Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, August 3, 1993 TAG: 9309090310
SECTION: EDITORIAL PAGE: A5 EDITION: METRO
SOURCE: GWEN THAYER HANDELMAN
DATELINE: LENGTH: Medium
For example, a friend recently wrote me claiming to understand why I have concluded that ``employer contributions to health benefits should not be viewed as `income' to employees and should therefore not be subject to an income tax.'' He clearly did not understand, however, because he proceeded to object that ``many employees do not benefit from the value of a tax-subsidized premium when their employers do not provide any health-insurance benefit.'' He observed that this ``calls into question the fairness of this public method for encouraging private health insurance.''
I try once again to explain: It is erroneous to consider employer contributions to health plans as ``tax-subsidized.''
It is one thing to ``question the fairness,'' that ``many employers do not provide any health-insurance benefit.'' It is another to conclude that the employer who does provide health benefits is not entitled to a deduction from income subject to tax for the expense. Since an employer's payment of employee health expenses is a cost of producing current income, then it should not be taxed under principles of ability-to-pay as measured by net income.
Unless you assume that the government is entitled to all a taxpayer's earnings, a taxpayer doesn't get a ``tax subsidy'' just because certain amounts are not taxed. The idea is not that taxpayers owe all their earnings to the government but that we each owe a ``fair share,'' according to our ability to pay. If certain amounts do not really improve a taxpayer's ability to pay, then not collecting tax on those amounts is not a subsidy.
The deduction for the cost of health benefits is not a ``subsidy'' but necessary to properly define the employer's ability to pay. The ability to pay of a business depends on its profits: that is, what is left after payment of the expenditures required to operate the business, such as employee salaries, including health benefits.
Thus, current law properly allows all businesses, whether they are corporations, partnerships or unincorporated sole proprietorships, to subtract from their business income the reasonable costs of producing that income.
To disallow the deduction would be to tax that employer at a higher rate than an employer of the same or greater real economic income (such as an employer who makes more profits by not providing health insurance to employees). For example, if the tax rate is 28 percent, then a person with $100 of income should pay $28. But if an individual with only $80 of true income is erroneously and unfairly counted as having an extra $20, for a total of $100, that person also will pay $28 in tax.
Superficially, it seems that the taxpayers are treated the same. But $28 is 35 percent of $80. Thus, the taxpayer with lower true income pays a higher rate of tax than the taxpayer with higher real income.
In some circumstances, the taxpayer with lower true income could even pay more in absolute dollar amounts than a taxpayer with greater ability to pay.
It would be far more appropriate to impose an extra tax on employers who do not provide their employees with health insurance.
Such employers do not absorb the full cost of their enterprise. While they pay for the maintenance of their plant and equipment, they shirk much of their labor cost. They shift to the rest of us the cost of maintaining their employees' fitness for work. They are subsidized when we are forced to bear responsibility for the health care of their uninsured employees.
Sometimes deductions are referred to as matters of ``legislative grace,'' but people and businesses should be taxed according to their ability to pay tax as properly measured. Policy-makers must recognize the distinction between a subsidy and a deduction needed to define real economic income, or lose sight of ability-to-pay as a principle of taxation.
The alternative will surely be regressive and opportunistic taxes with a consequent continued decline in the commitment of the tax-paying public to national endeavors such as health reform.
\ Gwen Thayer Handelman is associate professor of law at Washington and Lee University.
by CNB