Fiscal Fact No. 75
Now that more details of the President’s health care proposal have emerged, we can look more closely at how different groups of Americans will be impacted. As discussed in TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation Fiscal Fact No. 74, “President to Propose Large Tax Deduction to Spur Health Insurance Purchases,” 53 percent of uninsured Americans have no federal income tax liability. Therefore, the President was forced to allow the deduction for purchasing health insurance to reduce payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. liability; this is the only way to let the 53 percent with no income tax liability benefit, at least in the short run, from the deduction.
Following is an illustration of how the new Bush health care plan proposed during the State of the Union Address would affect four types of families.
First, we present a family of four with two children that earns $80,000 per year in wage and salary income and receives $10,000 in employer-provided health insurance. Next, we show that same family, but we assume it receives $20,000 in employer-provided health insurance. Third, we show the impact on a low-income family with a single mother of two children who earns $25,000 in wage and salary income and currently has no health insurance. Finally, we show a single person living by himself earning $50,000 and currently uninsured. We assume all families currently take the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. and receive the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (if applicable), and no other credits. Also, we calculate the Earned Income Tax Credit (EITC) and the additional child tax credit for the low-income single mother.
Table 1: Family of Four Earning $80,000 in Wage and Salary Income and Receiving $10,000 in Employer-Provided Health Insurance
|
Current Law |
Bush Health Care Proposal |
|
|
Wage and Salary Income |
$80,000 |
$80,000 |
|
Health Insurance |
$10,000 |
$10,000 |
|
AGI |
$80,000 |
$90,000 |
|
Standard Deduction (regular) |
$10,700 |
$10,700 |
|
Standard Health Deduction |
$0 |
$15,000 |
|
Exemptions |
$13,600 |
$13,600 |
|
Taxable Income |
$55,700 |
$50,700 |
|
Income Tax Before Credits |
$7,572.50 |
$6,822.50 |
|
Child Tax Credit |
$2,000 |
$2,000 |
|
Income Tax After Credits |
$5,572.50 |
$4,822.50 |
|
Payroll Tax Base |
$80,000 |
$75,000 |
|
Payroll Tax (Employee) |
$6,000 |
$5,625 |
|
Payroll Tax (Employer) |
$6,000 |
$5,625 |
|
Total Payroll Tax |
$12,000 |
$11,250 |
|
Total Income and Payroll Tax |
$17,572.50 |
$16,072.50 |
|
Total Tax Savings |
|
$1,500 |
|
Marginal cost of an additional dollar of health insurance (through employer); moved from wage/salary |
Take-home pay (outside health insurance) falls by 70 cents for each additional dollar of health insurance (assuming overall compensation stays constant) |
Take-home pay (outside health insurance) falls by $1 for each additional dollar of health insurance (assuming overall compensation stays constant) |
Table 2: Family of Four Earning $80,000 in Wage and Salary Income and Receiving $20,000 in Employer-Provided Health Insurance
|
Current Law |
Bush Health Care Proposal |
|
|
Wage and Salary Income |
$80,000 |
$80,000 |
|
Health Insurance |
$20,000 |
$20,000 |
|
AGI |
$80,000 |
$100,000 |
|
Standard Deduction (regular) |
$10,700 |
$10,700 |
|
Standard Health Deduction |
$0 |
$15,000 |
|
Exemptions |
$13,600 |
$13,600 |
|
Taxable Income |
$55,700 |
$60,700 |
|
Income Tax Before Credits |
$7,572.50 |
$8,322.50 |
|
Credits |
$2,000 |
$2,000 |
|
Income Tax After Credits |
$5,572.50 |
$6,322.50 |
|
Payroll Tax Base |
$80,000 |
$85,000 |
|
Payroll Tax (Employee) |
$6,000 |
$6,375 |
|
Payroll Tax (Employer) |
$6,000 |
$6,375 |
|
Total Payroll Tax |
$12,000 |
$12,750 |
|
Total Income and Payroll Tax |
$17,572.50 |
$19,072.50 |
|
Total Tax Loss |
|
$1,500 |
|
Marginal cost of an additional dollar of health insurance (through employer); moved from wage/salary |
Take-home pay (outside health insurance) falls by 70 cents for each additional dollar of health insurance (assuming overall compensation stays constant) |
