Taxing Health Care for Health Care
By Jacob Feldman
•
Monday, July 20, 2009 3:31 pm
In search of funding the $1.6 trillion health care bill, the Democrats are scrambling for new sources of tax revenue. One proposition is a flat annual fee on insurance providers based either on market share (premium income) or per policy. Premium income is the revenue raised by an insurance company in premiums paid by customers. Notably, premium income excludes investment income. Of course, Democratic legislation exempts the public option from these taxes, making it harder for the free market to compete against the public option. The fee will total $7-10 billion per year raising “around” $75 billion over 10 years. Unfortunately, this tax encourages both a decrease in demand as well as a decrease in supply of insurance provision by the private sector.
A tax on premium income means there is a decrease in demand for private health care plans because insurance companies pass the cost of the tax onto customers in the form of higher premiums. More expensive plans mean that not all privately insured Americans will be able to afford the increased costs, causing Americans to drop their insurance plans. A government-induced increase in dropped coverage is a violation of Obama’s promise that “if you like your insurance package you can keep it.” While claiming to protect your insurance option, the Obama administration hypocritically enacts taxes to push private providers out of the health care sector.
A tax on quantity of issued policies would decrease the supply of insurance plans. Taxing an insurance companies’ number of issued plans encourages insurance companies to drop coverage for individuals who pay the least in premiums in order to compensate for increased cost. Additionally, because investment income is not taxed, imposing a tax on the quantity of policies issued by a provider incentivizes providers to reallocate financial capital toward investment rather than selling coverage. With the per policy tax, look for the insurance industry to minimize its opportunity cost losses by investing in the stock market rather selling overpriced premiums.
Democrats talk a lot about allowing Americans to keep their insurance plans, but the taxes hardly agree.
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