Corporate Welfare Keeps Health Insurance Alive

David Brooks, columnist at the New York Times, makes a convincing case that the US is a back door welfare state (find it at http://www.nytimes.com/2012/02/24/opinion/brooks-america-is-europe.html?...). Excerpts:

The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks.

For example, in Europe, governments offer health care directly. In the U.S., we give employers a gigantic tax exemption to do the same thing.

These tax expenditures are hidden but huge. Budget experts Donald Marron and Eric Toder added up all the spending-like tax preferences and found that, in 2007, they amounted to $600 billion. If you had included those preferences as government spending, then the federal government would have actually been one-fifth larger than it appeared.

The Organization for Economic Cooperation and Development recently calculated how much each affluent country spends on social programs. When you include both direct spending and tax expenditures, the U.S. has one of the biggest welfare states in the world. We rank behind Sweden and ahead of Italy, Austria, the Netherlands, Denmark, Finland and Canada. Social spending in the U.S. is far above the organization’s average.

You might say that a tax break isn’t the same as a spending program. You would be wrong.

David Bradford, a Princeton economist, has the best illustration of how the system works. Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion “weapons supply tax credit.” The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!

But, as the economist Bruce Bartlett demonstrates in his impeccably fair-minded book, “The Benefit and the Burden,” the cumulative effect of these tax breaks is terrible. Like overgrown weeds, the tangle of tax breaks distorts behavior, clogs the economy and deprives the government of revenue.

And because they are hidden, many of the tax expenditures go to those who need them least, the well connected and established over the vulnerable and the entrepreneurial.

My comment:

Without the federal tax credit for employers who buy health insurance for employees and dependents, health insurance would have ceased to exist decades ago. The health insurance business model is a useless, wasteful, stupid way to pay for health care, which Americans increasingly do not want, but are forced to have, because tax credits and the 'Affordable' Care Act prop it up. The health insurance industry is the epitome of the well connected and established who receive preferential tax treatment over the vulnerable (the sick and injured in America) and the entrepreneurial (who can not start up a business because health care costs kill the opportunity). No better illustration exists of the overgrown weeds fostered by tax credits than the tangle of insurance which is currently distorting health care delivery (perverse incentives), clogging our economy, and depriving government at all levels of needed revenue.

Time to move on beyond the health insurance business model.

Dr. Joe Jarvis