More on Winners and Losers Under McCain's Health Plan

Last week, I posted on the complicated issues involved in assessing who would benefit from and who be harmed by McCain's health insurance proposals. The biggest element of uncertainty by far involves the question of how many employer provided health insurance (EPHI) plans are eliminated due to the possibly strong adverse-selection incentives McCain's plan introduces. 

That said, if we ignore adverse selection, the next big question is whether, in the absence of cost reductions, McCain's plan is a net bonus or cost for households.  Unlike current law, the plan would have the federal govt tax contributions to EPHI at a person's federal income tax rate (though apparently, the payroll tax would not be applied). In return, McCain would provide a refundable tax credit for people who purchase plans, whether from employers or otherwise.

Ignoring adverse selection and overall health costs, the question of whether McCain's plan would cut or raise your taxes depends on whether his credit exceeds the value of the current tax deduction given your health plan and federal marginal income tax rate (there's also the issue of state taxes, as well as bracket creep, which Don Pedro raised in comments to my initial post). In the short run, most people would benefit from McCain's plan. However, his tax credit is indexed to overall inflation rather than health-sector inflation, which means that over time, the credit's real value would shrink. The interesting question is how quickly.

The Tax Policy Center has just released some new estimates on this issue (for both candidates' plans). See their post for more, but here's the money quote vis-a-vis McCain's plan:

By 2014, the non-refundable portion of [McCain's] credit is worth less than the tax exclusion and, by 2018, income taxpayers pay $62 billion more in tax in the aggregate (although many middle-income taxpayers still come out ahead under the proposal).

For more, see the TPC post.