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The confusion may arise from the dazzlingly large sums that high-income families gain from these tax subsidies. According to a 2004 analysis, $50 billion in federal tax expenditures for health benefits, 26.7% of the total, went to the 14% of U.S. families with incomes of $100,000 or more.3 Conversely, the 57.5% of families with incomes below $50,000 received only 28.4% of the subsidies. In other words, on average, families whose income was at least $100,000 got $2,780, while those making under $50,000 received $102 to $1,448.
But progressivity in taxation (or tax subsidies) is not calculated on the basis of the absolute amount that government takes from (or gives to) families at different income levels. Rather, a progressive tax takes a larger percentage of income from wealthier families than from poor ones — the tax rate increases with income. Thus, a tax of $1,000 on a millionaire and $100 on a janitor earning $10,000 is regressive; the rate for the millionaire is 0.1%, whereas the janitor pays 1%.
Viewed from this perspective, current federal health-benefit tax expenditures are clearly progressive. An analysis of families that actually have employer-paid coverage shows that as income rises, the per-family tax subsidies plummet as a percentage of family income (see table). In other words, for families with employer-paid coverage, a move to tax health benefits would cost low-income families (with annual incomes below $10,000) 18.3% of their total income but high-income families (with annual incomes above $99,999) only 2.7%. And the tax rate would drop even lower for the super-rich. A Goldman Sachs executive who enjoyed the firm's infamous $40,543 health plan4 got a federal tax subsidy of about $15,367 last year. But that's only 0.13% of the bonuses received by the company's four top earners.5 So though taxing health benefits would spare the uninsured, the average poor family with employer-paid coverage would be taxed at a rate 140 times higher than Wall Street titans. In our book, that's a regressive tax.
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David U. Himmelstein, M.D.
Steffie Woolhandler, M.D., M.P.H.
Cambridge Hospital
Cambridge, MA
This article (10.1056/NEJMopv0907478) was published on August 19, 2009, at NEJM.org.
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