The principal health care reform bills in Congress, particularly those in the Senate, make use in various ways of tax credits as a method of helping individuals or businesses to pay for health care costs which they will have to bear under the bills. This use of tax credits requires careful analysis if they are to actually do the job they are supposed to rather than being an illusion.
In general, while some tax credits actually do what they are supposed to, such as the $8,000 tax credit for first time home buyers, often they have just been a way for Republicans to funnel tax money to their wealthy contributors while pretending to provide a benefit to people generally. The fallacy in the use of tax credits in the current health care bills is that in most cases they were put in the bill on the assumption that the target populations pay enough in taxes to make the tax credits a big enough subsidy to cause to the recipients to pay for new health insurance benefits. Unfortunately, this is often not the case.
For example, giving small businesses, however defined, tax credits to encourage them to make cash payments for health care insurance for their employees is likely not to be of much help to those business. The cash payments for insurance represent a real cost to the business, while the tax credits are only a theoretical benefit whose usefulness depend on whether and how much the business pays in taxes.
Small business are generally run to provide a level of income to the owner-operators, not profits for the legal fiction business. For example, the cash flow generated by these business is generally the method used to value them rather than their income statement. The owner-operators have no need to generate large amounts of profits in the business itself because the owner-operators use the free cash to pay themselves. Profits, if there are any, only need to be enough to provide an adequate cash reserve. This is because allowing the business to make a profit only creates a tax liability for the business, which tax liability can be avoided by paying the owner-operator more in income or benefits. The business does not benefit from having taxable income.
As a result, lots of successful small business don't pay much, if anything, in income taxes, so tax credits are useless to them. Put another way, health care tax credits are only useful if the profits of the business produce a tax liability, after deducting the cost of employee health care insurance, which exceeds the amount of the tax credit per employee plus the amount of any other tax credits which the business may qualify for. This clearly would have to be calculated each year to determine if the tax credits are worth the cost of health care insurance since taxable income will change over time as will the cost of health care insurance. Thus the affected businesses won't have any idea whether the tax credits are a good thing or not till the end of the year. This is not likely to encourage any business except one with an annually high tax liability to be very interested in paying for health care insurance.
The value of tax credits to employees of small businesses is also questionable. In order for the 50% tax credit to help the employee pay for health care insurance, it must provide enough extra cash for the employee to reduce the costs of health care insurance to an amount which the employee can afford. These tax credit are based on the surely correct assumption that employees of small business often can't afford the $12,000 or more a year that health care insurance typically costs.
Thus the first question is how many of these employees have federal income tax liabilities each year which equal $6,000? Then the question is whether this additional $6,000 is enough of an incentive for them to pay $12,000 for health care insurance. And this calculation is only good for the first year and does not include the cash flow issue. Health care premiums are doubling every 10 years, so each year the employee has to decide if the every increasing cash cost of health insurance is the best use for that money. And finally, the income of these employees often varies with the number of hours works, the amount of their sales or other matters related to the general economy. So the tax credit may be a good deal one year but not the next. On the other hand, the tax credit will also go to employees who are making enough that they will buy health care insurance without the tax credit, in which case it's wasted money.
All of which seemingly argues for the simplified approach of taking the employer out of the picture and letting the employees buy health care insurance from a federal plan and having the federal government directly pay some or all of the cost based on the income of the employee. There does not appear to be any point in making small businesses and their employees run around making complicated calculations and having the federal government over pay, in some cases, for what can be accomplish more cheaply and easily by doing it directly.