News & Politics

End the Two-Tier Tax System for Health Care

The conversation around health insurance and health care coverage in the United States is so messed up that it’s hard to imagine how we got here. The answer — as with an awful lot of other things government does — is that the “Know Betters” have spent much of the last century trying to “fix” things.

We tend to imagine that Obamacare, the Affordable Care Act, is most at fault — which is why so many people imagine that repealing the ACA is the be-all and end-all for the Trump administration and the current Congress. But the roots of our troubles go back much further.

In fact, the trouble stems back to wage controls during World War II.

During the war, there was a massive labor shortage in the U.S. because so many of the able-bodied men were off shooting Nazis and blowing things up. One side effect of this was that women were moving into the industrial workforce in great numbers — the “Rosie the Riveter” phenomenon — but even with that, the competition for labor was fierce.

In a normal market, companies would raise wages in order to compete for workers, but war-time wage and price controls prevented that. But in 1943, the War Labor Board ruled that “fringe benefits” were not included in wages for the purpose of wage controls. This made benefits like health insurance an important competitive edge for employers during the war, and even more so after the war while wage and price controls continued.

There was a side effect of this. The costs of benefits like health insurance to a corporation were costs of doing business; they subtract from the company’s net income and so reduce the company’s income tax. Unions could argue for better health insurance during collective bargaining, and companies could offer the health insurance at an effective discount because the companies were paying with pre-tax dollars.

As the competition for workers continued, and as unions looked for more benefits that could be added or union contracts, though, they began to run into limits. Basically, there’s only so much insurance it makes sense to buy: people can only get so sick.

Other coverage started to be added to health “insurance,” like coverage for doctor visits that people need every year. This violates the basic idea of insurance, which is supposed to compensate for damage done by unlikely events. On the other hand, it meant that insurance companies could negotiate bulk discounts, and the doctors could be paid by the companies with those cheap pre-tax dollars. So there was a natural movement to add more and more of these sorts of faux-insurance benefits.

But this had a problem: it left out everyone whose insurance wasn’t part of a big group and wasn’t being paid for using pre-tax dollars: poor people whose jobs weren’t with big companies; self-employed people; the elderly. By effectively making corporate health insurance dramatically cheaper than individual insurance, the wartime price controls had created a natural two-tiered system.

Our health insurance problems now were caused in large part by the natural, if unintended, consequences of World War II price controls. A solution is going to need to reverse this two-tiered system by ending the tax disparities between individuals paying for health care, and corporations paying for employee health plans.

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