When is a tax break actually a tax penalty? When it’s the tax exclusion for employer-sponsored health insurance.
That’s what Michael Cannon, Cato Institute’s director of health policy studies, convincingly argues in his recent paper, End the Tax Exclusion for Employer-Sponsored Health Insurance. His paper is a compact lesson in the ways that some supposed tax breaks can effectively function as tax penalties, not only distorting markets, but invisibly penalizing people for their choices. And it’s a reminder of the ways that seemingly minor, offhanded policy decisions, made with little thought to long-term consequences, can exert a haunting influence long after they are made.
The tax exclusion for employer-sponsored health insurance is exactly what it sounds like: a carve-out for health coverage offered through the workplace.
But he argues that, in practical terms, this tax break actually acts as a stealth penalty on workers who want to make their own health insurance choices. Typically even a generous employer only offers a handful of health plans, and those plans are unlikely to take the exact form an employee would otherwise choose on his or her own. If an employee wants to purchase any other plan, however, he or she would have to do it with money first received—and taxed—as cash compensation. Thanks to taxation, it would be worth a lot less. Thus the tax exclusion acts as a tax penalty on any employee who wants to choose their own health insurance.
Warren is spending this week talking up her “Ultra-Millionaire Tax Act.” It’s essentially a refreshed version of the same idea she proposed during her failed bid for the Democratic presidential nomination. The current measure, like the old one, would tax the net worth of American households with more than $50 million in assets to the tune of 2 percent annually, with an additional 1 percent tax for households worth more than $1 billion. Warren favored the wealth tax in 2019 when the economy was generally doing pretty well. But now, she says, it’s needed “because of the changes in this country under the pandemic.”
Of course, if there’s one thing America’s national political class does not like or understand, it is lulz. Lulz are inherently chaotic and disorderly, and that tends to cause headaches for most anyone with a bureaucratic bent. But it also produces reactions like one we saw yesterday, in which Sen. Elizabeth Warren (D–Mass.) used the GameStop episode to call for intervention by the Securities and Exchange Commission (SEC).
It’s not at all clear what the SEC could do to stop what is essentially a financial market flash mob, aside from ensure that no large institutional investors are secretly in on the WallStreetBets side of the trade. If that’s the case (and it may well be, though who knows), then the SEC will probably end up taking some sort of action based on existing rules designed to prohibit fraudulent pump-and-dump schemes, where stocks are artificially boosted and sold off.