They can't do otherwise.
Originally Posted by Goobieman
This is how corporate tax rates break down (federal tax only--states vary):
The tax advantage of health premiums to the employer is that it is a reduction to income before taxes. (e.g., if a company has revenues of $51,000 and insurance premium expense of $2,000, it's taxable income is $49,000).
Taxable income over Not over Tax rate
$ 0 $ 50,000 15%
50,000 75,000 25%
75,000 100,000 34%
100,000 335,000 39%
335,000 10,000,000 34%
10,000,000 15,000,000 35%
15,000,000 18,333,333 38%
18,333,333 .......... 35%
At taxable income of $49,000, a company would owe 15% of that in taxes, or $7,350.
Remove the insurance expense as a tax deduction, and taxable income rises to $51,000, with a tax bill of $7,750 ($50,000*15% + $1,000*25%).
Thus, residual income after expenses and taxes breaks down like this:
With tax deductible insurance premiums:
Remove insurance premiums:
Because tax rates are less than 100% for all levels of income, every dollar of expense eliminated will always exceed the additional tax burden generated by that savings.
If one imputes a decline in average premium cost across the whole of society (for the sake of argument, assume a 25% reduction in premium cost, which means an individual ends up purchasing the same insurance for 25% less than what his employer could previously), then employers would have to raise salaries by less than the previous cost of premiums to provide workers with the same compensation economically. Instead of paying $2,000 in insurance cost, an employer might have to pay an additional $1,600 in payroll expense (which is still tax deductible), resulting in a tax expense in this scenario of $7,410.
The breakdown may be summarized thus:
- Scenario 1: Removing the tax advantage of health insurance benefits to employers and pushing health insurance purchases to the individual at worst shifts the cost of insurance to the employer into direct payroll, meaning all employers have the same tax burden as before, but with higher wages for workers. Workers gain Employers break even.
- Scenario 2: Removing the tax advantage of health insurance benefits to employers and pushing health insurance purchases to the individual at best eliminates the cost of insurance to the employer. Workers break even Employers gain.
- Scenario 3: Removing the tax advantage of health insurance benefits to employers and pushing health insurance purchases to the individual at best eliminates some of the cost of insurance to the employer, with the rest shifting into direct payroll. Workers gain Employers gain.
Scenario 3 is the most likely scenario (expanding health insurance market places would exert significant downward pressure on prices), which is why eliminating employer subsidized insurance is the economically prudent and ethically appropriate action to take, regardless of all other health care economic considerations.