Take-home pay (outside health insurance) falls by $1 for each additional dollar of health insurance (assuming overall compensation stays constant) |
Table 3: Single Mother with Two Children (Head of Household), Earning $25,000 in Wage and Salary Income, Uninsured but Purchasing Health Insurance
|
Current Law |
Bush Health Care Proposal |
|
|
Wage and Salary Income |
$25,000 |
$25,000 |
|
Health Insurance |
$0 |
$0 |
|
AGI |
$25,000 |
$25,000 |
|
Standard Deduction (regular) |
$7,850 |
$7,850 |
|
Standard Health Deduction |
$0 |
$15,000 |
|
Exemptions |
$9,900 |
$9,900 |
|
Taxable Income |
$7,250 |
$0 |
|
Income Tax Before Credits |
$725 |
$0 |
|
Child Tax Credit |
$2,000 |
$2,000 |
|
Income Tax After Credits |
$0 |
$0 |
|
Refundable EITC (estimate) |
$2,475 |
$2,475 |
|
Additional Child Tax Credit |
$1,300 |
$1,300 |
|
Payroll Tax Base |
$25,000 |
$10,000 |
|
Payroll Tax (Employee) |
$1,875 |
$750 |
|
Payroll Tax (Employer) |
$1,875 |
$750 |
|
Total Payroll Tax |
$3,750 |
$1,500 |
|
Total Income and Payroll Tax (after refundable credits) |
-$25 |
-$2,275 |
|
Total Tax Savings |
|
$2,250 |
|
Marginal cost of an additional dollar of health insurance (purchased on own assuming $1 has already spent) |
First dollar: $1 Next dollar: $1 |
First dollar: – $2,249 Next dollar: $1 |
|
Note: The price of the health insurance she purchases on her own is irrelevant. Even if she purchases a very cheap plan, she still gets to take the full $15,000 deduction. She could even purchase a plan that is cheaper than the amount she saves from the tax change. We assume no changes to her EITC or additional child tax credit amount as a result of the policy change. Such technicalities should be known at a later date. |
Table 4: Single Man with No Children, $50,000 in Wage and Salary Income, Uninsured but Purchasing Health Insurance
|
Current Law |
Bush Health Care Proposal |
|
|
Wage and Salary Income |
$50,000 |
$50,000 |
|
Health Insurance |
$0 |
$0 |
|
AGI |
$50,000 |
$50,000 |
|
Standard Deduction (regular) |
$5350 |
$5,350 |
|
Standard Health Deduction |
$0 |
$7,500 |
|
Exemptions |
$3,400 |
$3,400 |
|
Taxable Income |
$41,250 |
$33,750 |
|
Income Tax Before Credits |
$6,736.25 |
$4,861.25 |
|
Credits |
$0 |
$0 |
|
Income Tax After Credits |
$6,736.25 |
$4,861.25 |
|
Payroll Tax Base |
$50,000 |
$42,500 |
|
Payroll Tax (Employee) |
$3,750 |
$3,187.50 |
|
Payroll Tax (Employer) |
$3,750 |
$3,187.50 |
|
Total Payroll Tax |
$7,500 |
$6,375 |
|
Total Income and Payroll Tax |
$14,236.25 |
$11,236.25 |
|
Total Tax Savings |
|
$3,000 |
|
Marginal cost of an additional dollar of health insurance (purchased on own) |
First dollar: $1 Next dollar: $1 |
First dollar: – $2,999 Next dollar: $1 |
|
Note: He is currently uninsured, but now purchases health insurance as a result of this plan. The price of the health insurance he purchases on his own is irrelevant. Even if he purchases a very cheap plan, he still gets to take the full $15,000 deduction. He could even purchase a plan that is cheaper than the amount he saves from the tax change. |
Overall, this health care tax reform plan has its share of both good and bad tax policy. It has been common these past several decades to promote social goals through the income tax code, and this is another example. However, such tax code manipulations do have limits, and the President’s plan has bumped up against one of them: so many people pay no income taxes that deductions no longer have any value to them.
Therefore, to reach a significant fraction of the uninsured, it was necessary to reduce their Social Security and Medicare taxes. A few commentators have begun to wonder whether these lower payroll taxes will translate into lower Social Security benefits after retirement. Tax payments are still linked to benefits by law through a complex formula, and a calculation of how such potential reductions would compare to the benefit people receive from the new health insurance deduction is not possible until more detailed analysis from government agencies is available.
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