Since the benefit is tax free, if this employee is in the 30% tax bracket (payroll and income tax combined) the tax subsidy is $6,000. That is, had the $20,000 been paid as wages, government at all levels would have taken $6,000. But since the money was spent on health insurance instead, government took nothing. To get the entire subsidy, the employer must spend $20,000, however. Suppose the employee and the employer chose a more economical plan, costing, say, $15,000. They would save $5,000 that would then be available to pay additional wages. But since the tax bite will be $1,500, take home pay will rise by only $3,500. So here is the bottom line: under the current system we can always lower our taxes by buying more health insurance. If we buy less health insurance, our taxes go up. Further, for someone in the 30% tax bracket, the incentive is to buy insurance until it’s worth only 70 cents on the dollar. For someone in the 50% bracket (which is where most of the decision makers are) the incentive is to buy insurance until its worth only 50 cents on the dollar” …show more content…
The Economic Research web site of the Federal Reserve of St Louis shows how the real median household income in The United States has been going down since 2000 (see figure 1), while the health care cost have more than doubled (see figure 2). In 2000 a company paid an average of $6438 per worker health plan, that amount went up to $16351 by 2013, that is money that could gone to a worker payment but instead the employer had to spent it in health