Many health analysts believe that exempting employer-provided health coverage from taxation encourages overspending on health care, as well as depriving the federal budget of revenue.
Some have proposed making health coverage subject to social security payroll taxes; that is, health coverage would count as earned income when it is provided, and so workers would pay taxes on it. Health coverage also would count as earnings when benefits are calculated, so benefits would increase as well.
The Tax Policy Center’s Howard Gleckman reviews new research from the Urban Institute’s Eric Toder and Karen Smith. Read the whole piece, but here’s Gleckman’s bottom line:
Eliminating the tax preference for employer-sponsored insurance would improve the government’s overall financial condition as well as the health of the Social Security trust fund. But the increase in Social Security benefits would affect different earnings groups in very complicated ways. And while the Social Security Trust Fund would be strengthened by higher payroll taxes, that improvement would be mitigated by an increase in benefits.
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This is the begnining of the end. During WWII there was a wage freeze which made it difficult to recruit new workers. Congress passed legislation that allowed companies to offer healthcare which was used to lure workers from other companies and to reward workers. Over time this employee benefit (tax free) was expanded. Now it is looked at as a source of revenue.
The IRA was created in an attempt to entice workers to save for retirement. This provided pre tax savings. The 401K is also a pre tax savings vehicle.
The Roth IRA was created recently that allows after tax contributions to be made and without paying taxes of any kind on withdrawl.
All of these financial incentives reduce federal income tax revenues. Congress new this at the time. Now some see these income exemptions as a source of revenue.
When you look at the short fall in Social Security revenues, even all these income exemptions are not enough to solve Social Securities problem. The highest income wage earners receive the least dollar in benefits for dollars paid in Social Security. For every dollar increase in the wage base for high wage earners, SS-OASI would have to set aside 52% or more of the increase in payroll taxes to pay future higher benefits due to higher wage base.
There is a similar problem for adding employer paid healthcare to the wage base. However, instead of 52%, it is higher. In simple terms there is not a dollar for dollar increase in revenue increase to make up the shortfall. It would help, but let us not kid ourselves. The SS Social Security will sink just a little slower, but sink none the less.
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