Beware the National Commission on Fiscal Responsibiliity & Tax Reform

by John R. Graham

Few people are taking President Obama’s National Commission on Fiscal Responsibility and Tax Reform seriously. Most free-marketers believe that it is a mechanism to put lipstick on a significant tax hike, or add a national Value-Added Tax (VAT) to the taxman’s toolbox. Certainly, the 75 groups from whom it has heard (as reported on July 1) are largely pro-tax, pro-spending outfits.

Nevertheless, it was a little startling to read in the Wall Street Journal (Damian Paletta, “Key Tax Breaks at Risk as Panel Looks at Cuts,” October 25, for non-subscribers who cannot access the link) that the Commission might propose eliminating “the ability of employees to pay a portion of their health-insurance tab with pretax dollars” (Damian Paletta, “Key Tax Breaks at Risk as Panel Looks at Cuts, October 25, 2010).

From a purely economic standpoint, this is a trivial issue. The status quo, whereby the employee can take advantage of Section 125 of the Internal Revenue Code to finance a share of his employer-based health benefit directly, does not increase his choice of health plan. He still has to accept whatever limited choices his employer makes for him. Furthermore, our employers do not actually pay any of our health premiums: We pay ever last penny ourselves, mostly through reduced money wages (as I discussed in detail in my analysis of Senator McCain’s 2008 presidential campaign’s proposal to reform the tax code to give individuals a tax credit).

But public policy is about emotions and psychology as well as pure economics, and camouflaging health costs by deluding people into believing that their employers pay for our health benefits has done immeasurable harm to the cause of consumer-driven health reform. Just try to tell people that their money wages would go up if employers ceased paying for fringe benefits.  Nine of ten will insist that their employers will keep the money for themselves!

Since the early 1990s, states and Congress have taken significant, incremental steps to give consumers more control of their health dollars, through Medical Savings Accounts, Flexible Spending Arrangements, Health Reimbursement Accounts, and Health Savings Accounts. They are necessary, but not sufficient, to achieve consumer-driven health care. Let’s not allow the government to take away these valuable tools.

Critical Condition

NRO’s health-care blog.