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Eye on the News

David Gratzer
The Audacity of Distortion
Obama’s attacks on the McCain health-care plan are misleading.
15 October 2008

Barack Obama describes John McCain’s 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 Clinton’s health-care plan. The Obama spots’ argument in a nutshell: under John McCain’s health-care plan, your taxes will go up—and you’ll probably lose your health insurance, too. In tonight’s third and final debate, we’re 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 McCain’s 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 Roosevelt’s wage and price controls and a series of IRS rulings during the 1940s and 1950s. It’s an expensive system, costing the U.S. Treasury about $250 billion a year in lost revenues. It’s 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 Obama’s campaign, noted in February: “The most promising way to move forward in all three dimensions—coverage, cost, and long-run fiscal situation—is to replace the employer exclusion with a tax credit.” Of course, those on the right and left don’t agree on specifics, such as whether coverage should be mandated.

The Obama campaign’s 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 campaign’s first line of attack is that the McCain plan will raise people’s 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 it’s almost unbelievable, you almost don’t believe what I’m telling you, because it sounds so wrong.”

Actually, it is wrong. Senator McCain isn’t proposing to tax health benefits without offsetting measures: he offers tax credits for individuals and families. As Michael Dobbs, who runs the Washington Post’s 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 campaign’s second charge—that people will lose their coverage under McCain’s plan—is 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 it’s 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 Americans—including many currently uninsured—opt 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 McCain’s tax credit represents a mere fraction of what people will need to pay for coverage. “So you’re 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.’” Biden’s assertion was designed to make viewers wonder where the other $7,000 went. But it didn’t go anywhere. A $12,000 plan doesn’t require a $12,000 tax credit, since no one pays 100 percent income-tax rates. Under the McCain plan, people would have higher incomes—health benefits would count as income—and would pay more income tax, but they’d 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 McCain’s health plan certainly has its share of problems. (Of course, so does Senator Obama’s, which is probably far more expensive than advertised—perhaps costing double the Wall Street bailout over ten years.) But by trashing McCain’s tax credit with misleading attacks, Obama offers cynicism instead of fair criticism.

Dr. Gratzer, a physician, is a senior fellow at the Manhattan Institute.

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