The Deregulation Canard
The approach involved two basic elements. First, after (somehow) implicitly attributing the current financial crisis to deregulation, Biden argued that McCain wants to do the same thing to the health care sector and so presumably send it into a similar crisis. “As a matter of fact,” Biden said, “John recently wrote an article in a major magazine saying that he wants to do for the health-care industry deregulate it and let the free market move like he did for the banking industry.” The same argument is advanced in a new Obama campaign commercial. Over images of Fannie and Freddie logos, the ad asserts that McCain wants to do to health care what “Bush/McCain policies have done to our economy,” by which they mean deregulation. The ad says:
McCain just published an article praising Wall Street deregulation; said he'd reduce oversight of the health insurance industry too, “just as we have done over the last decade in banking.”
The line they quote comes from an article by John McCain (i.e by his campaign) about the McCain health plan in the latest issue of Contingencies magazine. In a passage arguing for more competition to lower the cost of health insurance, McCain writes:
I would also allow individuals to choose to purchase health insurance across state lines, when they can find more affordable and attractive products elsewhere that they prefer. Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation. Consumer-friendly insurance policies will be more available and affordable when there is greater competition among insurers on a level playing field.
The Obama ad of course doesn't quote all of that, but merely suggests McCain is endorsing some supposed deregulation of Wall Street. In fact, McCain is very plainly talking about the Riegle-Neal Interstate Banking Act, passed in 1994, which permitted banks to establish branches nationwide by eliminating the requirement for separate subsidiaries in each state and the prohibition against banks accepting deposits from customers out of their home states. This very sensible reform updated a 1956 law to modernize American banking, and there is simply no question it has been successful and useful. It passed the Senate 94 to 4, and Sen. Biden voted for it.
That important act of deregulation had exactly nothing whatsoever to do with the economic crisis we now face, and on the contrary has contributed to American prosperity and competitiveness. The Obama campaign could raise questions about how close an analogy there might be to that law in allowing health insurers, like banks, to work across state lines. But the tack they have actually taken — accepting the analogy and asserting it reflects poorly on McCain's plan — is either dishonest or ignorant. Either way, it makes no sense.
The Tax Distortion
The second leg of the Obama-Biden critique is directed at McCain's proposal to provide a tax credit to individuals and families for the purchase of health insurance while counting employer-based coverage as taxable income. Biden himself was the first to launch this particular charge. At a rally in Pennsylvania on September 18, Biden told the assembled audience that John McCain, through his health-care plan, is:
proposing the largest increase on middle class taxpayers in American history….It will cost the middle class over one trillion dollars in additional taxes. So ladies and gentlemen it's almost unbelievable, you almost don't believe what I'm telling you, because it sounds so wrong.
It does sound wrong, because it is. The Washington Post a few days later described Biden's claim as a “fabrication,” explaining that McCain's plan takes the existing tax break for employer-purchased health coverage and gives it to individuals as a credit to use in purchasing health insurance they select — whether they get their insurance through their employer or not. The plan doesn't provide the tax benefit twice — before and after the employer purchases coverage — but once, the way it is provided today. The difference is that individuals get the benefit as individuals, rather than through their employer's payroll, and regardless of how they purchase their health insurance. It's true that this means more taxable income, but the amount of additional taxes paid on that income would be made up for and then some by the tax credit itself. The Post quotes Eric Toder of the non-partisan (if slightly left-leaning) Tax Policy Center saying “It is not fair to pull out just one part of the McCain proposal. It is a package. They are giving back more than they are taking away.”
In fact, as the Post further noted,
By most independent calculations, the McCain plan will leave most taxpayers better off in strictly financial terms, at least until 2013. After 2013, the benefits will begin to diminish. By 2018, taxpayers in the top quintile will be slightly worse off, but middle-income taxpayers will either break even or be slightly ahead.
