Taxes and Health Care: How Far How Fast?

by Ramesh Ponnuru

Peter Ferrara argues that the heart of a plan to replace Obamacare should be a change in tax policy. Instead of an open-ended tax break for employer-provided coverage, the federal government should provide everyone with a flat tax credit that they can use to pay for either employer-provided or individually-purchased health insurance. James Capretta and Jeffrey Anderson make the case for a slightly different plan. They would provide the tax credit to people who don’t work for large employers that offer health insurance, while capping the tax break for those employers’ plans.

The Capretta-Anderson approach forgoes certain benefits of the Ferrara plan. Capretta and Anderson would not give people who get their insurance through large employers the freedom to exit their plans to get a better deal on the individual market–unless, that is, they are willing to use their own after-tax dollars to do it. But the Capretta-Anderson approach also avoids certain dangers. Let people in large employer plans use tax credits to get out, and younger and healthier people might start rushing for the exits, leaving the employers covering an older and sicker population. They would then have to raise premiums or drop coverage. The risk, then, is that the employer-based system on which most Americans currently rely would unravel. That possibility would make the plan a pretty heavy lift politically.

But I think the worries people have about life without employer-provided insurance would diminish a lot over time if the individual market were larger and better developed, which is one reason I think the Capretta-Anderson plan might be a good waystation toward the eventual adoption of the Ferrara plan. The individual market would expand a lot under the Capretta-Anderson approach but would not have to replace the employer market in a rapid and disruptive way. And we would reap the most important benefits (expanded coverage, more cost-conscious consumers) early in the process, while admittedly deferring the relatively less important benefits (the ability of people who work for large employers to change their health coverage without changing their jobs) until later.

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