Marc Ambinder Says That $5,000 Might Be Greater than $12,000!

The Atlantic Monthly death spiral watch continues, as Marc Ambinder gets himself deep into "opinions on shape of earth differ" territory:

Marc Ambinder: Fact-checking Obama: First, CBS News's Wyatt Andrews reports on a charge that Barack Obama often makes about John McCain's health care plan: that it will result in tax increases for tens of millions of Americans. The truth is that it... well, it might not--although McCain would require Americans to begin to pay taxes on the health benefits their employers provide to them, some analysts think that they'd get more than that money back in the form of the refundable tax credit that McCain is proposing.... [T]he money McCain would give employees might not cover the cost of the premiums which average mroe than $12,000 per family. And one reason for changing the tax incentives is to put the kibosh on the employer-based system.  Non-partisan analysts don't think McCain's plan would expand coverage...

Question: Does Marc Ambinder so ignorant that he does not know that McCain's tax credit maxes out at $5,000, which is less than $12,000? Or is he so mendacious that he thinks it important to hide that fact from those of his readers who don't already know it?

Why oh why can't we have a better press corps?

Comments

[trotsky]

[Now it is. A decade forward it isn't.]

No, but $5,000 is about 41 percent of $12,000 -- which is to say, it's in the ballpark of the typical value of the tax deduction the typical family gets for its health insurance.

Plainly, if my employer simply cuts off my health insurance and John McCain gives me a $5,000 tax credit in exchange, I'm much worse off.

If my employer drops my coverage while writing me a check for the value of my health insurance and John McCain also gives me a $5,000 tax credit, I'll also probably we worse off when I test my luck in the individual insurance market. But if I'm a die-hard free-marketeer, I'll at least think my odds might be good.

Why oh why can't we have better economics-bloggers?

[truth-teller]

If McCain's health care plan is a tax hike as you claim, then why does Tax Policy Center estimate that it will cost the Treasury $1.3 trillion over 10 years?

[mooshinator]

Brad, if I understand the plan correctly McCain would *tax* the $12,000 so you aren't actually paying $12,000, but the $5,000 is a *credit* so you get all $5,000.

Unless the *tax* you pay on $12,000 is greater than $5,000, you'd save money.

I'm not saying the overall plan is a good idea, just saying that on the surface the $12k vs. $5k comparison isn't accurate. It's ($12k * your tax rate) compared to $5k.

[Existenz]

Brad is right -- if my employer decides to stop giving me health coverage because of McCain's tax changes, I'm stuck with the full bill. And I don't get the benefit of group rates anymore, which means pre-existing conditions and my age and the free market comes into play.

And I'm sorry, but $5000/year is not enough to get a health insurance plan that is anywhere near the one I have through my employer. So yes, this would be a big hike, not in my taxes, but in my health care expenses. I'd probably have to pay at least $1000/year, probably more to get a private health care plan equal to the one I have now.

[mooshinator]

Existenz, there are multiple arguments here. Brad's post was calling out Marc Ambinder for refuting the argument that McCain's plan constitutes a "tax increase". However, we both agree there's no *tax* increase, so on that point Brad is wrong.

It's an entirely different argument to state that the net benefit of the plan would increase health costs. It very well might. Certainly, if an employer drops coverage, the $5,000 tax credit won't come close to covering the cost of a new health plan. However, and here's a point that I'm confused on, how does the McCain plan provide an incentive for an employer to drop health coverage? From what I can see, the McCain plan simply taxes your health benefits which shouldn't cost the employer any more or less than they were paying before? From an employer perspective, this plan shouldn't make one bit of difference.

From what I can tell, McCain's "health care" plan has nothing to do with health care at all. It seems to me that it's just a big tax cut. It gives everyone $5,000 (that they can spend anywhere, not just on health care) while at the same time raising your taxes by a few thousand dollars.

Isn't this entire proposal just a $1,000-$1,500 tax cut for every family? I don't see anything in here that looks like it will affect health care coverage in any way.

Am I missing something?

