Policy Redux

Last fall the Obama campaign excoriated the McCain people about their proposal to finance part of health care reform with a tax on employer paid health insurance. A WP story this morning suggests that the administration is facing pressures to reconsider that point of view.

Some in the administration like David Axelrod argue that the best way to finance a new national health system is to tinker with taxes on the rich. For example, while one part of the administration is talking up reforming the Alternative Minimum Tax (ATM) - a God awful abomination of tax policy created several decades ago people like Axelrod suggest that the way to finance this new policy is to finagle with how "rich" people get to use deductions. "He believes this is the most equitable way to do this. It places the burden on people who can most afford it." That is what passes for logic in Axelrod's mind.

The Post suggests that there are some more thoughtful responses. For example, Senate Finance Committee Chair Max Baucus is about to propose a bill that would tax employer paid health plans. Baucus would tax benefits above $15,000 per year. That would include one in five workers. Many on the left argue that taxing benefits would be unpopular. They trot out survey research which suggests that people might get grumpy if their benefits were taxed. The survey results sound like so much noise.

Gordon Tullock, in a classic journal article called The Transitional Gains Trap argued that programs enacted have a sticking power even if all indicators suggest that alternatives would work better for even the class affected by the program. The original policy of excluding health benefits from income came about as a way to evade WWII wage and price controls. But groups like unions want to hold on to it - even if the new system will serve society better.

In the long term the key element of the McCain plan (taxing benefits as a financing mechanism) made a lot of sense. It still does. Let's hope it stays on the table.