The Wall Street Journal-20080204-Equity and Health Care

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Equity and Health Care

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Democrats, and even a few Republicans, are in a populist mood, and fair enough. But if they really want the tax code to be more "progressive" -- i.e., from each according to his means -- they ought to forget the Bush tax cuts and address the way the government subsidizes health insurance. On the advice of our doctors, we're not holding our breath.

According to the Democratic consensus, too many people lack health insurance, and the liberal remedy is to protect the status quo while expanding public programs for the uninsured. That's the opposite of a rational health policy: Not only does the current system cause unnecessary problems for the insured, but many of the gaps in coverage owe to the way tax subsidies shortchange the uninsured, particularly working-class and middle-income families.

If such inequality and unfairness existed anywhere other than health care, the Democrats would be raising hell. Instead, they're silent -- which is politically telling.

The core problem is that people who get insurance through their employers pay no income or payroll taxes on the value of the benefit. The Treasury defines this as a "tax expenditure," meaning it's revenue the government forgoes to encourage certain behavior. If these losses were converted to the equivalent of direct spending, the tax exemption would have cost more than $208 billion in 2006. The only federal programs that cost more are Social Security, Medicare and national defense. But all that money props up only employer-provided insurance. Individuals who buy policies don't get any tax breaks and pay with after-tax dollars.

If the purpose of health-care reform is to decrease the ranks of the uninsured, these job-related tax breaks are poorly targeted, even regressive. The more generous the employer health plan, the more the subsidies increase. On average, lower-wage workers have more limited coverage as part of their compensation, usually from small- or medium- sized businesses. Estimates show that the subsidy is worth more than $3,000 for upper-income families (with higher marginal tax rates), and less than $1,000 for those on the lower income rungs.

These aren't new insights, and economists have recommended changing these incentives for decades. What's hard to believe are the convenient blind spots of the Democratic Presidential candidates. Hillary Clinton, queen of the wonks, includes in her health-care proposal an undefined cap on the deduction for "high-income Americans," but all of her emphasis is on larger spending subsidies. Barack Obama doesn't even mention it. Neither did John Edwards.

They're uncharacteristically missing a chance to effectively raise taxes on "the rich." Curbing these subsidies could generate billions for their elaborate "universal" health programs. More to the point, this is a simple matter of equity, usually Democratic terrain. If the government is going to support health insurance, then those subsidies ought to apply regardless of a person's income, where they work, or how they purchase their insurance.

So why the Democratic silence? Perhaps it's because they think such a change would interfere with their main policy goal, which is slow but steady progress toward government control of the health-care market. Or possibly it's because many of the most generous tax- subsidized health plans come from union-negotiated contracts. Or maybe Democrats simply don't want to concede that President Bush has a point.

In his 2007 State of the Union address, Mr. Bush suggested redistributing the government's health subsidies. His proposal would sever the link between insurance and employment, shifting the deduction to individuals and capping it at $15,000 a year for a typical family. About four-fifths of the country would do better than they do now, while the rest currently have the most gold-plated employer coverage and would still have plenty of options.

Not only would this be a relatively cost-effective way to increase coverage. It would also address the major market distortions that the employer-exclusive deduction causes, with individuals essentially prepaying for routine costs through third-party insurance companies. If Republican candidates came to their senses, they'd recognize an opportunity to poach a traditionally Democratic issue -- as well as an opening to address middle-class anxiety without demagoguing business or "the rich." Individual policies would also be portable when workers are between jobs, reducing risk and uncertainty.

But the big questions are for the Democrats, who claim to believe that health-care reform is as much a moral as an economic issue. Whatever their other ambitions, how can they stand by a system that offers the least assistance to the working class and nothing at all to the uninsured?