[naugiedoggie]

I feel that the distinction between "healthcare deduction" and "tax credit" is significant and the story is unclear. My understanding is that "tax credit" is a straight writeoff from your tax liability, so if you compute your taxes and come out owing $14,500, then a "tax credit" of $2500 means you send a check for $12,000. OTOH, this "plan" is always discussed in terms of a "healthcare deduction," which means you would add the employer-paid premiums to your taxable income and then deduct the $2500. In my case, I would be adding $6600 to my income and then deducting $2500.

The problem that I see with the "tax credit" idea is that for most Americans, adding $6600 to their income is not going to increase their liability by $2500. That would mean that the Treasury would be losing huge sums of money. It's a budget buster so huge that I don't believe even a Republican Congress would accept it from a Republican President.

This is the first place I've seen anyone call out the ambiguity of the terminology and what it implies. I see two possibilities: it really is a tax credit, in which case it is DOA and will never be implemented; it is a tax deduction, and represents a tremendous tax increase for most Americans insured through employers.

Thanks.

mp

[rev]

I commend you to Angry Bear: http://angrybear.blogspot.com/2008/09/mccains-health-plan-tax-cut-or-tax-hike.html.
Mooshinator, if you read this, you will understand how the incentives in McCain's plan drive up the cost of employer group health plans due to the adverse selection death spiral problem, eventually making the plan too expensive for the employer to provide (employers who currently provide health coverage as a benefit to attract and retain employees while the plan costs are reasonable will drop this benefit when it becomes too expensive).
Also, Mooshinator, the post I cite says that the credit is "provided directly to insurers in lieu of (some) insurance premiums and then could be rolled over into an HSA if there's something left over", so it's not exactly free cash you can spend anywhere.

[Max B. Sawicky]

Well let's see. A deduction is not a credit, no doubt about that. In this case, however, people already have the deduction and the health insurance.

Let's say you have a plan that costs $12K, pre-tax, and your marginal tax rate is 25%. To keep it simple, assume for the moment that your health insurance costs the same in the group and individual market. Your tax savings due to the tax exempt status is $3K. McCain and Palin get elected and hand you a $5K credit and take away the deduction. You tell the boss to give you the $12K instead of the health insurance. Your income goes up by $12K, but don't forget, it gets taxed at 25%, so you only $9K ahead after-tax.

Now you have to buy health insurance. You apply your $5K credit, leaving $7K to be covered by your $9K. So you're ahead of the game.

Naturally, the boss doesn't necessarily give you the value of your fringe benefit in dollars (though to him it should be all the same, out-of-pocket). And of course your rate in the individual market is going to kill you unless you are young and healthy. But you could come out ahead.

A higher marginal rate and/or a more expensive policy reduces the value of the changeover (the deduction is worth more, the higher your rate). It also subsidizes your purchase when it is deductible -- higher the rate, the bigger your dollar (not %) discount.

In general it looks like a good deal for young, healthy, not-rich workers who are reckless enough to take a chance on the individual market.

More broadly, there is the dynamic of people opting out of group insurance, leaving the less healthy, causing more to opt out, leading to the "death spiral" of group health insurance. The less healthy see their savings eaten up sooner, the younger who will eventually get less healthy will have less savings for retirement and other contingencies.

[mooshinator]

Okay, I think I understand... the bit about the tax credit only being usable for insurance or an HSA is something that I missed and I think is the key to my misunderstanding. If it were truly free cash, then clearly there would be no tax increase here, but for folks who have insurance through their employer (assume it's 100% covered, for simplicity) they only break even if their usual yearly out of pocket expenses (which the HSA can be used for) exceed the tax increase. For the healthiest individuals, their usual yearly out of pocket expenses will be less than the tax increase and since the remainder of the HSA is useless to them the net effect is a tax increase.

Also, now I understand why this would encourage employers to drop their health coverage. Currently there's no marginal benefit to dropping employer-offered insurance. Under the McCain plan the healthiest individuals are given a marginal benefit for dropping their coverage and getting cheap high-deductible coverage elsewhere. This drives up the cost of employer-offered insurance for everyone else and leads some employers to drop it completely.

