The Magazine

The Cabinet of Dr. Obama

Dissecting the health care proposals of Obama and McCain.

Oct 20, 2008, Vol. 14, No. 06 • By YUVAL LEVIN
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

Over the past few weeks, in a series of television ads, in stump speeches, and in the presidential and vice presidential debates, the Obama campaign has sought mightily to attack John McCain's proposal for health care reform. It's vehemence and tenacity have been striking, especially given how little McCain himself has actually had to say about his plan. Ironically, their misleading critiques actually hint at the strengths of McCain's proposal, and point to the serious vulnerabilities in Obama's own approach to health care politics.

At the core of the McCain health care agenda is the most important conservative policy innovation since welfare reform: the transformation of the benefit now given to employer-provided health coverage into a health insurance tax credit made available to all. For almost 70 years now, the federal government has given a significant tax preference to employer-provided health insurance. When your employer takes money out of your wages to purchase coverage on your behalf, the money is not counted as part of your gross income, so you don't pay any taxes on it. But if you purchase insurance yourself, not through an employer, the money you use to do so gets taxed.

This makes employer-provided insurance vastly more appealing and places a serious burden on those to whom it is not available or who prefer coverage other than what their company offers. It has prevented the development of a genuine market in individually purchased health insurance and therefore artificially keeps insurance costs high. It has kept consumers from having a clear sense of what their health care costs, and so has inflated the price of care itself as well as the price of coverage. It has severely reduced the options available to families, making it more difficult to find insurance that meets their particular needs. It has tied health insurance to employment, leaving people uncertain about career moves and insecure about the future of their coverage. And it has vastly increased the number of Americans without health insurance, since not every business can afford to provide coverage, and those whose employers don't offer it cannot readily find affordable options on their own.

And yet, for all its troubles, the employer-based system is quite popular with the people it serves. Nearly 90 percent of them, in a recent Kaiser Foundation poll, rated their insurance as good or excellent. They would certainly like to see costs go down and to feel more secure about their coverage, but they do not want their existing coverage taken away from them. This obviously poses an enormous challenge for reformers: How can the problems of the current system be addressed without displacing the millions of Americans who are satisfied with it?

The McCain solution is to change the incentives for consumers, but not for employers, so that people find themselves with more options, but are not forced out of their current insurance arrangement. Rather than exempt from taxation all the money used by employers to buy insurance, he would treat it as income but then provide individual taxpayers (regardless of how they obtain their coverage) with a credit that more than covers the taxes. The effect of this, from the point of view of individuals and families, would be to make employer-provided coverage just one option among many.

All American taxpayers, regardless of whether they now have health insurance or where they get it, would receive a $2,500 health care tax credit ($5,000 per family) under McCain's plan. If you now have health insurance through your employer and would like to keep it, you can do that and the economics of the arrangements would change only slightly, and (for all but the top 5 percent of taxpayers) for the better. The money your employer takes out of your wages for your insurance would be taxed, but the new credit would more than cover the additional taxes, leaving you with the insurance you have now, and with a little more money in your pocket at tax time (between $700 and $1,600, according to the estimates of the Tax Policy Center). Things don't change for your employer, and they get a little better for you.

In last week's town hall debate, Barack Obama attacked this feature of the plan as an example of "one hand giveth and the other hand taketh away." But the giving and the taking occurs only on your income tax form, and in the end you're left with the insurance you want to keep and more of the money you've earned. The point of all the giving and taking, meanwhile, is to make options available for those not satisfied with the current system, or not served by it.