I've had a lot of emails about a recent piece on McCain's failure to sell his main tax proposal--the
refundable credit for health insurance. The article explained how the
credit would leave most middle-income Americans paying less tax than
under Obama's plans.
Both candidates have offered complex tax proposals. Proliferating alternative baselines (with or without the extension of the Bush tax cuts, with or without a "patch" for the alternative minimum tax, and so forth) deepen the confusion. Unable to fathom the details, voters are left to weigh the competing slogans. Mr Obama promises to cut taxes for 95 per cent of working families. Mr McCain says the rich need a tax cut, too. Guess who wins that argument.
Here is a fact you might not have noticed. It certainly seems to have slipped by most Americans. The typical US household would get a bigger tax cut under Mr McCain's proposals than under Mr Obama's. I know a few politicians who could do something with that.
Broadly speaking, Mr McCain proposes to leave the Bush tax cuts in place. Mr Obama proposes a big increase in taxes on people earning more than $250,000 a year, in order to cut taxes and increase subsidies at the bottom; for the middle, he too would mostly keep the Bush tax code. Middle-income households do come out slightly ahead under the Obama plan - but only if you leave out the effect of Mr McCain's healthcare proposal. The question is, why would you do that?
Mr McCain wants to abolish the tax-break for employer-provided healthcare and replace it with a refundable $5,000 credit. Mr Obama says that a family health plan might cost $12,000 a year - leaving families who buy their own policy $7,000 worse off. This is incorrect. So far as I know, Mr McCain has never taken the trouble to explain why.
Suppose a family currently has a $12,000 policy provided by an employer. Under the McCain proposal, instead of attracting relief as at present, this benefit would be taxed as ordinary employment income - but the extra tax paid would be more than offset by the new $5,000 credit. In the first analysis, nothing changes so far as employers are concerned: all the action is on the employee's pay cheque. The policy delivers a net tax cut to middle-income households and is enough to make the McCain tax plan on average a better overall deal for them than the Obama plan.
Odd, don't you think, that the McCain campaign should think this unworthy of emphasis?
As it happens, taken together, I prefer Obama's tax and health-care proposals to McCain's: I think McCain's health credit is good as far as it goes, but it does not go nearly far enough. Obama's plan would expand coverage much more, and it seems to me that this should be a key goal. However, the fact remains that McCain's plan would put more disposable income (net of taxes and health-care outlays) in the pockets of most middle-income voters.
Well, you would not guess this from the way the McCain campaign has dealt with the issue. Joe the Plumber and the preoccupation with Obama's thinking on redistribution has clouded what surely ought to have been the main thing, from a tactical point of view. Anyway, as many have pointed out, we are all redistributionists in principle. Republicans too believe in spreading the wealth around. Is McCain planning to abolish the earned-income tax credit? Is he proposing a flat-rate income tax with no exemptions? It is a question of how far, not whether.
Many of the emails I received began, "You are just wrong," and came from accounting firms, lawyers, and academics of one sort or another. I was initially disconcerted. What had I missed, I wondered? But no, it turns out, my correspondents had simply misunderstood McCain's proposal in one way or another--and I don't blame them for having done so. He is offering a refundable tax credit, not an ordinary credit (which can only be set against taxes owed) and not a deduction in taxable income (which would provide a much smaller tax saving); this credit would also be paid to people with employer-provided health insurance, not just to people who buy their own; and the existing payroll-tax exemption for health insurance would continue under the McCain plan (if this were abolished too, his plan would cut disposable income rather than increase it for many households).
These were the most popular reasons for believing I was mistaken, and for maintaining that the Obama proposals would give middle-income households a bigger overall tax cut. Even sophisticated voters have failed to get the message: McCain is offering middle-income American a bigger tax cut than Obama.
Am I naive to suppose that this would have been a stronger selling-point than Joe the Plumber? Wouldn't it have been a good idea to make sure this was understood?
McCain's plan works out to a net advantage only if employers continue to insure their employees.
The problem is that by removing the employer as the means of insuring individuals many will opt to let individuals insure themselves and give them the insurance money as salary. History teaches us that as soon as something like that happens more people will stay uninsured. The McCain plan will give an advantage to many at the cost of a few that will lose all because they got really sick while being uninsured. It is a cruel game of crap shoot where a small number of people will be destroyed so that a majority can experience a slight economic advantage for a few years until the negative health effects of having a larger number of the population uninsured kicks in.
