Thursday, September 9, 2010

A Tax Increase Conservatives Should Support

Cross-posted from The Agenda on National Review Online.

We often hear that a bipartisan compromise on the federal deficit will require both spending reductions and tax increases. Conservatives, in their ideal world, would eliminate the deficit entirely by reducing spending. From what I read, though I could be misunderstanding their position, many liberals don’t believe that the deficit is a serious concern; those that are concerned would certainly emphasize tax increases over spending reductions. Hence, those in the “sensible center” seek to split the difference and combine tax increases with spending reductions.

The problem with most tax increases, especially the ones large enough to make a dent in the deficit, is that they hinder economic growth, and thereby growth in tax revenue. Hence, over the medium-to-long term, one dollar in tax increases does not reduce the deficit as well as one dollar in spending reductions. And, of course, some taxes do more to hinder growth than others.

This gets me to the one tax increase that conservatives should support: the elimination of the tax break given to employers for purchasing health insurance for their employees. This tax break costs the Treasury over $300 billion a year—real money—and is one of the biggest reasons why health care is so expensive. Not only would eliminating this tax break reduce the deficit, but by unleashing an individual market for health insurance, it would slow down, and possibly reduce, the amount the government spends on health care, further reducing the deficit.

Because most of us (under 65) get our insurance through our employers, we have little to no choice in what kind of insurance we get. Instead of buying insurance for ourselves, like we do with every other kind of insurance, your employer’s human resources specialist does it for you. You may not even know the HR specialist personally: how is she supposed to know what kind of insurance is right for you?

There are other inefficiencies that flow from this system. Employers save money by buying insurance in bulk: one-size-fits-all plans for all of their employees. If you want to change jobs, or if you lose your job, your insurance doesn’t go with you, creating significant economic insecurity. Losing your insurance this way is especially bad if you have a chronic disease, because a new insurer will lose money insuring someone with a preexisting condition.

A one-page bill, eliminating the tax break, would have improved our health care system far more than Obamacare’s 2,300 pages ever will. Unfortunately, when John McCain proposed just that in the 2008 campaign, Barack Obama attacked it as a tax increase (which it is).

And the President kept his campaign promise. Obamacare, instead of eliminating the employer tax break, doubled down on the employer-sponsored system, by forcing employers with 50 or more workers to provide health insurance for all of their employees.

Imagine if, instead of PPACA, we had passed that one-page bill. Not only would we have made a huge dent in the deficit, but we would have dramatically improved the ability of those with preexisting conditions, and those between jobs, to keep their insurance. We would have unleashed torrents of innovation into the design of affordable health insurance products for young and healthy people.

One criticism of the one-page law is that it would be too disruptive to existing insurance arrangements. But there are ways to address this, such as by phasing out the tax break over time, or by creating a transitional period during which individuals could purchase, without penalty, the same policies they had previously obtained through their employers.

The good news is that many mainstream liberals are open to eliminating the employer tax exclusion. Last year, before PPACA had been written down, Ezra Klein wrote, “If you want to pass health care reform, it probably has to be done.” And to be completely fair, PPACA does contain a provision that weakly simulates such a reform: the “Cadillac tax” on high-cost health plans, the one that labor unions forced Democrats to substantially water down, so that it doesn’t kick in until 2018 (if ever).

So, to those like Matt Yglesias who write that conservatives don’t care about the deficit, or those like Jonathan Chait who compare Republican budget proposals to the Special Olympics, I say: Here’s a $300 billion tax increase that conservatives should rally behind. Is there a $300 billion spending cut, excluding national defense, that liberals could support in return?


  1. Why start by excluding half of the discretionary budget? Anyway, also get rid of the mortgage deduction. Get rid of the agricultural subsidies. Ethanol subsidies. Medicare Advantage. Means test Medicare between 65-70.


  2. I'm with you on closing tax loopholes -- I'd prefer a flat tax myself -- but that doesn't count as a spending cut. As to why to exclude defense spending? Because it's ideologically and intellectually too easy for liberals, and wouldn't have bipartisan support anyway. Medicare Advantage subsidies have already been eliminated by PPACA, so you're out there. The rest would help, though I'm not sure if that adds up to $300 billion.

  3. Dang, totally forgot one of my core ideas. We do need to reform federal pay. I would change the pension system to a defined contribution plan like the rest of us. I would gradually reign in the differences in pay that exist in the lower skilled echelons. Decent Heritage piece.