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I have very much enjoyed the discussions around healthcare generally and the high-cost 'excise' tax specifically. I would suggest this is precisely what happens when we don't resolve the clashes in our fundamental values first, before trying to create legislative compromises.

Simply put, we haven't agreed on what's fair, on who should pay for healthcare. Either healthier, wealthier, and younger people have a societal responsibility to subsidize sicker, poorer, and older people, or they don't. I don't care which belief you have; I just care that you have a consistent belief.

Personally, I happen to think healthcare is a human right. Thus, like voting rights and access to the courts, I believe it is something that has to be actively guaranteed by the government. The employer-based system, by definition, is inequitable. It favors larger organizations over smaller ones, and smaller ones over the self-employed and unemployed. It favors high income workers over average income workers, and average income workers over low wage workers. The employment status of someone should have zero impact on one's access to healthcare.

However, I understand the practical reality that national health insurance is the next step of healthcare reform, not the current one. In the meantime, I mainly just hope we don't end up gutting the Social Security Act worse than when we started. All the discussions about why we shouldn't implement national health insurance are exactly the same as why we should privatize Medicare/Medicaid/SCHIP/etc. What I want to do is put the discussion of the 'Cadillac' tax into the larger context it deserves, that of total rewards, the complete package of wages and benefits.

All wages, bonuses, tips, commissions, stock options, life insurance payments, health insurance premiums, dental insurance premiums, disability insurance premiums, retirement contributions, auto loans, home loans, tuition reimbursement, and all other kinds of payments made by employers to employees are payments made because of the labor of the employee. We can discuss whether the absolute levels of compensation are appropriate or not, we can discuss whether different kinds of compensation have different effects on behavior, and so forth, but the important realization is that it's all the same. It's all compensation.

As such, I'm making a rather radical, but also, rather mundane, argument: it should all be treated the same by our income tax code. The purpose of taxation is to raise revenue; other purposes should be handled by agencies other than the US Treasury.

Singling out 'high-cost' health insurance premiums specifically for taxation is extremely inequitable and destabilizing, in my opinion. In that sense, I'm firmly in the camp that says the House approach is significantly better than the Senate approach.

But the principle behind the excise tax actually is at once both progressive and capitalist. It's a principle that disagrees with the idea that employers should be providing 'benefits' separate from wages, that there's a distinction between financial compensation and nonfinancial compensation. Effectively, providing tax breaks to certain types of compensation unfairly benefits the employees of large firms who are best able to negotiate ways of maximizing those types of compensation. Typically, that's regressive and ineffecient in two ways. First, it disproportionately favors the largest firms, and second, it disproportionately favors the most highly compensated employees within those firms. Not in every single case, but broadly speaking.

In fact, these types of incentives are so strong that we have to have detailed, onerous regulations on employers that have nothing to do with the core businesses in which they compete. There are entire subspecialties of HR and Legal professionals who deal with specific laws like ERISA (the Employee Retirement Income Security Act) and more generally how the Internal Revenue Code affects employers and employees receiving various types of benefits. For those who like a little concrete detail to go with their abstract claims, I'll elaborate on three examples of what I mean (and these are brief, grossly simplified summaries).

