Health Care and Wages

Proponents of the health insurance “excise tax” say that if we moved to equalize the tax treatment of compensation received in the form of subsidized health insurance and compensation received in the form of cash money, that people would wind up with less-generous insurance plans and more money. Larry Mishel from EPI is not a proponent of the excise tax. And he’s written a paper (PDF) that I guess is aimed at persuading you that this “less insurance, more cash” connection is wrong.

But if that’s what he’s trying to persuade me of, I’m totally unpersuaded. That said, I agree with Kevin Drum that Mishel convincingly establishes another point which is that if you want to say that rising insurance premiums are the reason for stagnating middle class wages, you’re barking up the wrong tree. It’s true that if you look at wages and benefits together, then things don’t look as bleak if you look only at wages. But it’s still true that there’s been a large compensation slowdown for average workers. The total compensation share of the economy doesn’t really change over time, so if the highest-earners start earning a higher slice of compensation then average people start earning a smaller slice. That’s how it works.

But back to the excise tax. Austin Frakt rounds up the academic evidence that there’s a direct tradeoff between wages and insurance premiums, and it’s pretty overwhelming. And this is really common sense. Your boss wants to spend as little money as possible getting you to work for him. Subsidizing your health insurance costs money. Paying you money costs money. You extract as much total money out of him as your market bargaining power lets you do. If he’s willing to part with $65,000 in exchange for your services, he doesn’t care if that’s $55,000 in salary and $10,000 in insurance benefits or $65,000 in cash or whatever. You can bargain what you can bargain for. If the tax code makes the after-tax value of health benefits larger than the after-tax value of wages, then you have an incentive to take a relatively large share of that $65,000 in the form of insurance. If the tax code doesn’t do that, then you have an incentive to take a larger share in the form of money — money that you might, but then again might not, wind up spending on copayments or deductibles.

Suppose I proposed a law saying that if an employer buys a Vespa for an employee, then the employer can deduct that as an expense, but the employee doesn’t have to pay income tax on it. I don’t think it would be controversial to say that this law is going to increase the number of Vespas people own, but isn’t going to increase the total share of GDP that goes to employee compensation.