Like heroine that gives an initial rush at the beginning but leads to ruination over time the McCain plan will bring a slight economic advantage initially but it will aggravate a bad situation where health costs resulting from ever increasing number of Americans without health insurance are going up - not to mention the human suffering.
Have we not learned from the failed Bush "compassionate conservative" policies? It is all smoke and mirrors and McCain wants to continue the grand deception with slogans and half baked ideas.
this credit would also be paid to people with employer-provided health insurance, not just to people who buy their own
So one family without health insurance gets $5,000 to help it buy a $12,000 policy while another family that already has health insurance keeps the insurance and gets extra money in their pocket? Toward what health insurance end does this accomplish?
the existing payroll-tax exemption for health insurance would continue under the McCain plan
I have not been able to find this definitively stated in the McCain plan. Trying to confirm it I keep being told it is an "understanding" that payroll taxes would not be applied.
Clive,
I'm a bit confused as to the last part you described of keeping the employer payroll tax exemption on healthcare. Is this something McCain has readded to his platform recently? And if so what's the purpose of the healthcare rebate if the goal is no longer to abolition employer provided healthcare and instead provide people with extra money to buy their own insurance?
Is this basically just a massive money giveaway disguised as a healthcare policy?
The appeal wouldn't have been stronger than Joe the Plumber because the appeal of Joe has very little to do with taxes. It is the typical Republican appeal to working class whites that somehow the government is going to take something from you and give it to people less deserving than you. It is basically Hillary's Appalachia campaign with a new face. I'm sure it will be effective in certain parts of the country.
I've been saying this for weeks: the biggest problem with McCain's healthcare plan is that McCain is cripplingly unable to defend it. He should be arguing that (like Clive points out) most middle-class folks come out ahead of the curve with his plan... but he should also be strenuously arguing that his plan will force HMOs to compete directly for people's money rather than focusing on getting huge corporate contracts.
Maybe my point is going to be a bit tangential. But do you really believe that individuals can negotiate a good deal with health insurance cos? Even if you could go across state lines. I imagine there'd be tremendous demand for the young and healthy. But the ones that struggle with healthcare bills today will stay vulnerable, more so perhaps, under the McCain plan. And I think its relevant to keep that in mind because today I maybe better off under McCain plan since I am young, in 4-5 years I maybe worse off as my premiums go up. A holistic analysis should take that into account..
1) Obviously, McCain nullified any ability to push his refundable health-care tax credit the day he claimed that credits for those who don't pay taxes is "welfare," and "socialist." Oops. McCain is actually very lucky that the media has not called him on this hypocrisy.
2) My theory as to why McCain has such a hard time selling his health care plan is that he doesn't actually understand it. McCain is notoriously disinterested in domestic policy, but he obviously had to have a health plan, so his advisors put words in his mouth. I see this as a big difference between the candidates: I am willing to bet that before a policy is uttered by Obama he has made the effort to grasp it. I can't say that I have the same confidence in McCain.
To restate an old trucker's joke about dispatchers:
"How can you tell a Republican politician is lying?
Their lips are moving."
(Democrats aren't much better, by the way.)
I think the McCain plan has to fall under the heading of "we'll say anything to get elected." It isn't thought out, but they aren't trying to appeal to the informed voter, rather appeal to the under-informed voter that doesn't see the underlying flaws, but just the $5000 bucks he or she MIGHT get if the McCain ticket was actually elected.
It's sort of the monthly payment/credit card mentality that as much as anything has the middle class and below (yours truly included) in such trouble. "I want, I want, I want it now"--I'll worry about paying when the bill comes (or I get sick.)
I'll vote for Obama, and hope for a strong majority in both houses of Congress. I'm only moderately hopeful that anything will get done, tho. I hope for an Obama landslide with long coattails--maybe he'll use his mandate to get important things (like universal healthcare) done.
I'm sort of a dunce when it comes to all things economic--so probably this is a stupid question--but if the effect of the McCain tax plan is truly to give broader relief to middle and lower income tax-payers while maintaining (or expanding?) the cuts already in place for higher income brackets, then how does he propose to pay for all of this? Massive cuts in spending? The "spending freeze" made permanent? Err... eliminating earmarks? Or is the notion that such a large accross-the-board tax cut will jumpstart the economy and result in higher wages all around and therefore higher revenue for the government? How about a helping hand from one of you "dismal scientists"?
