Federal Income Tax And Health Care

Charlie Martin at PJ Media is trying to explain an important tax issue and doing it badly.  He is OK when he says:

In a normal market, companies would raise wages in order to compete for workers, but war-time wage and price controls prevented that. But in 1943, the War Labor Board ruled that “fringe benefits” were not included in wages for the purpose of wage controls. This made benefits like health insurance an important competitive edge for employers during the war, and even more so after the war while wage and price controls continued.

But that’s not the issue Charlie.  The issue is taxes not wage controls.  Wage controls are long gone and no longer an issue.  The tax benefit accrues to the employee because the IRS ruled that healthcare benefits received can be excluded from gross income by the employee.  From a tax perspective the employer is indifferent between wages and health care benefits for employee because both are tax deductible for the employer.  It is the employee who prefers health care rather than wages because the former is excluded from gross income and not taxed while the latter are included in gross income.

We do agree with Charlie’s conclusion that all types of health insurance should be treated equally in terms of taxes.  The easy solution is to make health insurance benefits part of gross income.  It is easy from a computational standpoint but not from a political standpoint.  Good luck Charlie.

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