Wednesday, May 23, 2012

Deductions v. Credits

Ramesh Ponnuru warns Mitt Romney's campaign to offer a tax credit for buying health-care rather than a tax deduction:
In 2007, George W. Bush’s administration proposed to start treating individually purchased and employer-provided coverage the same. People who got insurance either way would get a “standard deduction” of $15,000 off their taxable income -- and they would get the same deduction whether they bought cheap or expensive insurance, restoring the incentive to economize. Romney is considering reviving Bush’s idea...

Like today’s tax break for employer coverage, the standard deduction would be most valuable to people in the highest tax brackets. The uninsured typically aren’t in those brackets. As a result, Bush’s proposal would have done little to increase rates of insurance coverage. At the high end of estimates, 9 million additional people would have gotten coverage. (About 50 million Americans lack insurance.)
That’s why other Republican health proposals have offered a tax credit instead of a deduction. A credit is worth the same amount of money in all tax brackets. When Senator John McCain ran for president, he proposed a $5,000 tax-credit plan for families. Representative Paul Ryan and Senator Tom Coburn have also introduced tax-credit plans. Compared with a deduction, a credit would increase the number of people with insurance much more for the same amount of money.

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