Leonhardt On the Employer Tax Exclusion

David Leonhardt has been a man possessed with good health care writing recently. Yesterday, I made the case for ending the employer tax exclusion on health care benefits as a way to pay for health care reform, and today, Leonhardt does so in depth, and also explains how the tax exclusion exacerbates the spending problem.

The fact that these benefits are not taxed, as the Massachusetts Institute of Technology economist Jonathan Gruber notes, stems from “nothing more than an arbitrary administrative decision made 60 years ago.” Unfortunately, that decision created all kinds of economic damage. Because health care — unlike food, clothing and most other things — isn’t taxed, it’s effectively on sale. And when something is on sale, people often buy more of it than they need.

In the case of health care, they buy — or their employer buys for them — insurance plans that don’t make much of an effort to control costs. Rather than putting pressure on hospitals to root out administrative waste, the plans cover the cost of that waste. They also cover the costs of brand-name drugs that are no more effective than generic alternatives and other kinds of expensive care that do little to improve health.

As a result, the tax exclusion ultimately raises your tax bill, via wasteful Medicare spending. Indeed, if there is a single health care idea on which liberal and conservatives agree — including Douglas Elmendorf, director of the influential Congressional Budget Office — it’s scrapping the exclusion.

Well, there you have it. The reality of what’s actually being proposed isn’t nearly so sweeping for reasons Leonhardt explains, so just go read the article.

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