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Sunday, June 7, 2009

Obama's Health Care Tax Conundrum

Over the last couple weeks, a proposal to raise money to pay for President Obama's health care plan has been floated. This proposal would tax health insurance benefits that individuals receive from their employers. This plan would raise plenty of money and it would cover the roughly $90 billion yearly shortfall the plan currently has. The problem with this idea is mostly political. President Obama bludgeoned John McCain about this very same proposal when McCain proposed it in the campaign.

It seemed anything but that last fall, when Sen. John McCain, R-Ariz., proposed taxing health insurance benefits and Obama spent millions on campaign commercials attacking the idea.

One ad accused McCain of favoring "taxing health benefits for the first time ever ... taxing health care instead of fixing it. We can't afford John McCain."

A second Obama ad called McCain's approach "the largest middle-class tax increase in history." Driving the point home, it contended the "McCain tax could cost your family thousands. Can you afford it?"

Beyond the political problem is a problem of policy. When McCain proposed this tax he proposed it in conjunction with health savings accounts. McCain hoped that this new tax combined with a credit that allowed individuals to insurance on their own would drive people away from employer funded insurance and toward buying health insurance on their own.

Obama's health care proposal doesn't include health savings accounts but rather a public option. A tax on employer's health insurance would drive more people to the public option, which many claim is Obama's plan all along.

There is another larger problem that President Obama faces. Initially, President Obama wanted to pay for his universal health care plan by a series of tax increases on the wealthy that included increasing taxes on charitable and the elimination of the mortgage interest write off. Unfortunately, many of these proposals have been rejected by the Democratic Congress which found taxes that even they couldn't agree with on the wealthy. It appears that even the liberals in Congress have less of a stomach for soaking the rich than the President, and that's his first problem.

The second problem is that the president has proposed so much spending that at some point he would reach his limit. After all, his proposal for universal health care is only going to cost an extra $100 billion plus or so yearly. I say only because in comparison to his other proposals that's not such a big amount. Of course, given that he's already run a yearly tab of nearly $2 trillion dollars more than his receipts, the president can't simply finance his proposal.

Think of the president as a spoiled yuppie who maxes out several credit cards. Between the stimulus, the bailouts, the omnibus, and his massive budget, he's reached his limit. That limit is universal health care. He's finally run out of places to tax.

So far, the president has been anything but warm to the idea, however, he also hasn't eliminated it as an option. Obviously, he can't be warm to the idea. Not only would endorsement of the tax on employee health care benefits be seen as a major flip flop, but it would also leave no doubt that his pledge to only tax the top 5% was nothing more than an illusion. On the other hand, he can't eliminate it as an option because he's almost out of options for funding universal health care.

The whole idea exposes a fallacy that his opponents should eventually expose and exploit. The president claims that we can't wait to reform health care. He says that health care costs continue to explode and will soon consume one in five dollars in our economy. So, he proposes reform that will cost an extra $120 billion yearly. How does that resolve the issue of exploding health care costs? Soon, that question will be asked and the president will have no answer. That's because his answer for exploding health care costs is to make them even larger.

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