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Tuesday, January 23, 2007

Bush Health Care Proposal Round-Up: Klein, Mankiw, Tax Foundation, and Cowen

Some reactions to the president's new health care plan. First, Ezra Klein says he was wrong to lend support to the initiative:

I Was Wrong, by Ezra Klein: Alright, unpleasant post to write, but I was wrong: The Bush administration's health plan is a trap. ... And this comes, I hasten to underscore, from someone who was willing, eager even, to give the Bush administration a chance, to believe the Democratic majority had spurred them towards more pragmatic, constructive policy-making. Fool me once...

What the early reports ... didn't make clear ... was that the plan's changes to health care deductibility don't set limits, they're creating, instead, a standard deduction of $7,500 for individuals and $15,000 for families. My initial understanding was that those were caps: Above them, you couldn't deduct anything further. Below them, you simply deducted what you spent. That was incorrect. Instead, everyone will get precisely those deductions no matter what they spend. If you're 23 and your health care costs $2,000 a year, you still deduct $7,500, pocketing the difference. It would, in that situation, be economically foolish of you to purchase high quality, comprehensive coverage. And that goes all the way up the line. The intent here is clear: To incentivize the purchase of low-quality, high-deductible care, particularly among the healthy, young, and/or rich. To degrade the risk pool, and encourage HSAs. To reduce coverage, costs, and health security.

It's almost laughably wrongheaded... As for me, I made the mistake of extending good-faith to an administration that, time and again, has proven it deserves none. The optimist in me has been grounded for a week, and won't get dessert for two.

But Greg Mankiw likes the proposal, particularly if the tax deduction is turned into a refundable tax credit:

Post on the Bush Health Plan, by Greg Mankiw: An editorial in today's Washington Post, normally no fan of the Bush administration, gives a favorable review to President Bush's health care proposal. ... The editorial includes an amendment to the proposal that the Congress should take seriously:

Rather than embracing tax deductions, which are most valuable to people in high tax brackets, Mr. Bush could have made his proposal even more progressive by recommending a refundable tax credit that would be worth the same to everyone.

If this plan (as revised to turn the deduction into a credit) does not command bipartisan support, nothing will.

The non-partisan [Update from comments ???] Tax Foundation is not so favorable towards refundable tax-credits. The Foundation concludes "Ultimately, this may be a death blow for serious tax reform":

Health Care Tax Deductions Would Reach Less Than Half Of Uninsured, by Brian Phillips, Tax Foundation: President Bush is expected to announce tonight a new health care deduction aimed at enticing Americans to purchase their own health insurance. Tax Foundation economist Gerald Prante released a new study that reveals less than half of the uninsured would be able to claim such a deduction:

Over 50 percent of uninsured Americans owed no income taxes in 2004 after taking all credits and deductions. Therefore, if a healthcare tax incentive were passed in the form of either a deduction or a nonrefundable credit, over half of the uninsured would not even be able to claim any of it. The only way in which such an initiative would entice them to purchase any health insurance at all would be if the credit were made refundable.

But refundable credits have their own problems. We have already seen the number of non-payers explode during the Bush Administration and another refundable credit would continue that trend. Already, a third of all taxpayers who made enough money to file a tax return (43 million) paid nothing or received money back as a result of credits. In addition, another 15 million did not make enough to file. ...

Further, odds are not good that the deduction would stimulate Americans to purchase their own insurance or drive prices down:

The President has likened his new plan to the mortgage interest deduction. While often referred to as the most popular tax deduction, the home mortgage interest deduction is considered ineffective by most economists. It may raise the level of home ownership slightly, but the massive subsidy mostly succeeds in pushing up home prices by the amount of the deduction, enriching home builders and real estate agents but doing little for individuals.

Ultimately, this may be a death blow for serious tax reform. The pressure to fix an insanely complicated and unfair tax code will continue to dwindle as fewer and fewer Americans have to pay into the system. More non-payers mean a higher tax burden for those who already pay the vast majority of federal taxes. Major challenges ahead, such as reforming entitlement spending, are made increasingly difficult as politicians continue to use the tax code to "solve" social problems.

Tyler Cowen weighs in as well:

The new Bush health care plan, by Tyler Cowen: Jonathan Zasloff writes:

Bush plans to pay for it not by efficiencies, but rather by restricting the benefit packages of the already insured, through the deductibility cap. I'm sure that there are some extraordinarily lavish plans out there, but is there any serious policy justification for this way to go? If anything, this seems to be a recipe for business to delete coverage, and throwing more people into the individual market.

Paul Krugman is very negative. Arnold Kling loves the plan. Greg Mankiw isn't complaining. Ezra Klein says it is better than nothing.

My feelings are mixed, but my view is closest to Zasloff...

    Posted by on Tuesday, January 23, 2007 at 10:11 AM in Economics, Health Care, Policy | Permalink  TrackBack (1)  Comments (36)

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