MikeF writes [McCain's] plan will force HMOs to compete directly for people's money rather than focusing on getting huge corporate contracts.
This highlights one of the biggest objections to McCain's plan. The sick and elderly will be unable to find affordable insurance, or any insurance at all, because individually the insurance risk is too high. Insurance companies give better rates to huge corporate contracts because the actuarial risk is lower.
I'd like to second what spook said. I am a retired academic. My own health plan is excellent because my university is committed to providing good benefits for its employees, because it has a strong bargaining position due to its size, and because of the acumen of its staff benefits office. To think that an individual, even a highly educated professional, could do as well on his own is simply ludicrous.
Seems like it's not just bigger; it's ten times bigger for an individual who chooses to spend that much on health insurance.
Instead of talking about that, McCain chose to try to win an election by getting the electorate to sympathize with those making over $250K. Odd indeed.
I get the feeling McCain is somehow embarrassed/intimidated to talk about his credit as a middle-class tax cut by fears of perceptions of his plan among the base: it's as if the real Republican position on taxes is not just to cut taxes, but that it is to cut them for the affluent and affirmatively NOT to cut them for the middle class, and that he has internalized that and is still operating in a base-preservation mentality. So his attacks go to the one place where the opponent is proposing tax hikes, even though his own middle-class tax cut apparently BEATS his opponent's.
Political malpractice born of lazy partisan habits of mind would be my diagnosis. They'd rather talk about tax hikes from Democrats when the rhetorical reality is that they've actually WON the debate on taxes (Obama wants to cut them too), and his own plan beats him on that score.
Te downside of focusing on your $5,000 refundable tax credit: It would mean sacrificing the phrase "redistributionist-in-chief." And how is someone supposed to win an election without repeating that phrase ad nauseum?
There's another detail that everyone seems to keep missing. The tax credit is only applicable to health expenses:
So if you have a good plan and no or minimal expenses, your $12K plan is taxed and the $5K credit is useless because it has no place to go. For these individuals, employers would change their plans to reduce their premiums by $5K and shift that to you (which the govt would immediately pay). After all, why see a $5K credit go to waste, especially when the are going to be taxed for the cost of that benefit? If the numbers bandied about are correct, employers would reduce the value of that $12K plan to $7K in exchange for $5K in premiums to the employee to be covered by the credit, reducing the revenues from the new tax by 40%, and reducing the employers overall cost. If employers are coming out ahead, then I don't see how this can be even remotely revenue neutral.
McCains plan does not provide for continuing payroll tax deductions-employer or employee.
This statement is wholly inaccurate.
His plan calls for the elimination of all tax deductions for employer sponsored health insurance-thereby insuring the abolition of employer sponsored health insurance. Undoubtly there are large numbers of small employers who would welcome this relief. I am a small employer-and understand this relief. But McCains plan would be tragic for the vast majority of American workers who only have medical insurance because they have an opportunity to purchase the coverage - at somewhat affordable rates-through an employer.
Then-preposterously-he is stating that American's can now take the $5,000 he would provide and go to the private insurance industry and purchase the coverage they and their families need.
Anyone who has even a cursory understanding of the private health insurance industry knows what a catastrophe that would be - both in terms of pre-existing conditions, costs of coverage and breadth of coverage.
Jim
The problem with the analysis of the McCain tax credit is dynamic scoring. The projection of the savings is based upon the assumption that no behavior will change. The numbers also apparantly are not adjusted for the varying percentage of employee contributions, whioh now will be taxed.
I also suspect that excusing payroll taxes from the employer paid benefits will be a non-starter. If so, then the McCain proposal will save nowhere near the projections. It can hardly be considered fair that if the employer provides access to health care then payroll taxes do not apply, but if you are on your own then they do? Well at least it isn't socialism!
The real problem is that the tax credit may either encourage the young and healthy to abandon employer based plans for cheaper catastrophic policies thus raising the insurance costs of those remaining in the plan or that many employers will decide it is easier to just cancel the health insurance and let everyone buy their own policies with the tax credits. Whether the employee compensation is increased to cover the savings on the policies or keeps pace with rising medical care costs is a separate issue.
That "net of taxes and healthcare costs" is the biggie. This is the last industrialized nation without some form of universal health care. The last one, and yet, it spends more than any other ON healthcare. That needs to be addressed. Anyone who thinks insurance companies will not keep the lowest risks and that McCain's plan will lead to even majority coverage, or coverage of "pre-existing conditions" is fooling themselves.
