Health Insurer Profits not so Fat

As the reform debate continues in Washington, recent reports have emerged showing that the health insurance industry is not as profitable as many would assume. Calvin Woodward of My Way News has posted this interesting article looking at some of the claims about health care profits and a more detailed look at the numbers regarding those claims. According to Woodward, farm and construction machinery, Tupperware, the railroads, Hershey sweets, Yum food brands and Yahoo are all more profitable than the health insurance industry.

Democrats and their allies have gone after insurance companies as rapacious profiteers making "immoral" and "obscene" returns while "the bodies pile up."

Ledgers tell a different reality. Health insurance profit margins typically run about 6 percent, give or take a point or two. That's anemic compared with other forms of insurance and a broad array of industries, even some beleaguered ones.

Profits barely exceeded 2 percent of revenues in the latest annual measure. This partly explains why the credit ratings of some of the largest insurers were downgraded to negative from stable heading into this year, as investors were warned of a stagnant if not shrinking market for private plans.

Insurers are an expedient target for leaders who want a government-run plan in the marketplace. Such a public option would force private insurers to trim profits and restrain premiums to compete, the argument goes. This would "keep insurance companies honest," says President Barack Obama.

The debate is loaded with intimations that insurers are less than straight, when they are not flatly accused of malfeasance.

They may not have helped their case by commissioning a report that looked primarily at the elements of health care legislation that might drive consumer costs up while ignoring elements aimed at bringing costs down. Few in the debate seem interested in a true balance sheet.

Lawmakers Debate Tax on Health Benefits

From the Wall Street Journal.com:

As lawmakers wrestle with how to pay for a proposed health-care system overhaul, an emerging flashpoint of debate is whether higher-income employees should face steeper taxes on health benefits than those with more-modest income.

Senate Finance Committee staff this month began talks in earnest aimed at reaching bipartisan agreement on a broad health-care rewrite. The greatest chance for bipartisan accord, for now, is in the hands of two Senate players -- Finance Chairman Max Baucus (D-Mont.) and his Republican counterpart, Sen. Charles Grassley of Iowa.

Sen. Baucus favors taxing some employer-provided health benefits. In an informal "white paper" released earlier this year, Sen. Baucus said this could be done without disrupting the employer-based health-benefits system, where nearly three-fifths of Americans get health insurance.

But congressional Democrats and Republicans may have difficulty finding common ground on how to limit the tax benefits that currently favor employer-based health plans. One way to do that is to impose a dollar cap on the cost of health benefits that may be excluded from taxable income.

An alternative, suggested by Sen. Baucus, is to deny the exclusion to individuals above a certain income threshold. Republicans are resisting that approach, according to aides with knowledge of staff discussions.

A third possibility would be to combine the two approaches, by allowing tax-free health benefits to the lowest earners but taxing health benefits above a certain income threshold on a sliding scale that increases as income rises.

For instance, single workers with income under $62,500 could have all their employer-based health benefits excluded from income tax, while benefits eligible for exclusion could be capped for those with income between $62,500 and $125,000. Above $125,000 all benefits may be taxed.

Also under consideration is a plan that would allow for adjustments in the tax treatment of benefits depending on where the employee lived. There is significant variation in health-care costs among states.

Labor unions are warning lawmakers against capping the exclusion for lower- and middle-income workers. They argue that to do so would single out workers at firms with large numbers of older workers and retirees, and small firms that may pay more for health-care because they have less ability to spread risk.

"If you had to choose, an income threshold would be better," said JoAnn Volk, a health-care lobbyist at the AFL-CIO. "But anything that might undermine the place where most workers get coverage is a concern."

Lay 'Death Tax' Debate To Rest

From the LATimes.com:

Everybody's familiar with Ben Franklin’s old saw about nothing being certain but death and taxes. But how about the "death tax"?

That's the loaded term employed by opponents of the estate tax, which has been part of the federal tax code for more than 90 years and the subject of furious repeal campaigns for almost that long.

