Thursday, September 18, 2008

An unsophisticated debate On the McCain health care plan.

Tom Bozzo makes an excellent contribution to the sophisticated debate over at AngryBear. I am writing about campaign politics here, and I think that Bozzo concedes to a valid argument for the McCain campaign which is politically irrelevant, because people won't believe it.

An unsophisticated version of the plan. Employer provided health insurance is counted as individual income for tax purposes (at cost per employee equally to employees if all have the same coverage). Individuals who purchase insurance on the individual market get a $2,500 refundable tax credit. Families who purchase insurance on the individual market get a $5,000 refundable tax credit.

Pro: This is plugging a loophole in the tax code, which is only fair to people who don't have employer provided health insurance and which increases efficiencies as firms and workers have agreed to do inefficient things to maximize the value to them lf the loophole. The tax credit will help the currently uninsured get insurance.

Con: Wait insurance for a family costs way more than $5,000. If my employer contintues to provide insurance, I lose because I pay more in taxes. If my employer doesn't, I lose the cost of insurance minus $5,000

Pro: You are implicitly assuming that the incidence of the new tax is more than %100 on the worker. The more reasonable assumption is that, if your employer drops health insurance, he she or it will increase your salary by the same amount he she or it paid to insurance companies.

Con: Yeah Sure. You trying to sell me a bridge in Alaska ?

My guess is that this is how it would go. The Pro response makes sense as economic theory, but won't convince people. I'd say the Con argument is politically a big winner. Providing information on how much the average premium for a family is on the individual market (about $12,000 I think) will make the con argument more convincing. Arguing that insurance companies will charge more than that for a plan as generous as a typical employer provided plan will be true and make the con argument more convincing. As summarized by Tom Bozzo (but hey at least I admitted it) Buchmueller et al, argue that a typical employer provided plan costs the employer $12,000 per family but would cost $14,000 on the individual market

Now I see no reason why the incidence of the tax on employer provided health insurance would be more than %100 on the worker. Plus I don't think that a reduction of real wages would be a pure transfer from workers to firms as I assume employment would increase. However, I think the McCain campaign would have better luck selling that bridge in Alaska than selling that argument from neoclassical economics.

1 comment:

rdan said...

Hi Robert...I like unsophisticated. Am I going to have to steal your posts for AB at times??? I will.