  1. If you're an organization implementing a wellness program trying to limit healthcare costs and improve productivity, you want to encourage certain types of outcomes that are correlated with a healthier lifestyle and thus lower health insurance costs. But, you can't reward people for actually achieving outcomes. You can pay for membership at a health club, but you can't attach any outcome related to a standard related to a health factor (like, say, weight) unless you specify alternative standards and methods for waiving the standard. You can pay for employees to go through programs to quit smoking, so long as quitting smoking isn't a requirement - if you want to provide financial incentives for people who actually don't smoke, there's a whole additional set of criteria, including making arrangements for people for whom it's unreasonably difficult to quit smoking.
  1. [continued] Also, it's illegal to discriminate against certain protected classes, like people over 40. Well, age happens to positively correlate quite closely with health care costs, and negatively with desired outcomes to reduce healthcare costs. So employers have to design demographically appropriate wellness programs so as to make sure they don't discriminate. It's cheaper to insure a 24 year old man than a 24 year old woman (men don't tend to get pregnancy complications). It's cheaper to insure a 24 year old woman than a 44 year old woman. And it's cheaper to insure a 44 year old woman than a 64 year old woman. Not only can you not do anything in the wellness program that directly favors people under 40, you also can't do anything that correlates with anything that favors people under 40, because that would, by definition, create an outcome that would discriminate against people over 40. And you have to actively test for these kinds of potential discriminatory outcomes; 'I didn't know' isn't an acceptable defense. We create phrases like 'similarly situated individuals' to navigate the bizarre landscape of giving employers competing mandates: to both cut health care costs and to not cut health care costs.
  1. The maximum 2009 contribution to a 401(k) retirement plan, a plan that allows an employee to defer wages for the sole purpose of enjoying tax deferred growth, was $22,000 (including the discrimination, which is allowed in a positive direction, for those over 50). It doesn't take an economist to understand that the vast majority of workers don't have an extra $22,000 to defer to take full advantage of the tax break. And there's an even bigger benefit high income folks receive: not only can wealthier individuals contribute more, but they also receive higher tax breaks for every dollar they contribute because what's relevant is the marginal tax rate. If someone in the 15% tax bracket puts in $1,000, they defer $150 worth of federal income taxes. For the same amount of investment, someone in a 25% tax bracket defers $250. And someone in a 35% tax bracket defers $350. Now, Congress and the IRS aren't stupid, so they also include some regulations designed to prevent abuse by highly compensated employees, which adds another level of regulation and testing to the plans.
  1. Section 125/cafeteria/flex benefit/reimbursement plans are quite similar to retirement accounts conceptually; you put in pre-tax dollars to be taken out at a later date. The key difference is that instead of a long time horizon, these accounts are emptied annually, instead of withdrawals being taxed, withdrawals are tax-free, and instead of spending the money however you want, they come with extremely specific restrictions on the types of expenses that are eligible. For example, if it is covering out of pocket medical expenses, they have to be your out of pocket medical expenses. Stash a bottle of Tylenol you bought with money from the account at work and share one pill with a coworker who has a headache? You just broke the law. On a trip with your girlfriend and she needs you to run out and buy her some more allergy treatments? Don't submit that as a reimbursement. And don't tell the fundies, but both birth control and condoms are eligible expenses. Of course, you have to attest that the condoms are for prevention of disease, which begs the interesting question, are there uses of a condom which are not eligible? The general rule on over the counter medications is that they're okay if bought to alleviate or treat an injury or disease. That's brilliant; that leaves out slightly important categories when it comes to healthcare like preventing injury and disease and products which promote general good health. I kid you not, dental treatments are eligible, toothpaste and toothbrushes are not. Weight loss programs for a specific medical condition are eligible, weight loss programs to promote general health are not. Then there are other categories, like dependent day care expenses, which require careful planning because they can trade off with other tax breaks which might be more beneficial related to child and dependent care. And at the end of the day, there are the same problems with higher income folks getting a bigger tax break because they're in a higher marginal tax bracket and extra regulations on employers trying to alleviate abuse by forcing them to do testing and impose caps for highly compensated individuals and so forth.

If we don't like the reality of wasting tremendous resources managing benefit programs, the much more efficient mechanism of dealing with disparities, both incidental and intended, is to eliminate the loopholes that hollow out the progressive nature of income taxation in the first place. If you haven't thought much about employer-based benefits before, it's worth exploring until it really sinks in. You may propose a different solution, but at least we can all be on the same page about the problems caused by using the tax code to treat different kinds of compensation differently. It's both inequitable, in the sense that higher income people benefit more than lower income people, and it's inefficient, in the sense that it requires a lot more regulations on businesses that wouldn't be necessary if benefits were separated from employment. After all, are car makers or computer manufacturers or software companies or architecture firms or retailers really in the business of providing financial planning? If so, it's even worse: then that's hugely discriminatory against people at smaller employers, the self-employed, and the unemployed. Does your local mom and pop store have an HR staff member dedicated to employee benefits? They probably don't have a dedicated HR staffer period.

In short, both camps are correct on the excise tax. It is a tax on 'Chevy' plans as well as 'Cadillac' plans - otherwise, it wouldn't do much. That's the whole point of group health plans; the cost is based on the group, not the individual. Healthcare spending does trade off against wages - personnel costs are the biggest expenses at organizations large and small (and more philosophically, all non-capital costs are labor costs; the Earth doesn't charge a monetary fee for extracting resources or occupying land). Of course, there's no reason to conclude that the distribution of healthcare savings would be to simply raise wages by $X per covered worker. The distribution of wages is more unequal than the distribution of healthcare benefits, not less. Where I would jump in to all of this is that none of this is unique to healthcare. Like most other loopholes in our income tax system, the tax breaks for employee benefits are regressive. They disproportionately benefit those with the highest incomes and most stable financial situations.

In addition, those opposed to the excise tax are correct that it is a tax based on cost, not benefit. Here, we actually have a very useful comparison. Currently, the IRS allows a tax exemption for up to $50,000 in compensation in the form of life insurance.

IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes.

Well guess what? Just like health insurance, life insurance costs are positively correlated with age. So let's say your employer has a group term life policy whereby the coverage amount is 3 times annualized base salary. An employee who makes $40,000 a year would thus have $70,000 worth of insurance coverage subject to taxation ($40,000 x 3 - $50,000 = $70,000). An employee who makes $30,000 a year would have a taxable amount of $40,000 ($30,000 x 3 - $50,000 = $40,000). But the $30K employee doesn't necessarily pay less in taxes. If they're significantly older than the $40K employee, they're likely to have a higher tax liability even though their benefit is lower because the tax is based on the cost, not the benefit.

