Beyond the Chart: Sure, Health Care Deduction Is Huge, but What’s the Return?

Neal Soss’ much-discussed chart of the United States’ 20 largest “tax expenditures” tells us nothing about the value in terms of costs and benefits to various constituencies of each expenditure. Work place issues expert Ellen Dannin provides an example of how we can look at employer-provided health insurance.

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A chart created by Credit Suisse’s Neal Soss, showing the 20 largest tax expenditures for the United States, is making the rounds. The term “tax expenditure” means any money spent by the government through the tax code, such as tax credits, deductions and exemptions.

The chart itself simply lists the 20 largest tax expenditures and the cost of each to the budget. How the list is understood is another matter.

Seven of the 20 tax expenditures on the list are primarily directed toward investors. They include preferential treatment of capital gains, exclusion of net imputed rental income, deferral of income from controlled foreign corporations, preferential treatment of qualified dividends, step-up basis of capital gains at death, deduction of US production activities and various energy and natural resources credits/deductions. Together, they cost our treasury $235 billion a year. The rest of the list is made up of deductions that individual taxpayers or their employers could take or benefits that go directly to people. Low-income citizens generally do not take deductions when they file their federal, state and local taxes, but they do pay the payroll taxes that fund Social Security.

Many people will see the chart as a list of “loopholes” or “entitlements” that must be eliminated if we are to put our fiscal house in order. But, as one blogger says of the chart, “Good luck to the politician who votes to eliminates any of these.” People would fight tooth and nail if they were touched.

There is an interesting human story lurking within tax/don’t tax and spend/don’t spend choices. Our national discussion of taxes sounds as if all tax expenditures are identical and are a loss to the treasury and to the public. But, if we take the time to follow the money, we will see that not all money collected and spent by the government has the same characteristics and effects.

Imagine a different chart that included the same tax deductions, subsidies and benefits but showed the other part of the equation – who all benefits from a particular deduction, and how.

Take the most expensive single deduction on the chart – $171 billion for employer-sponsored health insurance – as an example. It is possible to track the effects of tax support for employers to provide health insurance and the incentives the expenditure of tax money creates.

We know that many – but not all – job seekers prefer working for an employer that offers health insurance.

We can also assess how subsidizing employers who provide health insurance affects people’s health and the nation’s well-being and productivity. For example, to the extent good health care gives us a more productive workforce and provides other personal and societal benefits, the benefits may so exceed the costs as to make the loss of tax revenue a good value.

On the other hand, we could also look into how much of that government health insurance subsidy benefits investors in private health insurance companies and does not lead to wider social benefits.

We could also compare health outcomes and costs for those with employer-provided health insurance compared to single-payer systems or people who buy their own health insurance. For each of these categories, we could ask how they differ in terms of costs to achieve those outcomes. If there are marked differences in costs and benefits, we might need to adjust the size or even the existence of the tax expenditure.

While we are asking these questions, we also ought to ask why some people have no health coverage at all. Some might have decided not to buy health insurance because they are healthy and think they won’t get sick. Others may not be able to afford health insurance, but may have too much money to qualify for Medicaid.

If these uninsured people become ill or injured, we, as a society, may have a moral choice. Do we let them live with the consequences of their choices or their situation in life, or do we decide we are our brothers’ keepers? If we decide not to provide assistance, do we deny health care to children whose parents have no coverage, either because they are too poor or because they have made bad choices?

We might also want to consider whether and how those of us who do have health insurance are affected by uninsured people who survive illnesses or injuries but live on in a compromised condition. It may be impossible to assess the costs of lost human productivity and contributions to our society caused by failure to provide adequate health care.

Many more questions might be asked about these and other outcomes and inputs into our health system and the role that providing a tax incentive to employers to provide health insurance plays in promoting the well-being of the United States as a whole.

The point is that merely looking at the name of a tax subsidy or other tax expenditure tells us nothing about whether we have made a wise decision to spend the money to provide that benefit. Only by doing the hard work of digging into the effects of an expenditure can we make a wise decision.

An honest investigation into these and other tax “expenditures” may lead to unexpected outcomes.