I was just listening to McCain's anti-"share the wealth" routine on CNN. He doesn't mention that we already have tax brackets tied to income levels, so the tax rates already "share the wealth". Does he want a flat rate, which will shift the tax buden to the less well-off FAR more than the return to Reagan-era top rates that Obama wants.
But the interesting thing to me is that McCain was just saying "we HAVE Social Security... we HAVE welfare" and so on. Where does he think those programs came from? Social Security grew exactly from the types of policies he opposes, from the Depression. Maybe he should try to get his hands on a summary of socio-economic history of our country.
The other thing he was talking about was ending the back-biting and in-fighting in Washington. Right. When he can't even do that within his own campaign.
It's hard to tell whether people are deliberately spreading misinformation about Sen. McCain's health care plan, or if they genuinely don't understand it. Or maybe they're misunderstanding it on purpose.
John McCain's health care plan supports job-related health insurance by replacing (replacing, not eliminating) the existing tax exemption on health coverage with a tax credit that benefits all Americans, whether they have job-related health insurance or not.
Sen. McCain's $5,000 tax credit ($2,500 for individuals) will replace the tax exemption for the 59% of Americans who have employer-provided health plans with a federal tax credit that will also go to the 41% of Americans who don't get health insurance at work, giving 100% of Americans the same tax benefit. Currently, that 41% get no tax benefit for health insurance. No wonder there are so many working uninsured.
Employers will continue to offer health insurance because their business deductions stay exactly the same under Sen. McCain's plan. People will not lose their job-related health insurance, nor will they have to pay for their health insurance out of the tax credit, as Sen. Obama's campaign has claimed.
Here's how it will work: a family making $80,000 year pays 25% in income taxes. If they get a $12,000 a year plan at work (that's a really GOOD plan, the same as members of Congress get), their $5,000 tax credit will replace the existing $3,000 tax deduction (the value of their $12,000 plan at their 25% tax rate), leaving a $2,000 surplus that will be deposited into a Health Savings Account for the family's use on medically-related expenses.
Families in lower income tax brackets will get a bigger surplus, and even those in the highest income tax bracket (35%) will still have money left over for their HSA. Families which currently pay no income tax can use their refundable tax credit to buy health insurance or have it deposited in a health savings account.
For the 41% of Americans who don't get health insurance at work, the $5,000 tax credit can be used to buy a plan on the open market. That's $5,000 (or $2,500 for individuals) more help from the federal government than they're getting now.
And since Sen. McCain wants to let people buy plans across state lines and take advantage of expanded, non-traditional group plans, increasing competition and taking advantage of different mandates and lower rates in other states, that $5,000 per family ($2,500 for individuals) will go pretty far toward reducing the number of working uninsured in America. One study says 24 million uninsured families will be able to afford to buy their own plans under this plan.
Sen. McCain's plan would finally give people who don't get health insurance at work the same tax benefit as those who do. Isn't that a whole lot more fair than only giving federal tax subsidies to people who already have the advantage of employer-provided health care?
Sen. McCain's plan won't "tax your healthcare for the first time." It will change an inherently unfair federal tax exemption that only 59% of Americans receive into a tax credit that benefits all Americans. Sen. McCain's plan will help millions of Americans who can't afford health insurance to get it without forcing them into a huge new government-run health plan.
It's hard to believe that smart guys like Senators Obama and Biden think that paying taxes on $12,000 actually COSTS $12,000 (unless they think that’s how it should be….), or that $3,000 in additional tax liability (see the $80,000 income family example above) isn't less than the $5,000 tax credit that replaces it, or that there's not $2,000 left over when you subtract $3,000 from $5,000.
Hard-to-insure people with pre-existing conditions can rely on a Guaranteed Access Plan (GAP), and, no, despite the scare tactics of the other side, Sen. McCain isn't going to "cut" Medicare and Medicaid benefits to pay for it. He wants to streamline how providers are paid, expand the use of information technology, eliminate fraud and waste, get better drug prices through faster introduction of generics and safe re-importation, and reduce costs through preventive care and reducing defensive medicine - all of which will generate enough savings to cover providing a fair health care tax benefit to all Americans.
Seems to me that they're misunderstanding the plan on purpose, so they can tell lies about it in their commercials.