Tax Subsidies for Private Health Insurance
Introduction
"Options for Reducing The Deficit: 2014 TO 2023." Congressional Budget Office, Nov. 2013. Web. 21 Mar. 2014. < http://www.cbo.gov/sites/default/files/cbofiles/attachments/44715-OptionsForReducingDeficit-3.pdf. See Health Revenues - Option 15, page 243
"Letter to the Honorable John Boehner Providing an Estimate for H.R. 6079, the Repeal of Obamacare Act." Congressional Budget Office, July 2012. Web. 21 Mar. 2014. http://www.cbo.gov/publication/43471.
Lowry, Sean. "Itemized Tax Deductions for Individuals: Data Analysis." Congressional Research Service, Feb. 2014. Web. 21 Mar. 2014. https://www.fas.org/sgp/crs/misc/R43012.pdf.
"Internet TAXSIM Version 9.2." National Bureau of Economic Research. N.p., n.d. Web. 21 Mar. 2014. http://users.nber.org/~taxsim/taxsim-calc9/index.html.
Subsidy Calculator: Premium Assistance for Coverage in Exchanges." Kaiser Family Foundation, n.d. Web. 21 Mar. 2014. https://www.kff.org/interactive/subsidy-calculator/.
I. Federal and State Tax Exclusions for ESI
See 12 United States Code Chapter 21. In 2012 the federal government temporarily reduced the employee social security contribution from 6.2% to 4.2%. In 2013 Congress allowed this tax relief to expire. The results of the tax simulation model used here are adjusted to account for the 2014 employer social security rate.
Although employers pay one-half of the FICA tax amount, economists generally assume that the incidence of the tax falls on employees and not on employers (with an exception for employees earning the minimum wage and subject to the FICA Social Security earnings limit discussed below). Because employers know that they will have to pay a payroll tax of $.0765 for each dollar they pay to an employee, it is assumed that the employer will adjust the employee's pay downward to account for that expenditure. In other words, if the FICA tax did not exist, it is assumed that the employers would pay employees 7.65% more.
United States. US Code. 26 U.S. Code § 125 - Cafeteria Plans. n.d. Web. 03 Apr. 2014. http://www.law.cornell.edu/uscode/text/26/125.
"Employer Health Benefits Survey 2012." Kaiser Family Foundation, Sept. 2012. Web. https://www.kff.org/wp-content/uploads/2013/03/8345-employer-health-benefits-annual-survey-section-14-0912.pdf. See exhibit 14.3 on page 203.
Note: Amounts may not sum to totals due to rounding effects.
Most states have an income tax. For more information on the rates in different states see: "State Individual Income Taxes." State Comparisons. Federation of Tax Administrators, n.d. Web. 03 Apr. 2014. http://www.taxadmin.org/fta/rate/tax_stru.html.
Taxable income means the amount of income that a taxpayer has after deductions and exemptions.
"OASDI and SSI Program Rates & Limits, 2014." U.S. Social Security Administration, n.d. Web. 23 Mar. 2014. http://www.ssa.gov/policy/docs/quickfacts/prog_highlights/RatesLimits2014.html. The 2014 maximum table earning was 117,000.
Between 2010 and 2012 the payroll tax for employees was reduced to 4.2%. "Payroll Tax Cut to Boost Take-Home Pay for Most Workers."2010/ IRS, n.d. Web. http://www.irs.gov/uac/Payroll-Tax-Cut-to-Boost-Take-Home-Pay-for-Most-Workers%3B-New-Withholding-Details-Now-Available-on-IRS.gov.
The effect of the exclusion from income tax operates based on total family taxable income, while the effect of the exclusion from payroll taxes operates only on earnings. For simplicity, we assumed that families have only wage income. For families with a mix of wage and other sources of income, their tax rates would vary, which would change the tax liabilities we show.
These are the wage amounts before the $2,500 contribution through the Section 125 plan, which has the effect of reducing adjusted gross income by $2,500.
"Publication 15: Employer’s Tax Guide." Internal Revenue Service, n.d. Web. 23 Mar. 2014. http://www.irs.gov/pub/irs-prior/p15--2012.pdf.
II. Non-Group Coverage
Families in which either the head of household or his/her spouse is 65 or older can deduct medical expenses in excess of 7.5% of their adjusted income.
2012 Form 1040. IRS. http://www.irs.gov/pub/irs-prior/f1040--2012.pdf
Lowry, Sean. "Itemized Tax Deduction for Individual Data Analysis". Congressional Research Service. February 12, 2014. https://www.fas.org/sgp/crs/misc/R43012.pdf
We note that the comparisons shown in Figure 3 were created to allow reasonable comparisons across the income scale, but are probably not very realistic in some regards. It is unlikely, for example, that families at these different income levels would choose to buy the same level of policy, or that many families with $40,000 of income could afford to pay for a mortgage with $10,000 of interest and for a health insurance policy costing $12,500. It is also unlikely that families with these different incomes would have the same mortgage interest.
For more information on the health premium tax credits see: "Explaining Health Care Reform: Questions About Health Insurance Subsidies." Kaiser Family Foundation, n.d. Web. https://www.kff.org/wp-content/uploads/2013/01/7962-02.pdf.
As in Figure 3, we assumed a household had two income earners and a 10,000 mortgage interest deduction.
The Affordable Care Act limits the out of pocket spending on essential benefits to $6,350 for an individual plan and $12,700 for a family plan. Households may incur additional expenses in many ways including spending on non-covered services and going out of network.
III. Special Tax Deduction for Health Insurance Premiums for the Self-Employed
Hipple, Steven. "Self-employment in the United States." Bureau of Labor Statistics, n.d. Web. 12 May 2014. http://www.bls.gov/opub/mlr/2010/09/art2full.pdf
The self-employment tax is the equivalent of the Social Security and Medicare taxes paid by workers. However, instead of the employee and the employer each paying equal shares of the tax, the self-employed pay the entire 15.3% payroll tax themselves. Half of the self-employment tax may be deducted when calculating adjusted gross income.
A self-employed health insurance deduction is available to individuals who are either: (1) self-employed with a net profit reported on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040); (2) a partner with net earnings from self-employment reported on Schedule K-1 (Form 1065); or (3) a shareholder owning more than 2% of the stock of an S corporation with wages from the corporation reported on Form W-2. See IRS Publication 535, available online at: www.irs.gov/publications/p535/.
We did not reduce the households modified adjusted gross income to account for qualified health spending. That is to say, the example household with 40,000 dollars of income, has 40,000 dollars of income after all deductions are accounted for. "Modified Adjusted Gross Income under the Affordable Care Act." Center for Labor Research and Education, University of California, Berkeley, n.d. Web. 13 May 2014. http://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf.