Four proposed tax changes for health insurance
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Four Proposed Tax Changes for Health Insurance. Bob Lyke December 5, 2008. Four Proposed Tax Changes. End tax exclusion for employer-provided coverage Allow individuals a full deduction for premiums Allow individuals a tax credit for premiums

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Four Proposed Tax Changes for Health Insurance

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Four proposed tax changes for health insurance

Four Proposed Tax Changes for Health Insurance

Bob Lyke

December 5, 2008


Four proposed tax changes

Four Proposed Tax Changes

  • End tax exclusion for employer-provided coverage

  • Allow individuals a full deduction for premiums

  • Allow individuals a tax credit for premiums

  • Allow employers a tax credit for providing coverage


Four proposed tax changes for health insurance

  • The hardest thing in the world to understand is the income tax.

    --- Albert Einstein


Some preliminary cautions

Some Preliminary Cautions

  • Generic approaches can have many variations

  • Small differences in specifications can have big effects

  • Complexity makes determining specifications difficult


Sources of complexity

Sources of Complexity

  • Identifying multiple objectives

  • Weighing conflicting objectives

  • Determining likely range of premiums


Ending tax exclusion for employer provided coverage 1

Ending Tax Exclusion for Employer-Provided Coverage (1)

  • Possible Gains

    --- savings could be used to finance

    health care reform

    --- could end open-ended subsidy

    --- could hold down growth in

    health care expenditures

    --- could reduce tax savings for

    higher-income families


Ending tax exclusion for employer provided coverage 2

Ending Tax Exclusion for Employer-Provided Coverage (2)

  • Possible Problems:

    --- may undermine employment-

    based insurance

    --- may be difficult to determine how

    much additional income is fairly

    assigned workers

    --- the replacement tax benefit (e.g., a tax credit) may be much more

    complex


Ending tax exclusion for employer provided coverage 3

Ending Tax Exclusion for Employer-Provided Coverage (3)

  • An alternative: cap the exclusion for overly generous coverage

  • Possible Additional Gain:

    --- less disruptive to current system

  • Possible Additional Problem:

    --- determining what is “overly

    generous” coverage


Full deduction for premiums 1

Full Deduction for Premiums (1)

  • Possible Gains:

    --- would be more equitable for

    people who buy individual

    market insurance

    --- could be relatively simple


Full deduction for premiums 2

Full Deduction for Premiums (2)

  • Possible Problems:

    --- would not do much to reduce

    numbers of uninsured

    --- may undermine employment-

    based coverage


Full deduction for premiums 3

Full Deduction for Premiums (3)

  • An alternative: allow a fixed “standard deduction” for health insurance

  • Possible Additional Gain:

    --- would limit purchase of overly

    generous coverage

  • Possible Additional Problem:

    --- may encourage people to

    purchase inadequate coverage


Tax credit for individuals 1

Tax Credit for Individuals (1)

  • Usual proposals: refundable and advanceable

  • Possible Gains:

    --- could fine-tune subsidies according to

    family income

    --- could balance competing

    cost and coverage objectives

    --- for many, could be simpler

    than program subsidies

    administered by states

    --- could be easy to modify


Tax credit for individuals 2

Tax Credit for Individuals (2)

  • Possible Problems:

    --- a flat credit (fixed percentage or

    amount) may not be adequate

    for low income families or

    be needed by high income

    --- an income-adjusted credit (with a

    phase-out) adds complexity

    --- can be difficult to integrate with

    employer-provided coverage

    --- could be difficult to target on

    the uninsured


Employer tax credit 1

Employer Tax Credit (1)

  • Usual proposals: for small businesses with low-wage workers

  • Possible Gains:

    --- could focus subsidies where many

    need them

    --- would involve fewer taxpayers

    than an individual credit

    --- could help maintain and expand

    employment-based coverage


Employer tax credit 2

Employer Tax Credit (2)

  • Possible Problems:

    --- low-wage workers might not

    be in low income families

    --- might be unfair to large employers

    with low-wage workers

    --- could be complicated to

    administer for some firms


Some concluding points

Some Concluding Points

  • Tax provisions are tools

    --- choose the tool after

    deciding the objectives

  • New tax benefits involve costs

    --- someone will have to pay

  • Consider alternatives

    --- expanding public programs

    --- increasing personal expenditures


Four proposed tax changes for health insurance

  • I can’t make a … thing out of this tax problem. I listen to one side and they seem right – and then I talk to the other side and they seem just as right, and here I am where I started.

    … What a job [I have]!


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