Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Corporation Tax Deductions Support Our Health System.

This is the last anecdote, I promise you. It has to do with Ireland, the Emerald Isle, in 2000. In an effort to attract corporations to move there, the Irish Republic lowered its corporate income tax to 12.5%, an unheard-of low rate. To Irish delight, corporations in Sweden, Scotland, Germany and many other nations, promptly moved to Ireland to enjoy the low taxes. Since Ireland is mostly rural, there was a migration of Irish workers from the country to the city, causing a housing shortage in Dublin. A taxi driver, in passing a little Dublin shack, was pleased to tell foreign visitors the shack had just sold for a million dollars. That, in turn, set off a building boom, bringing construction workers to Dublin, and causing a shortage of mortgages, leading to boom-time rates. Irish bankers were delighted that little banks could be so top-heavy with imported mortgage money. The little Irish banks became overextended, and promptly collapsed, taking the stock market with them.

The moral of this little Irish tale is clear: lowering corporate taxes will definitely attract businesses to relocate to your shores, but if you lower them too much, too fast, it can cause a disaster. Some people conclude from this you should never lower corporate taxes; other people conclude you should lower taxes, but do it carefully and slowly. In the American case at present, it is tempting to try it to stimulate the economy, but we owe a powerful moral debt to the Europeans, who are in bad economic condition. If only we could devise a way to punish our enemies but not our friends, it would seem perfect. Selecting certain manufacturers but skipping others would do the trick nicely. By the way, our federal corporate tax is 35%. That's the highest in the developed world, so our hands are tied -- we're sorry, but we just have to do it to keep our own corporations from moving to Ireland. Other nations, like Japan and Switzerland, would be sure to notice we have this power, even if we don't use it against them. Yet. We hold a powerful international weapon, providing we use it sparingly, but gracefully.

And our own corporations? Well, that's the whole point. We would like them to take the pressure off health insurance, either by allowing other health insurance to be tax-exempt or by telling their lobbyists to look the other way while we remove Henry Kaiser's little gimmick. There's even a compromise, for those who admire bi-partisanship. Lower the tax exemption for existing corporations, but extend them to other companies and people in general. We're not looking to lose or gain revenue, we are looking for equal treatment under the law. And finally, the best way of all would only require one sentence. Just amend the Health Savings Account Law to permit the premiums for mandatory Catastrophic high deductible to be paid out of the account. Since the Accounts are tax-exempt, the reinsurance premiums would be, too. The level playing field for health insurance is restored in an instant. Only after the inequality resistance is removed, can you consider lowering the exemption.

Well, fine, what about corporate taxes? Since I am a single-issue voter, it isn't in my interest to declare a position on unrelated issues. But I stay within my medical mandate if I point out one thing about the politics of this. You don't have to be a magician to guess some corporations would like to have a tax reduction, because a tax reduction is a money in the bank. Other corporations might persist in the party line that it serves our interest to leave things alone. So, the leadership might just have to stand by, while a newly elected hothead makes a name for himself by introducing a bill to eliminate corporate taxes, entirely. Just what would the consequences be?

A tax deduction of 35% is a tidy sum, all right, but many states have a 10% tax, so it's really 45%. But look at what happens when you give your employees health insurance. It's a business expense, so a $10,000 health insurance policy only costs the company $5500. And then, remember the first chapter of this book. Every employee gets a payroll deduction of 2.9%, up to $117,000 of salary. That's another $3000, per employee. Some companies have hundreds of thousands of employees. And if you've got high-priced employees over $200,000 in salary, it's another $3800, but notice this: there's no top limit to the taxable salary, so if you've got a $10 million president, he's generating a $380,000 deduction for the company. Many companies positively love expensive health insurance, which includes extremely dubious Flexible Savings Accounts with a use-it-or-lose-it feature, leading to prescription sunglasses toward the end of December if the employe hasn't used it. All of those other deductions on a pay stub except the income tax withholding are probably eligible for tax deductions, too. It isn't too hard to imagine a resourceful accountant who could make the whole donation of health insurance a free gift, when you remember all employees are getting a tax deduction of several thousand dollars, too. The higher the premium the better, which isn't at all a good thing for market prices for the rest of us. The only thing which limits more and more deductible items is the company runs out of taxes to deduct from. Who wants lower corporate taxes? Not us, think a lot of companies.

And then, there's Greece. We can't lower corporate taxes more than 10% at a time, for fear of bankrupting Greece and sending the financial world into a tailspin. So even the most rabid populist can be persuaded to limit the size and pace of the deductions. Therefore, we have some other things on our wish-list while we wait to watch how low corporate tax can safely go. That being the case, there are some other things on the wish-list while we watch what gradual corporate tax reduction can do. I would like to see every Flexible Spending Account roll over its end of year surplus into a Health Savings Account. That would immediately create several million new HSAs, meanwhile getting some good for the money. I'm really serious about Health Savings Accounts. Everybody ought to have one, so remove the prohibition on having more than one health policy. What we mean to prohibit is taking two tax deductions, so say so, and let people have as many accounts as they want. This is particularly important if you want to reap compound interest for newborns for an extra 26 years, but there are probably lots of retirees who are healthy and want to store up their benefits for later, but now have nowhere to put them. Of course, we should allow everyone to have both an Obamacare policy and a Health Savings Account, with the proviso you can't take a double tax deduction. Not everyone will do it, and of those who do, not everyone will use both. But as long as they don't game the system, why not? It's a lot easier to defend freedom of choice than prohibitions.

Originally published: Tuesday, January 06, 2015; most-recently modified: Wednesday, May 15, 2019