Let's bring this back to the beginning. I started by talking about fundamental beliefs. This is important because there are two fundamental ways of approaching financial planning like retirement and insurance. One is to view it as an individual responsibility, where you pay based upon your risk profile. For example, this is how we do vehicle insurance in the US. People with poor driving records pay more than people with excellent driving records. People in certain zip codes pay more than people in other zip codes. Young men pay more than young women. Single men pay more than married men. People who don't want to drive don't have to buy insurance at all. And so on and so forth. The other way of approaching this is to pool risk, to operate as a group instead of as an individual. Medicare works this way (or at least, 'traditional' Medicare, that implemented in the 1960s). Everyone pays the same flat payroll tax, and then everyone pays the same nominal flat monthly premium, whether you need heart surgery or not, whether you live to be 70 or 90, whether you exercise regularly or spend your free time browsing the internet.

The employer-based benefits system is the worst of both worlds. It doesn't completely pool risk (only the Federal Government can do that). Instead, it create various groups with disproportionate bargaining power, with 'small businesses' getting the short end of the stick while the impoverished and unemployed are mostly forgotten. But, the system also overpays for benefits. Many people would prefer to take their benefits in cash wages rather than insurance benefits were it not for the massive tax loopholes involved. If given a choice, some would buy less health insurance, while others would buy less life insurance, while still others would put less money into retirement accounts.

So, I'm not opposed to eliminating the special tax treatments for employee benefits, particularly if that includes the special tax treatments for certain kinds of income. My point is that if we're going to consider it, it should be a comprehensive revision of the tax code, not something that is specific to high-cost group health insurance plans.

If you're not prepared to do that, that's fine. Just know that if the argument isn't a principled one for an 'excise' tax on everything, it's not very persuasive, at least to me. Rather, it seems like just another way to shift the tax burden at the margins from the wealthy to the middle class. And it's particularly interesting on the political front since taxing health care benefits came up specifically in the 2008 elections.

The guy advocating the taxation lost. And the guy who won said he'd veto a bill that included taxation of employee health benefits.

On PBS's “Newshour with Jim Lehrer,” the president noted that McCain (R-Ariz.) “proposed to eliminate completely the exclusion on the taxation of health benefits.” McCain proposed taxing all employer-provided health benefits in exchange for a tax credit taxpayers would receive to buy insurance.

“I had said that this would be the wrong way to go because it would be too disruptive. Essentially employers would stop providing healthcare,” Obama said.  “John McCain had suggested everybody gets a tax credit, but the concern was that the tax credit wouldn’t be sufficient to actually buy health insurance on the market. So I am still opposed to that and would veto a bill if that was the approach.”

And that's about as succinct a description as is possible of the enjoyable irony that the old white guy was proposing a radical change that the young change agent thought was too disruptive...until it wasn't. When I propose taking it one step farther, not just taxing 'high cost' plans in one kind of benefit, but ending the whole system of special tax treatments for favored types of compensation, am I being too radical, or too conservative? Am I supporting Democratic ideals of progressive taxation or Republican ones about less regulations on businesses? Would the President veto my suggestion or embrace it? Our political system really is fascinating sometimes.

Crossposted at The Seminal at FDL.

Originally posted to washunate on Thu Jan 14, 2010 at 06:36 PM PST.

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Comment Preferences

  •  the tax code is related to a lot of things (8+ / 0-)

    from sprawl to healthcare. The GOP has spent a generation undermining progressive taxation. While we're throwing tax ideas around, let's make sure at least a few of them are excitingly bold for the times.

  •  But People Have Committed Lifetimes to the Presnt (5+ / 0-)

    scheme. It arose during WW2 when wages were frozen, so it was a way for labor to get something that wasn't defined as taxable.

    It's evolved since with unions and with govt workers to sacrifice income in exchange for coverage. Many workers are in health-risky occupations, others come to gov't careers because of health issues of themselves or dependents that keep them from being competitive at higher income in the private sector.

    I'm one of those. I worked in education for about 40% less than the private sector because of health problems that go back to the 1960's. Now I'm told I have to pay for that sacrifice.

    These middle class people are not corporations or rich professionals who can swap finances around from one category to another.

    You have people who would need years to adapt, and millions of late age workers and retirees who are stuck. The only result would be reduced coverage for the people who need it most.

