.

Where to start...

Let's begin with a quick reality check. The payroll tax is not 15%, at least for the individual. The tax rate for the individual is about 7.5%, and the employer is required to match that. Unless the new proposal somehow changes things, there's absolutely nothing that would require the employer to pass their savings on to the employee. Some employers will be kind enough to do so, I'm sure, but does anyone want to take bets on what percentage of employers will fall into that bracket?

Second, let's not forget that the "payroll taxes" in question fund medicare and social security. I saw nothing in the proposals that addresses what would be done to make up for that shortfall. Will money be redirected from general revenue to make up for this, or will social security wind up more screwed than it already is?

But let's set those unpleasant facts aside for the moment and use the White House figures. Eliminating payroll taxes on the first $15,000 should increase take home pay by $2,250 - if the employer passes on their 7.5%. That much will go to anyone making at least $15,000. But what about the rest of the savings? Let's look at the family of four again. As the system currently stands, at least the first $23,500 is tax free. If both of the children are under 17, they'll also be able to claim the child tax credit, which will totally cover the taxes owed on the next $18,350 - so a family of four will only see the payroll tax savings (potentially as low as $1,125) unless their income is over $41,850.

I think it's reasonable to assume that there are a lot of uninsured people who are going to fall into that category. According to the same White House Press Briefing, the average employer-paid health plan currently costs $11,500. A $1,125 - $2,250 boost in disposable income isn't going to go a long way toward covering that. Earlier in the briefing, the press flack suggested that a family of four could purchase insurance for $5,200. Assuming that such plans are available and adequate, the tax break still goes less than halfway toward covering that.

Those who are least able to afford health insurance now unlikely to receive enough help from this plan to change that equation much. But they aren't the only people who are helped by it. Let's look at a different hypothetical. This time, let's look at the same family of four paying for their own insurance, but with an income of $150,000.

I could be off a bit here, but assuming the same $23,500 adjustment from exemptions and the standard deduction, and the same $2,000 tax credit, I come up with a tax burden of about $22,800. If we knock another $15,000 off the income, these folks will drop a tax bracket and wind up with a tax burden of $18,990 - a savings of over $3,800. If they get the full payroll tax break, that will push them up over $6,000. That's more than needed to cover the mythical $5,200 White House family health policy.

So far, we have the uninsured poor getting a little more money, but not enough to pay for health care, and the rich getting substantially more money than the poor. It gets even better for the already well-off who have average-cost employer-provided health insurance already, though. Let's take the same family of four, with the $150,000 income, and give them an average-priced ($11,500) employer provided health care plan. They already have their health care paid for, but under the new plan, their taxes still drop - by nearly $1000, in addition to the savings from the payroll taxes.

That's right. If you're poor, the plan won't give you anywhere near the money needed to pay for health insurance. If you're even moderately well off and uninsured, the plan will go a long way toward covering that expense - particularly if you itimize your deductions, as health care and health insurance costs already become tax-deductable once they reach 7.5% of gross income. And, finally, if you are already moderately well-off and already insured, you're still going to get a nice tax break.

I used to think that "tax cuts for the rich" was just a satire of Bush's position on everything. I'm not so sure anymore.

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A pretty lengthy discussion of the proposal is over at Ezra Klein's blog. Ezra's a self-described policy wonk, and has devoted a fair proportion of his posts to health care.

His post is moderately favorable to the plan, but he seems to be looking at different elements than you. The commenters seem mainly to disagree. I expect a follow-up soon.

A quick back of the envelope calculation. (Sorry about the poor formatting)

Assumptions (very conservative): Total employment 100 million. 50% make above $15,000, 50% make 10,000 (approx. income, full time at min. wage).

Persons Employed:50,000,000;50,000,000

Income affected 15,000; 10,000

Total (Billions) 750; 500

Payroll Tax Rate 15%; 15%

Tax Reduction (Billions) 112; 75

Total SS and Medicare Revenue Lost: 187 Billion

Persons Employed:50,000,000;50,000,000

Income affected 15,000; 10,000

Total (Billions) 750; 500

SS Tax Rate 0.124%; 0.124%

Tax Reduction (Billions) 93; 62

Total SS Revenue Lost (Billions) 155

Approx. Annual SS Revenue (Billions) 740


Approx. % SS Revenue Lost per year 21%


Total lost revenue for SS and Medicare is about 187 Billion. SS alone loses ~21% of its revenue per year. Considering that the employment numbers are considerably understated, words escape me.

By speechless (not verified) on 23 Jan 2007 #permalink