Health Care Reform Center

Many health economists, ranging from Democratic advisor Jonathan Gruber¹ to the Heritage Foundation,² have argued that tax subsidies for employer-paid health insurance encourage over-insurance and are highly regressive, directed mainly to higher-income families. We beg to differ. The subsidies meet the usual definition of progressivity: they taper down (as a percentage of income) as income rises. Ending them would inflict a regressive tax increase, taking a larger share of income from insured near-poor and middle-class families than from the wealthy. 

The confusion may arise from the dazzlingly large sums that high-income families gain from these tax subsidies. According to a 2004 analysis, $50 billion in federal tax expenditures for health benefits, 26.7% of the total, went to the 14% of U.S. families with incomes of $100,000 or more.³ Conversely, the 57.5% of families with incomes below $50,000 received only 28.4% of the subsidies. In other words, on average, families whose income was at least $100,000 got $2,780, while those making under $50,000 received $102 to $1,448.

But progressivity in taxation (or tax subsidies) is not calculated on the basis of the absolute amount that government takes from (or gives to) families at different income levels. Rather, a progressive tax takes a larger percentage of income from wealthier families than from poor ones — the tax rate increases with income. Thus, a tax of $1,000 on a millionaire and $100 on a janitor earning $10,000 is regressive; the rate for the millionaire is 0.1%, whereas the janitor pays 1%.

Viewed from this perspective, current federal health-benefit tax expenditures are clearly progressive. An analysis of families that actually have employer-paid coverage shows that as income rises, the per-family tax subsidies plummet as a percentage of family income (see table). In other words, for families with employer-paid coverage, a move to tax health benefits would cost low-income families (with annual incomes below $10,000) 18.3% of their total income but high-income families (with annual incomes above $99,999) only 2.7%. And the tax rate would drop even lower for the super-rich. A Goldman Sachs executive who enjoyed the firm’s infamous $40,543 health plan⁴ got a federal tax subsidy of about $15,367 last year. But that’s only 0.13% of the bonuses received by the company’s four top earners.⁵ So though taxing health benefits would spare the uninsured, the average poor family with employer-paid coverage would be taxed at a rate 140 times higher than Wall Street titans. In our book, that’s a regressive tax.

David U. Himmelstein, M.D.
Steffie Woolhandler, M.D., M.P.H.
Cambridge Hospital
Cambridge, MA

This article (10.1056/NEJMopv0907478) was published on August 19, 2009, at NEJM.org.

References

1. Gruber J. A win-win approach to financing health care reform. N Engl J Med 2009;361:4-5. [Free Full Text]
2. D’Angelo G, Moffit RE. Health care reform: changing the tax treatment of health insurance. Heritage Foundation WebMemo No. 2344, March 16, 2009. (Accessed August 18, 2009, at http://www.heritage.org/research/healthcare/wm2344.cfm#_ftn2.)
3. Sheils J, Haught R. The cost of tax-exempt health benefits in 2004. Health Aff (Millwood) 2004;Suppl Web Exclusives:W4-106–W4-112. (Accessed August 18, 2009, at http://healthaff.highwire.org/cgi/reprint/hlthaff.w4.106v1.pdf.)
4. Wayne L, Herszenhorn DM. A bid to tax health plans of executives. New York Times. July 26, 2009. (Accessed August 18, 2009, at http://www.nytimes.com/2009/07/27/health/policy/27insure.html.)
5. Cuomo AM. No rhyme or reason: the `heads I win, tails you lose’ bank bonus culture. Albany, NY: Office of the Attorney General, 2009. (Accessed August 18, 2009, at http://www.oag.state.ny.us/media_center/2009/july/pdfs/Bonus%20Report%20Final%207.30.09.pdf.)