    Codifying the concept of "excess care" is a monstrously rightwing policy for the Democratic party to enact.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Thu Jan 14, 2010 at 06:44:47 PM PST

  •  Speaking of taxing all compensation equally- (7+ / 0-)

    Wages up to $106,500 are subject to social security tax.  Any amount above that is exempt.  So, an person making a salary of $106,500 has 100% of their income subject to social security tax, while a person who's salary is $10,650,000 has only 1% of their income subject to tax.  Fair, no?
    I know of a husband/wife team who own a non-medical home care service.  She takes a salary of $12,000 per month ($144,000).  Only $106,500 is subject to the social security tax.  He, although working there full time, considers himself a "volunteer" and takes no salary, thus he's not subject to any social security tax.  Had they each received a salary of $72,000, the whole $144,000 would be subject to social security tax.  A waste of money, in his eyes, yet perfectly legal.
    And we wonder why the system is heading for the crapper.

    Ahhh, the IRS Form 1099-C. It's so...so...forgiving!

    by Taxmancometh on Thu Jan 14, 2010 at 06:56:45 PM PST

    •  I'd love to make our trust funds (2+ / 0-)
      Recommended by:
      Angie in WA State, Taxmancometh

      progressive. But at least making OASI and DI a flat tax like HI would be a great improvement.

      I'm pretty sure that's one of the changes that will get made in the next couple decades because it's one of the easiest ways to make the math work (assuming we don't privatize Social Security, which is of course another way of making the math work).

    •  Since Social Security is really deferred savings (2+ / 0-)
      Recommended by:
      craiger, Taxmancometh

      ...with a cap on withdrawals the cap on deductions makes sense to me. I'm cool if it gets raised but it does make sense.

      HR 676 - Health care reform we can believe in - national single-payer NOW.

      by kck on Thu Jan 14, 2010 at 07:18:09 PM PST

      [ Parent ]

      •  No it isn't (3+ / 0-)
        Recommended by:
        happy camper, Taxmancometh, washunate

        It's not in the least a savings plan. It's social insurance.

        It is even harder for the average ape to believe that he has descended from man. --H.L. Mencken

        by denise b on Thu Jan 14, 2010 at 07:21:21 PM PST

        [ Parent ]

        •  There's retirement, disability, and SSI (2+ / 0-)
          Recommended by:
          craiger, Taxmancometh

          ...and I should have been more specific. I was only talking about the retirement part which is guaranteed. It is insurance in that it's averaging and spreading the risk over a large number of people. But it seems to me to be also like a defined benefit in that as long as you contributed you know you'll get it back. If you live long enough. It doesn't get invested and grow like a pension though.  I can see your point. It's kind of a hybrid in my mind.  

          HR 676 - Health care reform we can believe in - national single-payer NOW.

          by kck on Thu Jan 14, 2010 at 07:40:55 PM PST

          [ Parent ]

          •  Retirement from whom? (0+ / 0-)

            If you mean pensions, they are virtually non-existant today.  If you mean 401Ks, they have lost almost half their value and most people don't make enough to save enough to pay them enough to see them through enough of their old/retirement age.  Assisted living facilities cost 50K a year.  I don't know of one retiree with enough income to afford them.  

            SSI and disability have nothing to do with retirement.  Totally different kind of safety net. Getting on to SSI takes a lawyer, multiple tries, and pays next to nothing.

            They're asking for another four years -- in a just world, they'd get 10 to 20. ~~ Dennis Kucinich

            by dkmich on Sat Jan 16, 2010 at 03:46:08 AM PST

            [ Parent ]

          •  It is insurance and you are not guaranted to (0+ / 0-)

            get anything back. The benefits are not defined; they are indexed but they could be varied. That's why people don't want those benefits to go to a committee to be altered.

            The most valuable part of Social Security is in that part that is disability insurance for the worker and dependent support if the worker dies.

            Basically, SS just is insurance against being destitute. The situation is that for many, it is all the income they have. But is wasn't designed as a retirement fund.

            We are in a time where it is risky NOT to change. Barack Obama 7-30-08

            by samddobermann on Sun Jan 17, 2010 at 03:57:01 AM PST

            [ Parent ]

        •  But my point about why the cap makes sense (2+ / 0-)
          Recommended by:
          craiger, Taxmancometh

          ...stands.

          HR 676 - Health care reform we can believe in - national single-payer NOW.

          by kck on Thu Jan 14, 2010 at 07:41:42 PM PST

          [ Parent ]

        •  More like an annuity, but OK, call it insurance (1+ / 0-)
          Recommended by:
          Taxmancometh

          An insurance policy has coverage limits and it has premiums that are commensurate with the underlying risk and coverage limits.  Uncapping Social Security withholding would be like designing an insurance policy with a $20K coverage limit while charging premiums possibly exceeding $20K, based on income rather than risk.  Given a choice, any rational actor would prefer to self-insure.

          There is no logical reason to have a separate Social Security tax, if that's the goal.  Better to eliminate the Social Security tax and just jack up the income tax rate.  Otherwise, you've got this special, earmarked tax hanging out there reminding high earners that they're getting nothing for something, thereby destroying political support for the entire program.

