A quarterly magazine of urban affairs, published by the Manhattan Institute, edited by Brian C. Anderson.
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The Audacity of Distortion
Obamas attacks on the McCain health-care plan are misleading.
15 October 2008
Barack Obama describes John McCains health-care plan as radical and catastrophic for your health care. In the second presidential debate, on October 7th, he suggested that the McCain proposal was smoke and mirrors: So what one hand giveth, the other hand taketh away, he quipped. The Obama campaign is running TV ads in swing states that would draw a blush from Harry and Louise, the fictional couple featured in ads that helped sink Bill Clintons health-care plan. The Obama spots argument in a nutshell: under John McCains health-care plan, your taxes will go upand youll probably lose your health insurance, too. In tonights third and final debate, were likely to hear similar themes.
I am hardly a McCain fan. His health-care proposal is a dizzying mix of the populist (he champions drug reimportation, a back-door price control system that would kill innovation) and the impractical (he wants to save Medicare by paying doctors to follow government formulas, an idea riddled with flaws). But McCains core health-care idea is sensible: giving Americans tax credits to purchase their own health insurance.
Presently, people who get health coverage through their employer, no matter how expensive the plan, pay no income or payroll tax on the value of the benefit. Those without employer-sponsored health coverage, by contrast, buy their insurance with after-tax dollars. This unequal tax treatment arose out of Franklin Roosevelts wage and price controls and a series of IRS rulings during the 1940s and 1950s. Its an expensive system, costing the U.S. Treasury about $250 billion a year in lost revenues. Its also unfair, since it punishes the self-employed.
For decades, health-policy experts of all political ideologies have criticized the inequality in tax treatment of health-insurance premiums. For instance, Jason Furman, now economic policy director of Obamas campaign, noted in February: The most promising way to move forward in all three dimensionscoverage, cost, and long-run fiscal situationis to replace the employer exclusion with a tax credit. Of course, those on the right and left dont agree on specifics, such as whether coverage should be mandated.
The Obama campaigns attacks, however, have nothing to do with quibbling over these details. They represent, instead, a mischaracterization of the McCain plan and an unfair attack on a good idea. The campaigns first line of attack is that the McCain plan will raise peoples taxes. Vice presidential candidate Joe Biden offered a typical formulation last month: [Senator McCain is] proposing the largest increase on middle class taxpayers in American history. . . . It will cost the middle class over $1 trillion dollars in additional taxes. So ladies and gentlemen its almost unbelievable, you almost dont believe what Im telling you, because it sounds so wrong.
Actually, it is wrong. Senator McCain isnt proposing to tax health benefits without offsetting measures: he offers tax credits for individuals and families. As Michael Dobbs, who runs the Washington Posts Fact Checker blog, wrote: By most independent calculations, the McCain plan will leave most taxpayers better off in strictly financial terms, at least until 2013.
After 2013, Dobbs notes, without indexing, the benefits will begin to diminish; over the next half decade, the richest of Americans will find themselves somewhat worse off, but middle-income taxpayers will either break even or be slightly ahead.
The Obama campaigns second chargethat people will lose their coverage under McCains planis equally dubious. As a television ad put it: McCain would make you pay taxes on your health benefits, taxing your health care for the first time ever, raising costs for employers who offer health care so your coverage could be reduced or dropped completely. But its difficult to understand why employers would run for the exits. Under the McCain plan, they would still be allowed to take tax deductions on payroll, as they do now (no raising of costs here). By one estimate, the total number of insured Americans would increase under the McCain plan as Americansincluding many currently uninsuredopt to buy insurance directly, armed with a tax credit. That estimate may be quite conservative, since the McCain plan would also let people purchase health coverage across state lines, allowing them to shop around for better deals and making coverage more affordable for all. A recent study suggests that even without the tax credit, 12 million uninsured would get insurance through such a reform alone.
Finally, the Obama campaign argues that McCains tax credit represents a mere fraction of what people will need to pay for coverage. So youre going to have to replace a $12,000 plan with a $5,000 check you just give to the insurance company, as Senator Biden put it in the vice presidential debate. I call that the Ultimate Bridge to Nowhere. Bidens assertion was designed to make viewers wonder where the other $7,000 went. But it didnt go anywhere. A $12,000 plan doesnt require a $12,000 tax credit, since no one pays 100 percent income-tax rates. Under the McCain plan, people would have higher incomeshealth benefits would count as incomeand would pay more income tax, but theyd get a tax credit for the difference. James Capretta has crunched the numbers for $50,000-year-earners and shown that the plan would save them money.
Senator McCains health plan certainly has its share of problems. (Of course, so does Senator Obamas, which is probably far more expensive than advertisedperhaps costing double the Wall Street bailout over ten years.) But by trashing McCains tax credit with misleading attacks, Obama offers cynicism instead of fair criticism.
Dr. Gratzer, a physician, is a senior fellow at the Manhattan Institute.