Thanks to lobbyists and legislators looking out for the welfare of the richest Americans, the tax currently hits fewer than 3 of every 1,000 estates every year and bristles with exemptions and deferments for the rest. Its contribution to the federal treasury is about 1% of all revenue.

Yet it consumes enormous mind share in Washington. This month, a new tax-cut proposal from Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) won Senate approval. The resolution would raise the exemption on taxable estates to $10 million from the current $7 million (after the death of both spouses). It also would cut the rate charged on the nonexempt portion to 35% from the current 45%.

The tax is currently set to fall to zero for 2010 and return with a $1-million exemption and a 55% rate in 2011; President Obama proposes merely making today's exemption and rates permanent.

Arguments against the estate tax rank as the most special of special pleading, considering that more than 99.7% of all estates already are exempt. Perhaps 3,000 Americans who died in 2007 left estates valued from $7 million to $10 million; Lincoln and Kyl would have extended the exemption to them. As for those left to carry the burden, the number of taxpayers who died in 2007 leaving estates worth more than $10 million was 1,700. Their average estate was $31.6 million. Lincoln, Kyl and their colleagues actually wasted time on the Senate floor to give people like this a new tax break.

But then Kyl represents a state with a lot of wealthy retired sinus patients and Lincoln a state brimming with billionaires coincidentally bearing the same last name as the founder of Wal-Mart.

Even financial planners for the affluent acknowledge that many taxpayers are excessively concerned about the estate tax.

"A lot of people afraid they are going to be hit by it are completely out of the system" because of the exemption, says Mary Ann Mancini, head of the private client group at law firm Bryan Cave in Washington. "It resonates with people more on an emotional basis than a logical one."

No kidding. On the website of the Policy and Taxation Group, an anti-estate tax outfit founded by an Orange County wealth manager, you can find comments from taxpayers like this: "If I died today, I'd pay about $200,000 in death tax."

Tax Misrepresentations in Vice Presidential Debates

As many of you know, last night was the first and only Vice Presidential debate between Sen. Joe Biden and Gov. Sarah Palin. The debate covered a wide range of topics, but not surprisingly taxes and the economy engulfed a large part of the discussion. As usual, there were quite a few misrepresentations of the facts from both sides.

Fortunately the experts at The Tax Foundation have reviewed the debate transcripts and outlined all the inaccuracies in both candidates’ arguments. Below are snippets from both Biden’s and Palin’s gaffes, but you can read the full review by clicking here.

Sen. Biden's Errors

First, Joe Biden responds to a charge by Gov. Palin, who said that Sen. Obama voted to raise taxes on people making as little as $42,000. We've been over this numerous times, and while Gov. Palin's claim is misleading (see below), Sen. Biden's response contained an error as well:

The charge is absolutely not true. Barack Obama did not vote to raise taxes. The vote she's referring to, John McCain voted the exact same way. It was a budget procedural vote. John McCain voted the same way. It did not raise taxes.

While Sen. Biden is correct to say that the vote did not raise taxes, actually, Sen. McCain did not vote on this non-binding resolution. It passed 51-44, but Sen. McCain was one of five members of the Senate who did not vote in that roll call vote. Therefore, Sen. Biden's claim that he "voted the same way" is incorrect.

A little later in the debate, Joe Biden made this statement:

The middle class under John McCain's tax proposal, 100 million families, middle class families, households to be precise, they got not a single change, they got not a single break in taxes. No one making less than $250,000 under Barack Obama's plan will see one single penny of their tax raised whether it's their capital gains tax, their income tax, investment tax, any tax. And 95 percent of the people in the United States of America making less than $150,000 will get a tax break.

Actually the "100 million" figure is not families. It is not households. It is tax returns. But that's a somewhat minor issue in the whole scheme of things. The figure is incorrect because Sen. McCain, even relative to a current policy with Alternative Minimum Tax (AMT) patch baseline, does cut corporate income taxes and provides his refundable health care tax credit, which would reduce that "100 million won't get a tax break" figure. That figure is technically correct if you look only at the individual income tax and ignore Sen. McCain's health care tax plan, and if you do it relative to a current policy baseline with AMT patch. Furthermore, Sen. Biden makes the same error as Barack Obama in mixing baselines. The "95 percent" figure (when properly used) gives Obama credit for an AMT patch whereas he does not give McCain credit for an AMT patch tax cut when referring to the 100 million figure.