          "They let 'em vote, smoke, and drive -- even put 'em in pants! So what do you get? A -- a Democrat for President!" ~ Faster, Pussycat! Kill! Kill!

          by craiger on Thu Jan 14, 2010 at 11:20:52 PM PST

          [ Parent ]

    •  Taxman would they have a higher benefit? (1+ / 0-)
      Recommended by:
      craiger

      Because there is a cap on contributions there is also a corresponding cap on Soc Sec retirement pay. As it is lower wage earners receive a much better "deal" on their Soc Sec retirement benefits. If there were no cap on annual contributions would you support increasing the benefits to keep similar ratios in place?

      "let's talk about that"

      by VClib on Thu Jan 14, 2010 at 08:46:47 PM PST

      [ Parent ]

      •  Actually, no (0+ / 0-)

        Higher benefit that is.  Both parties would receive maximum benefits through their retirement.  

        I'm in favor of raising the limit on wages in exchange for a higher benefit when retired.  Social Security benefits are taxable, up to 80%, when you income plus one-half of your benefits exceed $32,000 if single and $64,000 if married filing jointly.  So, if you recieve a higher benefit, you're probably more affluent and your benefits would be taxed anyway.

        Ahhh, the IRS Form 1099-C. It's so...so...forgiving!

        by Taxmancometh on Fri Jan 15, 2010 at 06:05:10 AM PST

        [ Parent ]

        •  taxman - I am confused (0+ / 0-)

          You answered no to my question, but then state that you favor raising the limit in exchange for a higher benefit when retired. So I am confused. You also suggest that retirees would not want a higher benefit because it would likely be subject to income tax. It seems unlikely that retirees would not welcome the extra income as the highest marginal rate is likely to be well under 50%. Why wouldn't people want, and expect, a higher benefit if we significantly raise or eliminate the cap?

          "let's talk about that"

          by VClib on Fri Jan 15, 2010 at 08:57:02 AM PST

          [ Parent ]

          •  Sorry...let me clarify (2+ / 0-)
            Recommended by:
            VClib, craiger

            As of right now, they would both receive the same benefit b/c Social Security has a cap.

            However, I agree that they should raise the cap in exchange for granting higher benefits upon retirement.  

            80% of Soc. Sec. benefits are subject to tax if your income exceeds the threshold stated above.  Thus, people who contribute more to the system are probably more affluent than the rest and they would pay more tax on the benefit than the average citizen.

            Hopefully, this helps.  :)

            Ahhh, the IRS Form 1099-C. It's so...so...forgiving!

            by Taxmancometh on Fri Jan 15, 2010 at 10:59:39 AM PST

            [ Parent ]

    •  If/when they divorce the husband is screwed! (0+ / 0-)

      Nobody likes to think about these things.... until it happens. There is a reason why Unca Sam keeps every individual's 401k account separate.

  •  All of it or none of it. (0+ / 0-)

    It has to be this way or it shouldn't exist at all.

    If it isn't perfect then what is the point?

  •  Very good diary (1+ / 0-)
    Recommended by:
    washunate

    I don't agree with all of your suggestions but I like your diary. Thanks for drilling down into these descriptions because I think many people need to hear them.

    I would personally regret the expense but an across the board tax including capital gains seems fair.

    However, while I agree with your principle of income tax equity for all kinds of compensation, I believe we need to start thinking about decoupling health and retirement benefits from employment. Assuming Gooserock's valid concern is accommodated somehow such as near-retirees being grandfathered, the current system is collapsing and unevenly applied. We can expect to see more employers dropping benefits as labor becomes increasingly available and cheap. Most of my career I enjoyed a matching dollar for dollar defined benefit pension plan. Not many of those around these days but there are some. We need a new design that is portable, leaner wrt doing more with less, equitable, and more competitive globally. And it needs to be centrally administered and yes, tied to compensation to encourage if not require full employment.

    Lastly, your initial point about first establishing the principles is critical. Wherever the government's responsibility is not explicitly defined in the Constitution (like national defense is) we have endless disagreement. For instance, Social Security is not defined anywhere as to its  absolute requirement (i.e., no one knows what to expect, the GOP keeps trying to kill or diminish it). Either our social spending is amended to the Constitution or it is legislated clearly such that it can be relied on for generations.

    HR 676 - Health care reform we can believe in - national single-payer NOW.

    by kck on Thu Jan 14, 2010 at 07:12:32 PM PST

    •  i'm curious, do you think anyone is thinking (0+ / 0-)

      along more systemic lines? Anyone, I mean, in policy/political circles? I very much agree that the problem is basically that the system is collapsing. What surprises me is that it really doesn't seem like people are talking about what to do about it at any kind of systemic level (other than the privatizers who just want to make it every man woman and child for themselves).

