Clark Harvighurst, professor emeritus at Duke, writing at the WSJ Editorial Page has an interesting article related to health-care and taxes. He mostly addresses it to three CEOs, Bezos, Buffett, and Dimon who he summarizes with BB&D. We love the ampersand too Clark. We are 100% in agreement with his point that excluding health-care benefits provided by employers from employee income is major problem with the US health-care system. We are not convinced, however, that folks react exactly how he describes.
To be clear, when an employee receives health-care benefits paid by the employer it is valuable to the employee but it is not part of gross income as determined by the Internal Revenue Code. Specifically:
Under IRC sections 105 and 106, employer-provided health benefits, including reimbursement and insurance, are generally excluded from the income of employees.
It is one of those weird parts of the tax law that excluded almost $22,000 in income from MWG tax return a few years ago. We agree that BB&D would provide a major service if they pushed to treat health-care income as taxable like other income. We are not convinced that the beneficiaries are acting as Clark says. Here is his quote:
Because employees don’t pay taxes on employer-paid insurance premiums, most workers assume that—and behave as if—their health-care costs are borne by employers. True, most employees now pay some share of premiums directly, along with copayments and deductibles. But they still unknowingly pay far more in lower take-home pay. When working Americans say they like their health plans, it’s clear they aren’t seeing the whole cost picture.
We don’t see it that way. It seems to us workers act as if health-care costs are not taxable while wage income is. Thus, getting a whole dollar of health-care insurance rather than a dollar of wages that are reduced by FICA and income taxes seems rational. We think they are knowingly taking less take-home pay. Folks buy way too much insurance (they cover everything they can) because it is cheaper with before-tax-dollars.
Sidebar: Another problem with the current system is that a few folks are worse off under this deal. An example is the Lady de Gloves who did not take the health-care play offered by her employer because MWG was already covered. She got nothing while most folks got thousands of dollars worth of insurance. End Sidebar.
It is also rational for the employer since they pay a dollar in health care instead of a dollar plus FICA. So we see the current system as a rational reaction to the current irrational tax system. We do agree with Clark that the current system makes many of us uninterested in that actual costs of medical care. We entirely agree with Clark that we hope BB&D can change the tax treatment of fringe benefits. If we can fix corporate taxes then why not this?