I just got a media inquiry from someone who was on a conference call with Obama economic advisors Jason Furman and Austan Goolsbee.  According to this source, they claimed that McCain’s health insurance tax credit “will surely prove a trojan horse tax increase on middle class familes” (my source’s words) because the amount of the tax credit would grow only at the rate of the Consumer Price Index (i.e., inflation).  That’s much slower than the growth rate for the value of the current tax exclusion for employer-sponsored health insurance, which grows at the much-faster rate of premium growth.  (BTW, it also grows with the rate of increase in marginal tax rates.  Ahem.)

Others have made this charge before.  I’m sorry to hear that Fursbee have picked it up.

Here’s what I wrote to our media friend:

Fursbee are correct, in the sense that providing a tax break that is standardized (i.e., a fixed credit versus an exclusion whose value varies with one’s premiums and marginal rate), and whose growth is limited (to CPI versus today’s unlimited exclusion), would tax currently untaxed activity. 

But they’re flat wrong in concluding that would be a net tax increase.  The ‘why’ requires some explanation. 

Employers provide health insurance principally because those benefits are excluded from income & payroll taxes, while individual-market coverage is not.  A recent survey of health economists found that 91 percent agree that workers pay for health benefits through reduced wages.  The average “employer contribution” to the average family policy is roughly $9k.  That means that if employers weren’t providing health benefits, the labor market would force them to return that $9k to workers.  We call the current exclusion a tax break, even though it denies workers the ability to control $9k of their compensation.  If government took $9k from workers and used it to provide workers with health insurance, then we would call that a tax.  Yet when government effectively takes that money from workers and gives it to employers, we rather curiously call it a tax “cut.” 

McCain’s tax credit would level the playing field between job-based and individual-market health insurance.  With no tax penalty encouraging workers to let their employer control that $9k, the labor market would gradually force employers to add that money to workers’ cash wages.  Letting workers own and control that money is nothing if not a tax cut.  And it would swamp the tax-increasing effect of limiting the tax credit’s value to CPI growth. 

Fursbee are being too cute by half.  And I don’t even like the McCain tax credit.

I might have added that McCain’s credit would encourage Americans to be much more economical about their health insurance, which could restrain premium growth.  (Any excess premium growth due to the exclusion is itself a tax.)  Or I might have noted that the McCain credit would be a pure tax cut to people without access to job-based coverage. 

Or I might have mentioned that Fursbee should know better.  They know that tax exclusion for employer-sponsored health insurance is horribly inefficient, that reform is crucial, and that any reform will be imperfect.  Assuming my source is correct, they are being selective about their facts, demagoguing a serious effort to fix this problem, and making it harder for anyone to do so.