Obama Vs His Economic Advisors On Health Policy

There were undoubtedly many mis-characterizations of the opponents view in Friday nights debate from both sides. But there is one that especially stood out in my mind because it was not only unfair to McCain but it showed how disconnected or dishonest or both Obama was about his own economic advisor’s.

During Friday nights debate Obama said:

Just one last point I want to make, since Senator McCain talked about providing a $5,000 health credit. Now, what he doesn’t tell you is that he intends to, for the first time in history, tax health benefits.

So you may end up getting a $5,000 tax credit. Here’s the only problem: Your employer now has to pay taxes on the health care that you’re getting from your employer. And if you end up losing your health care from your employer, you’ve got to go out on the open market and try to buy it.

It is not a good deal for the American people. But it’s an example of this notion that the market can always solve everything and that the less regulation we have, the better off we’re going to be.

What Obama fails to tell you is that it is McCain that shares the view of economists in general, not Obama. Don’t believe me? Even Obama’s chief economic advisor endorsed the McCain plan – that is, before he was Obama’s economic advisor and this was specifically McCain’s plan.

Jason Furman, Obama’s Economic Policy Director writes regarding health policy:

The most promising way to move forward in all three dimensions – coverage, cost, and long-run fiscal situation – is to replace the employer exclusion with a tax credit, a step that has been proposed many times before (e.g., Butler 1991 and Pauly and Hoff 2002). Firms would still be allowed to deduct the cost of their contributions to employee premiums, just as they can deduct wages and other expenses today for the purpose of calculating taxable income. But workers would now have to include employer contributions to health insurance in their earnings for the purpose of calculating taxes (precisely which taxes is discussed below). In exchange for, workers who purchased qualifying insurance would get a refundable tax credit. Qualifying insurance would be along the lines proposed by the President in his standard deduction for health insurance, including limits on out-of-pocket payments, coverage of a general range of medical care, and guaranteed renewability by the provider (Treasury 2008).(emphasis added)

This is not unique to Furman either, as Brad DeLong, professor of economics at UC Berkeley and Bill Clinton’s economic advisor, in his post titled, An Unrealistic, Impractical, Utopian Plan for Dealing with the Health Care Opportunity specifically mentions the goal of, “No deduction for employer-paid health expenses.” See here.

This is why Harvard economist Greg Mankiw stated, “My guess is that most health economists would endorse the Furman-McCain plan.” See here.

This also makes sense: how much more expensive do you think auto insurance would be if it was covered by employers – and, in addition, covered everything including wear and tear on tires, and gas? That is, in a nutshell, the argument against corporate funded health insurance. It’s dishonest, ignorant, or both, of Obama to claim otherwise.

For more economists on the benefits of the McCain plan see here and here. For more on the economics of health insurance in general see here.

Update: The WSJ has more.

Update: Ross Douthat has more.

Update: Greg Mankiw and Jeff Jacoby have more.

2 Responses to “Obama Vs His Economic Advisors On Health Policy”

  • I am frankly puzzled as to why the MSM has not picked up on this point. My preference for the Furman-McCain plan also has some historical roots. During WWII, when we had wage and price controls, labor unions were constrained in their bargaining efforts. So they hit on the idea of getting more “fringe” benefits, rather than wage increases. And the Federal Government agreed that since these were not “compensation”, they would not be taxable for income or OASI purposes.

    Times have changed. Fringe benefits are now properly considered part of the total employee compensation package. These employer health insurance contributions should be recognized as taxable employee compensation for the purposes of employee payments to the IRS and OASI. The proposal to provide a tax credit to the employee is a suitable offset, in those cases where an employee’s total compensation includes the (newly taxable) employer health insurance contribution.

    Of course, in the cases where an employee does not have a health plan with employer contribution, the employee can use the tax credit to offset his purchase of health insurance.

    I note that the employer’s contribution would now also be subjected to the employer’s share of OASI tax. The employer’s health insurance payments were already deductible for its taxable profits calculations. This appears to increase the cost to the employer of providing health care, and may require a shift to the employee of some of the premium cost, again justifying the employee tax credit proposal. (Alternatively, the plan might have higher copays, etc.)

    The explanations of the Obama plan remind me of watching a very elegant Argentine tango.

  • I don’t know, either way you look at it this health plan will need funding, which means tax dollars will have to support this plan. The american is already pretty tapped out so I don’t know if they afford to pay these extra taxes to fund healthcare for everyone.

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