Wednesday, December 1, 2004

Tax proposal is the old switcheroo

It should be no surprise to voters that in his second term President Bush will spend some of his self-described political capital on major tax reform. White House spokeswoman Clare Buchan told The Washington Post that the "president believes the tax code should be simpler, fairer and more conducive to economic growth ... ."

This sounds well and good until the fine print comes into focus. The president proposes to eliminate taxes on interest, dividend and capital gains taxes. He would replace the lost revenue by eliminating the business tax deduction for employer-provided health insurance.

For anyone who owns stocks—and in 2000, 46 percent of Americans did—getting rid of taxes on dividend and capital gains seems like a great deal. But the negative effects of eliminating the business tax deduction for health care policies would dwarf, for all but a small number of stockholders, savings on dividend, capital gains and interest taxes.

While inflation is hovering at about 3 percent, employment-related health insurance premiums rose 11.2 percent in 2003. Benefit costs—of which health insurance premiums eat up the lion's share—are some of the biggest costs most employers face. If the tax deduction for health insurance costs disappears, two scenarios are likely. Many businesses may simply drop the benefit, or force workers to contribute more—a lot more. This could devastate average family budgets.

According to a Kaiser Family Foundation survey, the average monthly worker contribution quadrupled from $52 in 1988 to $222 in 2004. At the present rate of cost increases, neither employers nor employees will be able to accommodate even greater financial burdens.

Consequently, the ranks of the uninsured, now approximately 44 million Americans, will surely grow, a fact that will have financial repercussions for both the insured and the uninsured.

The proposal doesn't' meet the tests outlined by the president himself. Simpler? True, it's simple to eliminate a tax. But eliminating one tax by replacing it with another is just the old switcheroo.

Fairer? Significant health care cost increases will hurt both businesses and families. Significant savings from eliminating taxes on investment income will help only the very wealthy.

Conducive to economic growth? Hardly. Forcing conscientious businesses that provide health insurance to pay more to attract workers will constrain, not grow the economy. It will also punish workers who will end up paying more for health insurance with after-tax income. That will put the pinch on consumer spending.

Businesses and workers can only hope that the president's proposal is a trial balloon, a bad idea that Congress should shoot down fast.

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