McCain's Health Care Tax Credit

Following Joe Biden's claim that McCain's health care plan will result in millions of workers being dropped from employers' health care plans a number of free-market thinkers have rebutted.  It seems that Biden's claims are not based on fact, but on spreading misinformation, since McCain's plan is complicated and represents a radical change from the status quo.

The Diagnosis Blog has a straightforward explanation of how McCain's tax credit would work - essentially the current cost of employer-provided health care benefits would be treated as income, and subject to personal income taxes (but not payroll taxes).  My previous post on the tax effects of McCain’s credit shows that McCain's tax credit far exceeds that amount for all but the highest income earners with gold-plated health care plans.  The Tax Foundation further expands upon this point in their Fiscal Fact, noting that the low-income workers benefit most.

Biden's thesis implies that (1) Employers will drop their health care plans and (2) Not increase wages by an equal amount, allowing individuals to buy insurance on their own. This is obviously an absurd claim - though Marxist ideology buys into it. The premise is that employers want to cut worker's compensation dramatically (as cutting health care benefits without salary increases would do), but the theory fails to explain why employers provide health care at all, or why they don't cut wages now.

In other words, if you believe as Joe Biden does that employers will drop health insurance plans, even though they have no financial incentive to do so (in fact, they will still get payroll tax benefits from doing so), then you must also believe that employers will cut health care plans or salaries dramatically even without McCain's plan, simply because they are greedy, capitalist pigs. In fact, some employers may drop group health care coverage - because of the cost/complexity of doing so - but would increase salaries of workers allowing them to buy health care in the individual market.

Yuval Levin points out that the original source of Biden's claim, a report from the liberal Tax Policy Center, claims a shift to the individual market over a number of years (which included new hires and new companies, not employers "dropping" coverage) as well as substitution of wages for health care premiums.Michael Cannon takes on the implication that McCain's plan represents a tax increase, by noting that the credit represents a large tax cut (though Palin should take note as well, as she implied the plan was revenue neutral, and since the tax credit is "refundable" - i.e. people who pay not taxes can get a check - their is a cost to others associated with it). Cannon also points out the real issue: McCain's plan would give workers control over the money currently controlled by employers;  critics of McCain's plan want that money controlled by government.

In contrast, one of the most unreported aspects of Obama's plan is the "pay or play" mandate on businesses. That is, employers would be required to provided health care (as defined by the federal government) or pay a tax (at to-be-determined rate).  The effect of this is obvious: lower wages or fewer jobs.  The logic is simple: tell an employer he needs to pay a new tax of say 4% of his payroll, where will he come up with the money?  By cutting payroll.

It is for this reason that the unions are pouring so much money from compulsory dues into support Obama and attacking McCain's health care plan.