More importantly, they will have more reliable, affordable, and portable health coverage as well. In Thursday's debate, Biden added an even more deceptive element to his earlier fabrication. He said:
Now, with regard to the — to the health care plan, you know, it's with one hand you giveth, the other you take it. You know how Barack Obama — excuse me, do you know how John McCain pays for his $5,000 tax credit you're going to get, a family will get? He taxes as income every one of you out there, every one of you listening who has a health care plan through your employer. That's how he raises $3.6 trillion, on your — taxing you
r health care benefit to give you a $5,000 plan, which his Web site points out will go straight to the insurance company. And then you're going to have to replace a $12,000 — that's the average cost of the plan you get through your employer — it costs $12,000. You're going to have to pay — replace a $12,000 plan, because 20 million of you are going to be dropped. Twenty million of you will be dropped. So you're going to have to place — replace a $12,000 plan with a $5,000 check you just give to the insurance company. I call that the “Ultimate Bridge to Nowhere.”
The beginning portion of this mass of confusion is simply the same false claim he had made in Pennsylvania in September: implying the plan results in a net tax when it actually results in a net credit. On Friday, the Obama campaign even echoed this assertion with a new television ad showing Biden making this claim in the debate. The ad, like the claim, is patently dishonest.
Biden then argues that it's problematic that the tax credit McCain offers could go directly to the insurance company to pay for health coverage. Yet another dishonest new Obama ad on Friday made the same point too (while yet again repeating out of context the misleading point about taxing health-care benefits). But what exactly is the problem? Offering the option of having the money go directly to an insurer of your choice is a simple convenience — it doesn't mean the money doesn't belong to the individual taxpayer. And as the McCain plan makes clear, Americans with insurance coverage that costs them less than their new tax credit can deposit the remainder in a Health Savings Account for future needs.
The notion that Americans would need to “replace a $12,000 plan with a $5,000 check,” meanwhile, ignores the simple fact that the money employers now spend on employees' insurance belongs to the employees. It is a part of your wages that you never see. If it wasn't spent on health care by your employer but was given to you as cash wages, you would not be replacing a $12,000 plan with a $5,000 check, but rather with something approaching $12,000 in additional income and that $5,000 check. You would pay income taxes on that additional $12,000, but what you would pay would be less than the extra $5,000, so, again, nearly all taxpayers (except those at the very top of the income scale) would come out ahead.
And finally Biden asserts that 20 million people are going to be “dropped” from their insurance coverage under McCain's plan. It's hard to be sure just what he has in mind, but it may well be a distortion of the Tax Policy Center's analysis of the plan, which says that under the McCain plan about 20 million people would move into the individual insurance market by 2018 (since the plan would make it much more appealing), but does not distinguish between those who would do so by choice to pursue coverage that better suits their health and economic needs and those who would do so because they were “dropped” by their employer. Either way, people would not find themselves in the position Biden describes, since he leaves the effect on net wages out of his description entirely.
Distorting the Health-Care Debate
There is no question that part of the aim of the McCain plan is to build a more functional non-group insurance market so as to slowly and gradually sever the link between employment and insurance. That would help make health insurance more portable and reliable, and allow people to feel secure about their coverage regardless of changes in their employment and their lives. The insecurity of employer-provided coverage is one of the chief problems bedeviling American health care and the middle class, and McCain's proposal would help address it without creating a powerful incentive to push people into government run insurance — as Obama's plan would do. Biden's deceptive description notwithstanding, that is an important part of the appeal of the plan, from the point of view of both the average American family, and the broader American economy.
Under the McCain plan, workers would get more cash wages, a federal tax credit, and control over their health insurance that would make it more affordable, portable, and reliable. Giving a tax break to individuals and families, rather than through their employers' payroll, is one crucial element of that approach. Fostering more competition to lower costs and improve quality is another. The Obama campaign's new lines of attack against the plan don't argue otherwise. They just employ crude fictions and distortions to confuse the issue.
— Yuval Levin is a fellow at the Ethics and Public Policy Center and senior editor of The New Atlantis. His new book Imagining the Future: Science and American Democracy, will be published later this month.