As long as I summarized that correctly, I believe I understand now.

[Some Young Guy]

The one thing not mentioned is how much credit will increase going forward. My understanding is that it will be linked to inflation, not the actual cost of health insurance. So even if it's a good deal, that will quickly cease to be the case after a few years of 5-10% premium increases.

[naugiedoggie]

Thank you, Max, for the clarity. So, as stated, this "deal" would suck money out of the Treasury like a gigantic Hoover, since we expect a large percentage of the workforce to jump on the chance to increase their take-home pay. At the same time, as you recount, the actual "groups" of insured is bifurcating into the "low risk" and "high risk," the latter group becoming increasingly uninsurable. When I applied to Aetna for myself and my wife, the offer was made at $972/month and the application was accepted at $1271/month. This was the result of the "preexisting condition" clause, my wife being a user of Cymbalta. That seems pretty much how the McCain "plan" would play out broadly. From $11,600/year to over $15,250/year.

Well, even if the Republicans were to retake Congress, I don't see how there is any realistic chance of such a plan being implemented. There is no way they could plug that hole in the Federal Treasury, without taking away with one hand what they are holding out with the other.

Thanks.

mp

[Ken Houghton]

Max - Your employer deducts their portion of that $12K from income directly. So their cost is 12*(1-t) where t is their marginal tax rate.

They're not going to give you $12K; if you're lucky, you'll get $9-10, taxable.

Re-run the number at $10K and you've got $7,500 to cover $7,000--you MIGHT come out ahead, before the higher premium (due in part to higher admin costs, and in part to "because they can") comes into effect.

At $9,000 (anything below $9,333), you're losing money. And the surety of the entire cost being passed through is << 1.

Which is why one of the great advantages of employer-provided health insurance is that it provides insurance to those who can least afford it, which goes away under the McCain plan (as Tom Bozzo noted at the AngryBear link above; see also Robert Waldmann's follow-up post at http://angrybear.blogspot.com/2008/09/more-on-mccain-health-care-plan.html).

The Second Order effects of the McCain plan will be an increase in Adverse Selection and Income Inequality in the best of circumstances. (There is an argument that there is an increase in moral hazard, since those who are most liquidity-constrained will elect not to buy insurance, while also being those most likely to need health services, but it's difficult not to look at the plan and view that as a Feature, not a bug.)

Ultimately, it reduces access to affordable Health =Care= to two groups that need it most: the sick and the poor. Whatever discomfort you might have with the Obama plan, at least it doesn't do that.

[Max B. Sawicky]

Some Young Guy brings up an important point -- the credit is fixed to a nominal dollar amount (or maybe to general inflation), whereas the deduction is uncapped and open-ended. Basic strategy in reducing social benefits is to lock in a scheme that cuts outlays over time with some kind of teaser dividend up front. So the peddlers of tax credits are like mortgage brokers. In SYG's scenario, which I think is more likely than not, the scheme is not a revenue loser. Of course, the credit will have a political constituency that will demand its expansion too. Why would the GOP want to cut the benefit and gain revenue? So they could turn around and provide more tax cuts to you-know-who.

Re: Ken's point, the employer's cost of any fringe or wage is the amount times (1-t), so in a sense they should be indifferent to paying money or buying health. In reality we know that fringes and wages do not arise under the same circumstances, so they may not be fungible in the manner of Labor Econ 101 models.

[Robert Waldmann]

No no nooo you got it backwards. Ambinder said that $12,000 might be greater than $5,000.

Now, with your fancy pants "arithmetic", you can argue that if a number is between zero and one then one minus that number is also between zero and one, but you are never going to convince the US press corps to reform if you insist on talking over their heads.

[Robert Waldmann]

Actually Ambinder has internalized a rhetorical trick -- saying "It might be true that ... " for "I concede that" and most exactly in the context of "although it is true that ..., nonetheless ...".

The dubitive (how do you say that in English) is snuck in, because arguing with it makes one look like a fool (except in this case where you make Ambinder look like a fool).