Tuesday, October 14, 2008

McCain's Hidden Tax Increase on the Middle Class

The majority of people who have health insurance in the US today get it through their employer. It's cheaper that way, because of economies of scale -- overhead for employer-provided health insurance is less than 15% of the premium costs, as vs. over 30% of premium costs for individual health insurance, because the insurance company has to send only one bill and process only one payment for dozens, hundreds, or thousands of employees, rather than having to bill and process payments for each of those employees individually. In addition, employers are allowed to take your health insurance premium out of pre-tax money, rather than post-tax money. So I buy my Kaiser Permanente socialized medicine health insurance through my employer even though my employer doesn't directly kick in money because this gets taken out of my pre-tax income and never counts towards my gross income for the year.

John McCain, however, proposes eliminating this tax break for health insurance (note: this link is to John McCain's web site, so the tinfoil hat brigade can't yell "liberal media bias!"). He proposes that if I want to buy health insurance through my employer then I should be taxed on anything over $2500. The problem is that as a late-middle-aged man, my KP premiums are well over $2500 per year. Indeed, the average employer-sponsored family policy costs $12,680 per year.

The net result is that John McCain's health care proposal comprises a gigantic tax increase on the middle class. The average middle-class family's taxes would go up by over $2,000 per year. Meanwhile, the average middle class family will get a tax break of only $1,444 per year according to a non-partisan Tax Policy Center report. John McCain wants to play a shell game, where he pretends to give you a tax break at one end, then takes it away at the other, unless you're Paris Hilton in which case you get hundreds of thousands of dollars in tax breaks for, uhm, being Paris Hilton I guess. John McCain's tax cut for the middle class averages only $319 per year in the first year, yet he will hike taxes by over $2,000 per year on those same families. Contrast that to Obama's real tax breaks for the middle class, which average 2.4%. Under Obama, my taxes (I am in the 4th quintile) would decline by an average of 1.8%. Under McCain, my taxes would be a wash -- McCain would give me a bigger tax cut up front, but take it right back out with this new health care tax.

Paris Hilton may benefit from John McCain's tax cuts. But you and I and any other ordinary middle-class citizen buying health insurance through our employer will pay more taxes under John McCain's plan. So if you're Paris Hilton, be sure to vote for John McCain. For the rest of us... hah!

-- Badtux the Economics Penguin

H/T to: Just An Earth-Bound Misfit: McCain's Hidden Tax Increase on the Middle Class


  1. So what is the weather like there?

  2. I think that McCain's plan is more for trying to get health insurance off of the employer's books. I'm sure that the insurance industry would benefit as well as they would then be able to charge a "fair" rate on a per individual basis.

    Personally, I don't like the fact that my health insurance is tied to me being employed (CORBA is a joke). I would like to be able to change jobs without having to change my insurance. Unfortunately, as you point out, this is not feasible under the current system.

  3. Terrant, my health insurance is not on my employer's books. I pay the full cost of my health insurance. It just happens to be purchased via my employer's group plan vs. being purchased individually, because a) I wouldn't qualify for individual coverage anyhow, and b) it's cheaper that way due to lover overhead costs, and c) because it gets taken out in pre-tax dollars rather than in taxable dollars.

    No, the whole point is to fuck up the middle class some more. That's all.

  4. to say nothing of how the $5K tax credit mcCain is proposing is as big a bullshit lie as school vouchers.

    go ahead, i dare you, go out, as an individual with $5K to spend and see what kind of fucking coverage you end up with.


  5. It is an attempt to shaft the middle class. I was just trying to point out another aspect of why his plan is bad.

    I get part of my premium paid by my employer. That's my point of view. From what I understand this benefit is not taxed. Under McCain's plan that benefit would be taxed as income. When that happens, what would the point be for employers that do offer a benefit to continue to do so? Why not just drop the benefit and give the employees a raise that really isn't a raise? That is what I mean by taking it off the books.

    In the short term it would probably be a wash or as my deranged pro-McCain coworker noted a small gain. In the long term since health care premiums have outpaced inflation and wage increases, the middle class will end up paying more and more which will cause more people to lose coverage in the end.

    If McCain's plan happens, the only advice for the middle class would be BOHICA.

  6. No, it wouldn't be a wash. McCain is planning to give a $5,000 tax credit -- for a $12,000 benefit (average cost of a family plan). What that means is that you end up paying taxes on the remaining $7,000 that it takes to buy insurance, whereas currently, the entire $12,000 benefit gets taken out in pre-tax money and you pay taxes on none of it.

    So yes, even if your employer gives you a raise of $7,000 for the remainder of your health care benefit that your employer is no longer paying -- *you pay taxes on that $7,000!*. That is what I calculated the taxes on above, at McCain's proposed tax rate for the middle class.

    In short: The average middle-class family ends up paying $1,500 *MORE* in taxes under McCain's combined tax-and-health plans than they currently pay now. So you want to pay more taxes? Vote John McCain!

    -- Badtux the Math Penguin

  7. You are 100% correct in this entire post. You just missed 1/2 of the bad news.

    From www.johnmccain.com
    "While still having the option of employer-based coverage, every family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance. Families will be able to choose the insurance provider that suits them best and the money would be sent directly to the insurance provider."

    So middle class America is going to pay taxes on the ENTIRE $12,000 and $5,000 is going to the insurance companies.

    Or at least that is the way I read it, please correct me if I am wrong.

  8. The devil is in the details, but generally tax credits are not treated as taxable income by the tax codes. Still, the tax credit is laughably insufficient to buy health insurance for the average family, and the money above that which is required to buy that health insurance is very definitely taxed under McCain's plan regardless of the details.

    - Badtux the Tax Penguin

  9. Isn't the idea that employers will pay their employees the "extra" cash as part of wages sort of... well, silly? I mean, really? If they're not made to, what's their incentive?

  10. James, the employer is already effectively paying the employee this amount, just in pre-tax dollars that never get tagged onto the employee's gross income. It's fair to say that any employer already dishing out $12K/year for their employees to have insurance will continue to do so as part of their compensation package even with the McCain plan -- except then it'll be taxable as income (minus the $5K tax credit). McCain's plan does not outlaw employer-provided health insurance. All it does is make it taxed income -- even if it never shows up in the employee's paycheck as income because, duh, it went to the insurance company.

    - Badtux the Compensation Penguin


Ground rules: Comments that consist solely of insults, fact-free talking points, are off-topic, or simply spam the same argument over and over will be deleted. The penguin is the only one allowed to be an ass here. All viewpoints, however, are welcomed, even if I disagree vehemently with you.

WARNING: You are entitled to create your own arguments, but you are NOT entitled to create your own facts. If you spew scientific denialism, or insist that the sky is purple, or otherwise insist that your made-up universe of pink unicorns and cotton candy trees is "real", well -- expect the banhammer.

Note: Only a member of this blog may post a comment.