      It's like we're just waiting to wake up one day and realize that pension and healthcare plans are now broke.

      This is what has really interested me about the discussion about the excise tax. It's like the taxation angle really hasn't been thought about, yet, the question of who pays is one of the central questions of things like retirement and healthcare. An excise tax on high cost plans is basically a tax on middle age folks, those between youth and Medicare, and people with ongoing medical issues. If that's who we want paying for health insurance, well, then there's really no problem with the excise tax.

      •  I hear snippets but HCR has the spotlight (1+ / 0-)
        Recommended by:
        washunate

        Sadly, I suspect it will boil up into the same two policy camps as with health care - the Rubinites (Hamilton Group types) versus the Petersens (Kill-it-All) with a Third-way-type like the single-payer systemic transformation contingency left out.

        Yes, I'm concerned, for my country, our children, especially after how health care reform has been mitigated. Until these programs are fixed it will only add to the loss of savings and it will be the post-Boomers who will really suffer the worst.  Yet based on HCR the Pete Petersens Kill-it-All types have the advantage.

        HR 676 - Health care reform we can believe in - national single-payer NOW.

        by kck on Fri Jan 15, 2010 at 06:13:19 AM PST

        [ Parent ]

  •  Scrap preferential tax rates on dividends (3+ / 0-)
    Recommended by:
    Inland, washunate, Chicago Lawyer

    and capital gains. That would really end the elite's tax holiday that Bill Clinton started and Duhbya compounded.

    "These old Wall Street boys are putting up an awful fight to keep the government from putting a cop on their corner." - Will Rogers

    by Lefty Coaster on Thu Jan 14, 2010 at 07:24:44 PM PST

  •  A couple of observations (0+ / 0-)

    You stated that the "purpose of taxation is to raise revenue; other purposes should be handled by agencies other than the US Treasury."  There are of course reasoned arguments by those who would disagree with this assertion.  An example is that we as a society believe that making charitable contributions promotes the common good; thus, because we wish to encourage the making of charitable contributions, we as a society have chosen to have the US Treasury give an income tax deduction to those of us who make charitable contributions.  Historically, congress has long used the tax code to encourage or discourage behavior, two other examples being the deduction for mortgage interest paid on a principal residence to encourage home ownership and the above the line IRA deduction to encourage savings for retirement.

    Technically, loans are not compensation.  If a worker could get a loan from a bank at 6% but his employer gives him a loan at 5%, then you could make a reasoned argument that the 1% difference in interest is a form of compensation.  But the principal is just a loan and not compensation; and if interest paid on the loan is not below market, then it's just interest and not compensation.  Technically.  Of course if interest is not paid and/or the principal is never repaid, then it was never a loan in the first place.  And if the terms are below market, then the below market aspects of the loan could be valued as compensation.

    •  I'm curious, do you support those assertions? (0+ / 0-)

      Personally, I think the examples you cite are great examples of what's wrong with the tax code.

      There are other ways of incentivizing charitable donations and retirement savings that are both fairer and more effective. There are other goals besides home ownership that are worthwhile, like affordable housing.

      I certainly understand that a lot of people like tax breaks. What I would argue is that just because there's a tax break for x doesn't mean it's the best way of improving x. And it often has negative unintended consequences (like home subsidies encouraging McMansion sprawl).

      •  I don't guess I look at the question in that way (2+ / 0-)
        Recommended by:
        Clues, craiger

        I'm a CPA, and I do income tax returns.  These days I tend to wish that congress would simplify compliance rather than make if more complicated.  I tend to think that people shouldn't have to pay other people to figure out how much income tax they owe.  But that isn't likely to happen.  It seems to me that income tax law is intrinsically tied by congress to policy.  When the Republicans are in power, oil companies may receive better depletion rules; and when Democrats are in power conservation easements may be made more attractive.  I'm just trying to complete increasingly complex returns as quickly and economically as I can while trying to be as thorough and accurate as I can.  In light of our government's failure to enact meaningfully significant change to overhaul our broken healthcare system this past year, at a time when the chances for change were highest, it seems highly unlikely that a significant overhaul of the tax code, or any meaningful change in the way congress views its use of the tax code, is possible.  Thus my assertion that others will make reasoned arguments that differ from yours as to the "purpose of taxation"; and many of those people will be congresspersons and the lobbyists that support them.  But working within the system, there will also be those who will try to use the tax code for social and environmental justice.  An example here will be tax credits for fuel efficient and low-carbon automobiles, and photo-voltaic systems for home energy production.  So, while I may wish that the tax code was overhauled to make it simpler, this coming year I'm actually going to be hoping that congress will use the tax code to enact meaningful climate change legislation.

        •  Amen, David. The tax code is the simplest and (0+ / 0-)

          clearest, most understandable way to affect behavior. (I'm not talking about its overall complexity) Desired change can be implemented quickly without having draconian mandates that can't be applied to all equitably.

