The Employer Sponsored Exclusion

Today, Len Burman, a personal hero of mine and the head of the joint Urban-Brookings tax policy center, wrote a an Op-Ed in today's Washington Post. In it, he attacks an orthodox view of the unions in the health reform debate, we need to tax employer sponsored insurance.

Burman's argument in summary form is that currently, we do not count insurance as income, even though, under the principles of taxation, it is that. It is compensation for work done. However, through the grace of Congress (my words, not his) there is an exemption from the broad view of any accession to wealth however defined for employer sponsored insurance (ESI).

The problem with this exemption that seems so generous to employees (and employers get a deduction) is that it is regressive. Usually the exclusion is valuable only if your employer offers insurance. Also, you it is worth more to you the higher your income goes. If you add a premium conversion plan, where the employee pays part of the premium, you actually then have even more distortion, as the employees share is a deduction.

Administrability is of course the problem. There is this move for the cap that Burman mentions, but how exactly do you come up with the right cap value? How do you value the insurance someone receives, a question conveniently excluded? This is something I personally am interested in examining further.

But, for all its problems, we probably should tax these benefits. Burman's key point is that workers would likely on the aggregate be better off if employers were not paying so much for health insurance, knew how much it cost, and got instead a lower amount of cash wages ($100 of cash is worth more than $100 of health insurance to people).

Hence, today, I am very happy with Burman, and his wonderful editorial.

Read Ezra Klein's take too.