The Blind Spot in the Healthcare Debate
Here’s a story about 3 families, The Thompsons, The Alvins and The Xaviers.
The Thompsons are a middle-income family of five who live in central Virginia, where Mrs. Thompson is a teacher and Mr. Thompson is a manager at the local grocery store. Like all families, they have their ups and downs, but overall, though life is challenging, it's rewarding. Their lives revolve around their children’s education and happiness. Every year during tax time, the Thompsons look forward to the $3000 ($1000 per child) tax credit they receive from the federal government. They use this money to buy the kids new clothes, send them to camp, and put the rest away for college. Their youngest daughter, Tina, is showing some developmental problems that may need further medical attention. Overall, the Thompsons feel blessed and are optimistic about the future.
The Alvins are also a family of five, but Mr. Alvin runs a successful advertising agency and earns a little over $225,000 per year. Mrs. Alvin, though she has a Masters Degree in Psychology, made the decision to be stay at home and actively raise their children and run the household finances. The Alvin children are exceptional students and most likely will receive academic scholarships, though the Alvins have saved quite a bit for college. The Alvins are leaders in the community and their children are extremely well mannered. The sky is the limit for this family. They are not eligible for the $3000 tax credit ($1000 per child) because their household income exceeds the $110,000 maximum allowed.
The Xaviers on the other hand are having trouble financially and emotionally. Mr. Xavier is battling severe depression, and Mrs. Xavier is working full-time and trying her hardest to raise their three children, seemingly by herself. Mr. Xavier is struggling with alcohol addiction and contributes to the household finances only intermittently. The $3000 per year tax credit Mrs. Xavier receives every year is used to put food on the table. There’s hope for Mr. Xavier as there is a local clinic offering him mental health services. The Xavier children are showing signs of the family’s turmoil: the older son, Joey, has gotten into some trouble at school. The Xaviers remain hopeful as their faith and participation in the local church remains strong.
[Below is a hypothetical scenario but is similar to the absurd tax incentives associated with health insurance]
The Federal Government has decided to revisit the Child Tax Credit. After much political debate, The Child Tax Fairness Act was passed. The Child Tax Fairness Act eliminates the caps on income, which the Alvins were happy to hear as they could use the extra money as the cost of higher education is increasing more quickly than expected. However, in addition to raising the limits on income, the Federal Government decided to convert the Tax Credit to a Tax Deduction because the Tax deduction would directly impact those who paid federal income taxes and exclude those who did not. Under this new rule, the Thompsons will see their $3000 tax credit reduced to a $750 tax benefit and the Xaviers will now receive $0. The Alvins, on the other hand, will see their tax benefit go from $0 to $4500.
Does this scenario sound unfair and crazy? Of course, as a society, we value the children of all of our citizens, rich or poor. However, the logic behind giving a tax deduction vs. a tax credit on the surface sounds fair: why not reduce the taxes for those who paid? However, until you actually see the result of such action as detailed in the stories of the Thompsons, Alvins and Xaviers, where the higher-income individuals benefit disproportionately than the lower-income families, it is easy to see why using tax deductions as incentives is flawed and favors the wealthy. Tax credits treat everyone equally. What’s important to remember is a tax deduction and/or tax credit is a way for the federal government to subsidize a public good. A tax credit simply benefits all citizens, while a tax deduction benefits the higher-income households.
If you agree that a Tax Credit is a superior way to subsidize our countries families who have children, then I ask you would it also be a superior way to subsidize Health Insurance purchased at work? Yes, Health Insurance at work is Tax Deductible, which benefits families like the Alvins, and provides little to no benefit for families like the Thompsons and Xaviers.
There are only two tax proposals that can be considered fair. Either eliminate tax incentives for everyone or provide an equal tax benefit to everyone. The latter can only be accomplished through Tax Credits.