Lori Montgomery had an informative article in yesterday’s Washington Post about the latest thinking of Senator Max Baucus (D-MT) on the subject of raising money to pay for health reform by curbing the exclusion of employer-provided health benefits from taxation. This is, in my view, an entirely reasonable idea. John McCain’s way of doing this would have left large numbers of people stranded without health insurance, but the premise of Baucus’ revenue quest is that everyone will have health insurance and he needs to find money to pay for it. Under the circumstances, the exclusion is arbitrary and we should work to do away with it.
That said, it’s clear that the Finance Committee is wrestling with the fact that abruptly eliminating this provision of the tax code would unsettle a lot of people’s existing arrangements. So there’s interest in not wiping the exclusion out, but curbing it in a way that would raise some revenue but not have a huge impact on the majority of people. That seems reasonable, and if done right you could work toward phasing the thing out over the long run without ever really hammering folks. But of course the more gentle you are with the exclusion, the less revenue you get.
So it’s worth asking, where else could revenue be found?
I’ve written a bunch about raising revenue by taxing public health hazards, and I think that’s a good idea. But it would be nice to see congress recognize that another good idea would be the idea congress put forth in the first place—limiting the tax deductions available to high-income taxpayers. Basically, Obama’s proposal was that itemized deductions from folks in the top two tax brackets should only be deductible at the lower income tax rate that the middle class pays. This would raise a ton of revenue, and it has the unusual characteristic of being both highly progressive in its distributional impact and highly efficient in terms of avoiding distortions. The proposal was greeted as DOA by congress back when it was first unveiled, but the concerns about the impact on charitable giving are misguided and the longer congress looks at the revenue question the clearer it becomes that there’s no painless way to raise huge amounts of money. The deductions proposal is a good idea, and deserves a second look.