Saturday, January 22, 2011

Deficit Effect Of Ignoring Elimination Of The Employer Tax Deduction In Health Reform

The comment I posted on "What is Health Care Reform?" by Donald Marron that I discussed in my previous post:
I think to complete your [Donald Marron] argument about having a connection to health care to distinguish health care net revenues from the legislative reform net revenues, there needs to be a measurement of legislative opportunity costs, especially if one wants to motivate Congress to act or at least consider the economic effects of legislation on the deficit.

The most important reform for health care, as you rightly mention, is to eliminate the employer tax deduction. The deduction is a 'connected item to health reform' (and we will leave this concept undefined and sort of, I know it when I see it). Allowing the deduction to continue is a lost opportunity to reform health care and a lost opportunity to raise tax revenues $200 billion per year ($ 2 trillion over 10 year budget window). It depends on whether or not you view the marginal costs to include the opportunity costs of not eliminating the deduction.

If the deduction effect were included in the CBO cost analysis, and I believe it should have been, the deficit effect of the passed health reform legislation would start at the point of a deficit of $200 billion per year. Added to the $200 billion would be the additional deficit costs of the items in the legislation less any connected revenue producers, such as the Cadillac tax.

A CBO analysis that included the $200 billion per year foregone revenue would show a truer cost picture of ignoring the elimination of the employer tax deduction in the passed health reform legislation.

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