Illustration of the President s Health Care Tax Initiative
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1 January 25, 2007 Illustration of the President s Health Care Tax Initiative by Gerald Prante Fiscal Fact No. 75 Now that more details of the President's health care proposal have emerged, we can look more closely at how different groups of Americans will be impacted. As discussed in Tax Foundation Fiscal Fact No. 74, "President to Propose Large Tax to Spur Health Insurance Purchases," 53 percent of uninsured Americans have no federal income tax liability. Therefore, the President was forced to allow the deduction for purchasing health insurance to reduce payroll tax liability; this is the only way to let the 53 percent with no income tax liability benefit from the deduction. Following is an illustration of how the new Bush health care plan proposed during the State of the union Address would affect four types of families. First, we present a family of four with two children that earns $80,000 per year in wage and salary income and receives $10,000 in employer-provided health insurance. Next, we show that same family, but we assume it receives $20,000 in employer-provided health insurance. Third, we show the impact on a low-income family with a single mother of two children who earns $25,000 in wage and salary income and currently has no health insurance. Finally, we show a single person living by himself earning $50,000 and currently uninsured. We assume all families currently take the standard deduction and receive the child tax credit (if applicable), and no other credits. Also, we calculate the Earned Income Tax Credit (EITC) and the additional child tax credit for the low-income single mother.
2 Table 1: Family of Four Earning $80,000 in Wage and Salary Income and Receiving $10,000 in Employer-Provided Health Insurance Wage and Salary Income $80,000 $80,000 Health Insurance $10,000 $10,000 AGI $80,000 $90,000 $10,700 $10,700 $0 $15,000 Exemptions $13,600 $13,600 Taxable Income $55,700 $50,700 $7, $6, Child Tax Credit $2,000 $2,000 Income Tax After $5, $4, Payroll Tax Base $80,000 $75,000 Payroll Tax (Employee) $6,000 $5,625 Payroll Tax (Employer) $6,000 $5,625 Total Payroll Tax $12,000 $11,250 Tax $17, $16, Total Tax Savings $1,500 Marginal cost of an Take-home pay (outside Take-home pay (outside additional dollar of health health insurance) falls by insurance (through health insurance) falls by $1 for each additional dollar of employer); moved from wage/salary 70 cents for each additional dollar of health insurance (assuming overall compensation stays health insurance (assuming overall compensation stays
3 Table 2: Family of Four Earning $80,000 in Wage and Salary Income and Receiving $20,000 in Employer-Provided Health Insurance Wage and Salary Income $80,000 $80,000 Health Insurance $20,000 $20,000 AGI $80,000 $100,000 $10,700 $10,700 $0 $15,000 Exemptions $13,600 $13,600 Taxable Income $55,700 $60,700 $7, $8, $2,000 $2,000 Income Tax After $5, $6, Payroll Tax Base $80,000 $85,000 Payroll Tax (Employee) $6,000 $6,375 Payroll Tax (Employer) $6,000 $6,375 Total Payroll Tax $12,000 $ Tax $17, $19, Total Tax Loss $1,500 Marginal cost of an Take-home pay (outside Take-home pay (outside additional dollar of health health insurance) falls by insurance (through health insurance) falls by $1 for each additional dollar of employer); moved from wage/salary 70 cents for each additional dollar of health insurance (assuming overall compensation stays health insurance (assuming overall compensation stays
4 Table 3: Single Mother with Two Children (Head of Household), Earning $25,000 in Wage and Salary Income, Uninsured but Purchasing Health Insurance Wage and Salary Income $25,000 $25,000 Health Insurance $0 $0 AGI $25,000 $25,000 $7,850 $7,850 $0 $15,000 Exemptions $9,900 $9,900 Taxable Income $7,250 $0 $725 $0 Child Tax Credit $2,000 (only partly used) $2,000 (not used) Income Tax After $0 $0 Refundable EITC $2,475 $2,475 (estimate) Additional Child Tax Credit $1,300 $1,300 Payroll Tax Base $25,000 $10,000 Payroll Tax (Employee) $1,875 $750 Payroll Tax (Employer) $1,875 $750 Total Payroll Tax $3,750 $1,500 Tax (after refundable credits) -$25 -$2,275 Total Tax Savings $2,250 Marginal cost of an additional dollar of health insurance (purchased on First dollar: $1 First dollar: - $2,249 own assuming $1 has already spent) Note: The price of the health insurance she purchases on her own is irrelevant. Even if she purchases a very cheap plan, she still gets to take the full $15,000 deduction. She could even purchase a plan that is cheaper than the amount she saves from the tax change. We assume no changes to her EITC or additional child tax credit amount as a result of the policy change. Such technicalities should be known at a later date.
5 Table 4: Single Man with No Children, $50,000 in Wage and Salary Income, Uninsured but Purchasing Health Insurance Wage and Salary Income $50,000 $50,000 Health Insurance $0 $0 AGI $50,000 $50,000 $5350 $5,350 $0 $7,500 Exemptions $3,400 $3,400 Taxable Income $41,250 $33,750 $6, $4, $0 $0 Income Tax After $6, $4, Payroll Tax Base $50,000 $42,500 Payroll Tax (Employee) $3,750 $3, Payroll Tax (Employer) $3,750 $3, Total Payroll Tax $7,500 $6,375 Tax $14, $11, Total Tax Savings $3,000 Marginal cost of an additional dollar of health insurance (purchased on First dollar: $1 First dollar: - $2,999 own) Note: He is currently uninsured, but now purchases health insurance as a result of this plan. The price of the health insurance he purchases on his own is irrelevant. Even if he purchases a very cheap plan, he still gets to take the full $15,000 deduction. He could even purchase a plan that is cheaper than the amount he saves from the tax change. Overall, this health care tax reform plan has its share of both good and bad tax policy. It has been common these past several decades to promote social goals through the income tax code, and this is another example. However, such tax code manipulations do have limits, and the President's plan has bumped up against one of them: so many people pay no income taxes that deductions no longer have any value to them.
6 Therefore, to reach a significant fraction of the uninsured, it was necessary to reduce their Social Security and Medicare taxes. A few commentators have begun to wonder whether these lower payroll taxes will translate into lower Social Security benefits after retirement. Tax payments are still linked to benefits by law through a complex formula, and a calculation of how such potential reductions would compare to the benefit people receive from the new health insurance deduction is not possible until more detailed analysis from government agencies is available Tax Foundation Tax Foundation 2001 L Street NW Suite 1050 Washington, DC Ph: (202) Fax: (202)
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