In my previous post I explained that the subsidies of the Patient Protection and Affordable Care Act are regressive and unfair and create high marginal tax rates. What would a better approach look like?

To achieve the ideal, the federal government should offer people the same tax relief for the purchase of health insurance, regardless of where it is obtained—at work, in the marketplace, in a health insurance exchange, through a cooperative, and so on. In addition, we should end the regressive practice of giving the largest subsidies to those taxpayers who need help the least. A reasonable system would be one in which every taxpayer receives the same subsidy, regardless of income. If it is socially desirable to encourage people to insure and if the cost of insurance is largely independent of income, the financial help coming from government should also be independent of income.

Finally, we should end the wasteful practice of allowing people unlimited opportunity to lower their tax burden by buying more expensive insurance. Instead of generously subsidizing the last dollar of premium people pay, we should subsidize the first dollars more heavily and let them pay the last dollars out of their own pockets. A straightforward way of doing this is with a lump sum tax credit. A family would get, say, $8,000 to apply dollar for dollar to the first $8,000 of health insurance premiums. Since many employer plans cost almost twice that amount for family coverage, the tax credit would not cover the entire amount people are likely to spend on health insurance. Nor should it.

Families would be encouraged to think carefully about what value they get from the second $8,000 they and their employers have been spending. If they can find ways to economize, each dollar not spent on health insurance would be a dollar available for some other purpose.

For more ideas on healthcare reform, please see my Independent Institute book, Priceless: Curing the Healthcare Crisis.

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