          The idea of giving up the tax system's role in implementing policy decisions and just let it be for raising revenue is absurd. It is a powerful tool for influencing behavior; it's carrots and sticks.

          One example was when we had the real gas and oil shortages in the 70's a tax deduction/credit for insulation and other weatherization was added to the code.

          The response was so heavy and quick that there were shortages of the dreadful roll batting.

          But that (with speed limit changes) reduced the nation's use of oil and gas almost immediately. If we had mandated people put insulation in their house there would have been a revolt. And millions would have been too poor to comply.

          Now what Obama is doing through the stimulus money is giving a share to each state to provide free weatherization to the homes of the poor. It also encourages training programs to give jobs to unemployed young people. These are the folks that need it the most but that the tax system won't reach. So the system can't work that way on them.

          What about the Earned Income Credit? Would you do away with that???

          Loopholes are only loopholes when they don't benefit or influence you.

          We are in a time where it is risky NOT to change. Barack Obama 7-30-08

          by samddobermann on Sun Jan 17, 2010 at 04:31:16 AM PST

          [ Parent ]

  •  An interesting proposal came out of the (0+ / 0-)

    informal conference today, namely the capital gains, unearned income, be subject to the Medicare tax, just like earned income. Since so many people live on it. Anybody have thoughts on that one?

    •  that becomes slightly difficult (0+ / 0-)

      to the extent that it expands a 'payroll' tax beyond payrolls. One of the things that makes the FICA system work so well is that it's all automatic; employers just take care of it as part of the payroll process. Since capital gains aren't compensation from an employer, that would make a lot more tax filers have to calculate a separate tax from their income tax return.

      That's not impossible; independent contractors have to do that right now. I would just rather raise the existing payroll tax a tenth of a percent (or whatever would be the same amount of revenue) than create a new kind of tax that people would have to calculate.

      Now, if that was part of a larger tax movement on capital gains, that could be interesting. Capital gains get special tax rates compared to the normal income tax tables, capital gains are excluded from Social Security proper as well as Medicare, and there are some kinds of capital gains which aren't taxable at all. Just adding a Medicare tax would seem a little odd to me, but if we simply treated capital gains the same as wages, then that would make a lot of sense.

  •  My issue with your proposal (1+ / 0-)
    Recommended by:
    ozsea1

    is largely with the scope of your vision.

    Of all the places for tax reform to happen, you've chosen the smallest and poorest segment of the economy to tinker with.

     title=
    My position on this is that any tax relief enjoyed by the bottom percentile is good for all working Americans and should not even be considered for removal until the gluttonous fat parts of the pie have been reformed.

    Much of that fat part of the pie enjoys a very low capital gains tax rate, and numerous shelters and loopholes.  On the other hand, some of the people who would be hit by your reforms have a MUCH higher tax rate, and very few ways to shelter any income from taxes.  The fact that there are people with even fewer ways to shelter their income should not blind you to the fact that in the greater scheme of things, everyone who is not in the fat part of that pie is being taken advantage of.

    If the end goal of health insurance reform is to get decent insurance for everyone, I really don't understand how taking away decent insurance for some working Americans gets us any closer to that goal.  

    •  Not the way I understood it (1+ / 0-)
      Recommended by:
      washunate

      As you say, "much of that fat part of the pie enjoys a very low capital gains tax."

      Ain't it income?

      Make it a package deal - put it all in there.  All income subject to income and social security tax, including capital gains, no limit.  That ought to net a bit.  Mr. Hedge Fund fat cat will bankroll hundreds of widows.

    •  Well, I'm slightly opinionated about taxation (0+ / 0-)

      You can read a more comprehensive proposal here.

      Of all the places for tax reform to happen, you've chosen the smallest and poorest segment of the economy to tinker with.

      First, I didn't choose to attach taxation to healthcare. We could finance the war in Afghanistan by removing tax exemptions on employer health insurance plans, too. It all goes into the same pot. I disagree with a political process that forces some things to be 'deficit neutral' while other things are funded without regard to costs. Yet, even with the 'adults' in charge, that is still the political world we inhabit.

      Secondly, more substantively, compensation is not the smallest and poorest segment of the economy. Yes, total existing wealth is of course going to be larger than annual compensation, but we have a federal tax system that is based largely on taxing new wealth, not existing wealth. We tax income, not wealth. We tax capital gains, not capital ownership. And so forth.

      I'm not sure shifting from an 'income' tax system to a 'wealth' tax system would work very well, but I'd be eager to hear your proposal.

  •  You haven't mentioned the biggest tax inequality (1+ / 0-)
    Recommended by:
    washunate

    Great article- but you missed the biggest problem with the current tax code: A person who has job based health care gets to pay for that insurance premium using pre-tax dollars. Whereas another person who works at a job without healthcare- he has to pay for his insurance premiums with post-tax dollars. This is a glaring inequality.
    I agree with your conclusion though- all benefits, including healthcare, should be decoupled from employment. All compensation in the end should be taxed.

