Most working Americans get health insurance through their employer (or their spouse’s employer). That’s not a bad system, since companies typically employ a mix of people who are young and old, healthy and sick, so they can balance the risks of providing insurance.
But another reason it’s done that way is that it’s helps avoid paying taxes on that insurance. In fact, people getting insurance through their employers save about $250 billion on their taxes through that system every year!
Nobody likes paying taxes, but there is no good reason for why every dollar of health insurance you get from your employer should be tax-free while people who buy insurance on their own have to pay for theirs with post-tax dollars. In fact, it encourages your employers to make your health insurance more generous instead of just giving you a raise.
Obamacare tried to fix this by putting a huge tax (40 percent!) on health plans that are worth more than a certain amount.
But that’s not fair: If you’re, say, a Teamster making $50,000 a year, you shouldn’t see a 40 percent tax on your health plan while a computer programmer making $150,000 a year pays the same tax, if anything at all.
That’s why most Obamacare replacements propose just capping the size of the health plan that you can receive tax-free. It won’t cost any one individual very much money, will help make the system more equal, and comes with several other big benefits:
- It’s a major step toward closing the deficit, as it’ll raise hundreds of billions of dollars in tax revenue over the years.
- It won’t cost lower-income Americans very much (since they will pay very little in taxes on their insurance), drawing most of its revenue from the rich (who will pay closer to a 40 percent tax rate on their insurance). In the Teamster-vs.-programmer example, the Teamster will pay a little bit in taxes (since he has a generous health plan), but the programmer will pay significantly more.
- It will end an implicit subsidy to health insurance, helping to curtail health care costs overall.
Another, slightly more complicated solution would be to get rid of the tax exemption for health insurance entirely, and replace it with a tax credit — for, say, 25 percent of the value of health insurance. Wealthier Americans would pay more in taxes, while less wealthy Americans would pay less. Read more about that option here.