Health Insurance

Economists spend a lot of time studying health care and health insurance. One reason is that there are so many interesting issues. Another reason is money, with about 15% of our GDP tied up in health care and growing all the time, there's gold in them thar sick people. One issue that economists mostly agree upon is that insurance, which is really a price discount plan for most people, increases the quantity demanded of health care. (Something about the Law of demand, lower prices, higher quantity demanded.)

In the US most private insurance is provided through work. There are some good reasons for this but one not so good reason is tax avoidance. Employer-paid premiums are tax-deductible to the employer, but tax-free for the employee. If your income tax rate is 25%, then if your employer is willing to give you a $1000 raise you will realize $750 in after-tax income. The employer could instead spend $1000 on health insurance and that would not be taxed. So the choice is $750 in cash or $1000 on health insurance. Given that choice, a lot of people would say give me the health insurance. But if health insurance was taxed then more people would opt for cash which they could spend on anything they want.

The President is proposing to limit how much employer-provided health insurance is exempt from taxes. This proposal is attacting a reasonable amount of favorable opinion even from people that do not usually agree with him. Check out this editorial from the Washington Post.