    •  That's the biggest inequality? (0+ / 0-)

      Not by a long shot.

      Try capital gains taxes for a start.

      Then try reading last year's article by Reuters that said

      The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.

      Then how about the tax breaks awarded to people with children?  Those are huge.

      How about the inequality of property taxes for childless couples?

      What about tax breaks for marriage?  (Especially considering that a sizeable segment of our population is legally forbidden from ever aquiring those)

      What about all the people who inherit small sums of money?  Shouldn't they pay taxes on those if the millionaires have to pay taxes on the millions they inherit?

      Honestly, if you think that some working schmoe who gets healthcare from his employer is the biggest tax inequality in this country, I'd like some of what you're smoking.

      •  biggest inequality in the context of health bene. (0+ / 0-)

        I meant to say "biggest tax inequality in the context of healthcare and benefits" Since this diary was narrowly focused on the subject of tax treatments of employment healthcare & benefits- I thought that was understood.
        Anyways- what is with the hostile tone? We are on the same side. You can disagree with me without saying things like 'what are you smoking', etc.

        •  If you think taxing working people (0+ / 0-)

          on their health care benefits puts us "on the same side", you're mistaken.

          I'm sorry you read my tone as hostile.  It's more exasperated.

          I really can't believe that people who consider themselves progressives want to set working American against working American in this way.  This healthcare bill is crap, frankly, although there are little goodies here and there for various groups.  I'm attempting to be happy that some people are getting some things out of it.  If I don't get a subsidy, will I begrudge other people getting one?  No.  If I am not within range of one of Bernie Sanders' clinics, will I begrudge the money spent on them?  No.  Do I begrudge other working people getting decent employer healthcare if I haven't achieved it yet?  No.

          How selfish do you have to be to bitch about some teacher or fireman getting a benefit just because you don't get it too?

          •  Asking for fairness=/= begrudge (0+ / 0-)

            It's not a matter of me begrudging anyone. I get employer-based healthcare too. In fact- we get an exceptionally good deal- we pay <$100 per month for coverage for our family of 4 for a co-payment type HMO plan. What I am advocating is that people like myself should NO LONGER have such a sweet tax exempt deal. In fact I am with the diarist- NOBODY should get employer provided healthcare anymore. Job based healthcare is a nonsensical idea anyways. We should be abandoning job based healthcare and moving towards  a national healthcare system uncoupled with anyone's employment status.</p>

            So in short I am arguing against my own particular circumstances.

    •  Health insurance premiums are deductible from (0+ / 0-)

      income on schedule A.

      But for one of St. Ronnie's secret tax increases limiting medical deductions to over 7% of income

      We are in a time where it is risky NOT to change. Barack Obama 7-30-08

      by samddobermann on Sun Jan 17, 2010 at 04:39:27 AM PST

      [ Parent ]

  •  Great idea but... (0+ / 0-)

    It'll never happen.

    Another way to go about it is the "Fair Tax" idea: you get rid of the various income taxes and substitute a consumption tax (with a rebate per capita.)  Instead of redefining "income" you ignore it and tax consumption.

    That won't happen either for the same reason.  It's too simple.  The people who make laws are in the business of "helping" one group over another.  The way you do that is to arrange a huge "game" involving abstruse and arcane calculations by experts--not by making the rules easy for everyone.

    As soon as you said

    As such, I'm making a rather radical, but also, rather mundane, argument: it should all be treated the same by our income tax code. The purpose of taxation is to raise revenue; other purposes should be handled by agencies other than the US Treasury.

    using the word "should," it was clear that your idea was only "pie in the sky."

    •  I disagree with the FairTax (0+ / 0-)

      But I do like one component of it, which is that it is an approach that also realizes what we need is a radical overhaul, not some minor tweaks. I like the boldness, I just think getting rid of income, estate, and payroll taxes is not the right method.

      using the word "should," it was clear that your idea was only "pie in the sky."

      Yeah, well, unfortunately pie in the sky is all most of us have access to :)

    •  That is so regressive and detrimental to the (0+ / 0-)

      American economy that I hope it never sees the light of day.

      Poor people have to spend all they get and would be fully taxed while rich people can afford to save and invest thus wouldn't pay tax es on all their take.

      And they would be able to shop overseas and "save" on the taxes they wouldn't have to pay.

      Look at the people proposing a flat tax: Steve Forbes and other super rich people. And they have been selling it to dumb people ever since.

      We are in a time where it is risky NOT to change. Barack Obama 7-30-08

      by samddobermann on Sun Jan 17, 2010 at 04:48:20 AM PST

      [ Parent ]

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