But the "95 percent" figure is just plain wrong as well. According to the Tax Policy Center, no income quintile (including those earning under $150,000) would even see 95 percent of its tax units receiving a tax break under Pres. Obama's tax plan in 2009. Even in 2012 under Obama's tax plan relative to current law, an average of the fraction of tax units that receive a tax cut in the bottom four quintiles is less than 90 percent. In other words, Biden's statement is factually incorrect. The "95 percent" figure is fairly accurate when Obama uses it to talk about the fraction of working families that would receive a tax cut under his plan, but not the entire population nor the entire population earning under $150,000.

Gov. Palin's Errors

Gov. Palin started off early in the debate trying to label Sens. Obama and Biden as tax hikers. She said:

Now, Barack Obama and Sen. Biden also voted for the largest tax increases in U.S. history. Barack had 94 opportunities to side on the people's side and reduce taxes and 94 times he voted to increase taxes or not support a tax reduction, 94 times.

This is not true. Even if one considers the expiration of the so-called Bush tax cuts to be a tax increase (it is technically not a tax increase), it would not be the biggest tax increase in history under almost any measure that adjusts for the size of the economy. And Sen. Obama's presidential tax plan does "raise taxes" relative to a current policy baseline over ten years, but it's not even close to being the largest tax increase in U.S. history. Relative to a current law baseline, Sen. Obama is actually cutting taxes rather significantly in the aggregate (nearly $3 trillion).

Sticking with the "Obama will raise your taxes" theme, Palin also repeated the "$42,000" line that Sen. McCain has repeated over and over and over:

But we do need tax relief and Barack Obama even supported increasing taxes as late as last year for those families making only $42,000 a year. That's a lot of middle income average American families to increase taxes on them. I think that is the way to kill jobs and to continue to harm our economy.

As I wrote when Sen. McCain said this in the first debate: That was a non-binding Senate vote earlier this year, and it's different from what Obama is proposing as a candidate. Very few households making $42,000 per year would pay more in taxes under Obama's tax plan. Some may say that Obama is voting one way and proposing something else on the campaign trail. If that's fair, then McCain's drastic change of heart on the Bush tax cuts is fair game as well. McCain voted against the 2001 and 2003 tax cuts, but now supports extending almost all of them with the exception of the full repeal of the estate tax.

Gov. Palin's most egregious error of the night was actually repeated twice in 20 seconds. It was on the issue of Sen. McCain's health care plan, which neither side appears to understand.

I am because he's got a good health care plan that is detailed. And I want to give you a couple details on that. He's proposing a $5,000 tax credit for families so that they can get out there and they can purchase their own health care coverage. That's a smart thing to do. That's budget neutral. That doesn't cost the government anything as opposed to Barack Obama's plan to mandate health care coverage and have universal government run program and unless you're pleased with the way the federal government has been running anything lately, I don't think that it's going to be real pleasing for Americans to consider health care being taken over by the feds. But a $5,000 health care credit through our income tax that's budget neutral. That's going to help. And he also wants to erase those artificial lines between states so that through competition, we can cross state lines and if there's a better plan offered somewhere else, we would be able to purchase that. So affordability and accessibility will be the keys there with that $5,000 tax credit also being offered.

Sen. McCain's health care tax plan is not budget neutral. It is a $1.3 trillion tax cut over the next ten years, which is therefore the amount that would be added to the national debt under this proposal. It does cost the government something over the next ten years, and it's almost as expensive as Sen. Obama's health care tax plan, according to Tax Policy Center preliminary estimates ($1.6 trillion). To be budget neutral, Sen. McCain would essentially have to eliminate the exclusion from payroll taxes for employer-provided health insurance as well as the income tax exclusion. He does not do that. Notice that Gov. Palin, like Sen. McCain did in the first debate, doesn't give you the whole story on this plan, avoiding the inconvenient fact that he would tax employer-provided health insurance.