Health Policy Is Vital to Tax Reform Policy

Today the House Ways and Means Committee is scheduled to hold a hearing on improving the competitiveness of American businesses. It should consider health policy as well as tax policy in its deliberations.

There is strong bipartisan support in Congress for cutting the corporate tax rate to improve competitiveness. If done in a revenue-neutral manner, as the Tax Reform Act of 1986 was, that simultaneously gets rid of inefficient tax loopholes that distort business decision making, this would be a good thing. But what is really holding back the international competitiveness of American businesses isn’t so much the tax code as our health system.

The United States is unique among major countries in that health insurance for the working population is provided almost entirely by employers.  And until the Affordable Care Act, they weren’t even required to do so; small businesses are still not required.

No one ever sat down and thought up this system; it came about by accident during World War II. Because of wage and price controls, employers couldn’t raise wages. But because so many young men were in the military and the large demand for war production, many businesses had an acute labor shortage.

To provide additional compensation to get the workers they needed, some businesses started offering health insurance on top of cash wages. Before the war, health insurance was rarely provided.

Although obviously a form of income to the worker, the Internal Revenue Service nevertheless ruled that it was not taxable, although businesses could still deduct the cost. This anomalous tax treatment was a fabulous tax loophole for both businesses and workers, especially at a time when tax rates were historically high.

Eventually Congress codified the I.R.S. ruling and we have been stuck with an employer-based health insurance system ever since. Although from time to time, politicians have suggested getting rid of the exclusion for health insurance and using the revenue to create an individually based health insurance system, such efforts have been short-lived and unsuccessful.

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Jeffrey R. Ungvary President

Jeffrey R. Ungvary