Although I wrote about it in January of this year, it’s still hard for me to grasp that a drastic revision of the time-hallowed tax exclusion for employer-sponsored health insurance may be at hand. But such is indeed the case as Congress wrestles with the new administration’s plans for a fundamental reshaping of the national health-care ecosystem.

If the idea of taxing corporate health benefits to pay for government health benefits seems perverse, it’s good to remember that, in the view of some economists, not doing so seems equally odd. In a New York Times blog today, Princeton economics professor Uwe E. Reinhardt looks at the basic issues raised by proposals to scrap, or at least cap, the exclusion.

Two things make economists look askance at the current tax policy, says Reinhardt. First, the public subsidy on company-sponsored health care encourages people to spend more on medical products and services than they otherwise would. This inflated demand “becomes one of several cost drivers in health care,” he notes.

Second, because high-income employees are, of course, in higher marginal tax brackets, the savings they realize by not having to pay tax on the health insurance are greater than the savings realized by lower-income workers. “In other words, the benefits of such ‘tax expenditures’ (as the tax-revenue loss triggered by tax deductibility is called) accrue disproportionately to higher income groups,” Reinhardt points out. “Very low-wage workers hardly benefit at all from the tax exclusion. Their bosses benefit handsomely. It can be asked why lawmakers favor this distributional effect.”

It can indeed. It can also be asked, I think, whether there’s another kind of regressivity in the current arrangement: It favors large firms over small ones. Companies that can afford to offer health insurance enjoy a government-subsidized advantage over competitors that can’t come up with the money for the premiums. And the employees of businesses that don’t offer health insurance — often lower-paying companies — don’t realize any benefits at all from the tax exclusion. ###