There is nothing intrinsically bad about raising taxes if the money is used for important public services. However for an important segment within the population, tax increases of any sort are sacrilegious. Senator McCain has sought the support of this group, pledging that he would never raise taxes. This is why it is striking that the media has not paid more attention to Senator McCain’s health care plan. For a substantial segment of the population, this plan is likely to lead to an increase in taxes. The basic logic is that Senator McCain wants to eliminate the tax deductibility of employer provided health insurance and replace it with a $2,500 tax credit ($5,000 for a family). For most people with employer provided health insurance, this will end up being close to a wash at present. However this will change through time. The tax credit is projected to increase at the rate of inflation. Health insurance premiums have been rising much more rapidly. Suppose that an employer currently pays $7,500 a year for insurance. (That’s approximately what CEPR pays). If health care premiums rise at the rate of 7 percent annually (the rate that they have been increasing) then in 10 years, this premium will be $15,000. For someone in the 25 percent bracket, this would imply a tax deduction of $3,750. On the other hand, the size of Senator McCain’s tax increase will only rise with the projected rate of inflation, which is currently about 2.5 percent. In ten years this should raise the size of the tax credit to about $3,200. In this case, Senator McCain’s health care proposal would have raised our taxes by $550 (the $3,750 deduction minus the $3,200 tax credit). A $550 tax increase for a middle income family isn’t the biggest deal in the world, if the policy is otherwise sound (it isn’t), but it is inconsistent with a no new tax pledge. Senator McCain could of course change his formulas so that fewer people would face tax increases under his health care plan, but as it stands now, he does propose increasing taxes on a substantial portion of the population. This deserves some attention.
--Dean Baker
