Sometimes, even Factcheck.org gets it wrong (sort of)

By and large, I tend to rely on the non-partisan website Factcheck.org to verify or debunk the various claims raised by both sides in the presidential election.  And they tend to do a pretty good job of backing up their analyses.

However, in a recent posting analyzing the candidates' statements regarding the other's health insurance plan, Factcheck seems to miss the forest for the trees.

In its article, Factcheck tries to debunk the Obama campaign's assertion that the McCain health insurance plan will lead to the largest middle-class tax hike in history.  Frankly, I have no idea (and Factcheck makes no effort to explain) what would constitute the largest middle-class tax hike in history.

In order to go further, a brief primer is required.  John McCain's health insurance plan has two principal tax-related components.  First, if your employer provides health insurance, you will be taxed on that amount.  Currently, such employer-provided insurance is not considered taxable income.  Under McCain, you will suddenly be hit with a higher tax withholding from your paycheck.

Second, McCain will provide a tax credit of $2,500 for individuals, and $5,000 for families (regardless of size or needs).  Supposedly, you will be able to direct the government to send the credit directly to the insurer.  How, exactly, that might work in the context of tax credit remains a mystery, since tax credits are offset by tax liabilities on your return.  It seems possible that you could end up losing the benefit of the tax credit in the maw of other taxes, in which case you're SOL.

But in any event, follow this likely scenario:  Health insurance costs, on average, about $12,000 per year for a family (and I've rounded down - it's actually a bit higher).  Under McCain, you'll have to pay taxes on that.  Assuming a low tax bracket of 25%, you'll owe $3,000 in taxes that you would not otherwise owe.  Over 12 months, that $3,000 translates into taking home $250 less each month.  Pause, and ask yourself, can you afford to reduce your monthly pay by $250 a month?

The tax credit, meanwhile, goes directly to the insurer.  However, Factcheck does a calculation that would result in your having $2,000 left over to invest in a health savings plan or to spend on other health care.  Of course, that's impossible, because the tax credit goes directly to the insurer. You will never see it, and thus will never be able to otherwise use the funds.  (Presumably, Factcheck assumes that you will be entitled to a full refund and that the leftover credits will come to you on April 15). 

However, if you end up owing taxes at year end, your owed taxes will be offset against the tax credit, resulting in a reduced (or potentially eliminated) tax credit.  So at the end of the day, what are you left with?  Less money, higher taxes, and the same health coverage you already have.

Even if you do get a full refund, you are still left with less money each month, higher taxes, and the same health coverage you already have, with the added bonus of having given the government a $2,000 interest-free loan for a year.

Lastly, bear in mind that this all assumes an employer does not discontinue providing health insurance.  Because of the alterations the McCain proposal would cause to risk-pool insurance, experts note that within a handful of years after the plan is implemented, employers would begin dropping employee health coverage altogether.

What that would mean is you have to go into the market to buy your own insurance.  At $12,000 a year, you will have to pay $1,000 per month out of pocket.  Even deducting the $5,000 credit, you still pay $583 per month out of pocket.  Again, do you have an extra $1,000 per month?  How about an extra $583 per month?

What Factcheck then overlooks in its analysis is that, while the direct tax increase may not be the largest in history, the drain on middle-class disposable income may very well be, and may result in an economic disaster the likes of which (even today) we have never seen.

For another good take on the two health insurance plans being proposed by the candidates, this article at the Health Business Blog is a good read..