January 25, 2007
Illustration of the President’s Health Care Tax Initiative
by Gerald Prante
Fiscal Fact No. 75
Now that more details of the President's health care proposal have emerged, we can look more closely at how different groups of Americans will be impacted. As discussed in Tax Foundation Fiscal Fact No. 74, "President to Propose Large Tax Deduction to Spur Health Insurance Purchases," 53 percent of uninsured Americans have no federal income tax liability. Therefore, the President was forced to allow the deduction for purchasing health insurance to reduce payroll tax liability; this is the only way to let the 53 percent with no income tax liability benefit, at least in the short run, from the deduction.
Following is an illustration of how the new Bush health care plan proposed during the State of the Union Address would affect four types of families.
First, we present a family of four with two children that earns $80,000 per year in wage and salary income and receives $10,000 in employer-provided health insurance. Next, we show that same family, but we assume it receives $20,000 in employer-provided health insurance. Third, we show the impact on a low-income family with a single mother of two children who earns $25,000 in wage and salary income and currently has no health insurance. Finally, we show a single person living by himself earning $50,000 and currently uninsured. We assume all families currently take the standard deduction and receive the child tax credit (if applicable), and no other credits. Also, we calculate the Earned Income Tax Credit (EITC) and the additional child tax credit for the low-income single mother.
Table 1: Family of Four Earning $80,000 in Wage and Salary Income and Receiving $10,000 in Employer-Provided Health Insurance
Current Law Bush Health Care Proposal
Wage and Salary Income $80,000 $80,000
Health Insurance $10,000 $10,000
AGI $80,000 $90,000
Standard Deduction (regular) $10,700 $10,700
Standard Health Deduction $0 $15,000
Exemptions $13,600 $13,600
Taxable Income $55,700 $50,700
Income Tax Before Credits $7,572.50 $6,822.50
Child Tax Credit $2,000 $2,000
Income Tax After Credits $5,572.50 $4,822.50
Payroll Tax Base $80,000 $75,000
Payroll Tax (Employee) $6,000 $5,625
Payroll Tax (Employer) $6,000 $5,625
Total Payroll Tax $12,000 $11,250
Total Income and Payroll Tax $17,572.50 $16,072.50
Total Tax Savings $1,500
Table 2: Family of Four Earning $80,000 in Wage and Salary Income and Receiving
$20,000 in Employer-Provided Health Insurance
Current Law Bush Health Care Proposal
Wage and Salary Income $80,000 $80,000
Health Insurance $20,000 $20,000
AGI $80,000 $100,000
Standard Deduction (regular) $10,700 $10,700
Standard Health Deduction $0 $15,000
Exemptions $13,600 $13,600
Taxable Income $55,700 $60,700
Income Tax Before Credits $7,572.50 $8,322.50
Credits $2,000 $2,000
Income Tax After Credits $5,572.50 $6,322.50
Payroll Tax Base $80,000 $85,000
Payroll Tax (Employee) $6,000 $6,375
Payroll Tax (Employer) $6,000 $6,375
Total Payroll Tax $12,000 $12,750
Total Income and Payroll Tax $17,572.50 $19,072.50
Total Tax Loss $1,500
Table 3: Single Mother with Two Children (Head of Household), Earning $25,000 in
Wage and Salary Income, Uninsured but Purchasing Health Insurance
Total Tax Savings $2,250
Table 4: Single Man with No Children, $50,000 in Wage and Salary Income, Uninsured
but Purchasing Health Insurance
Total Tax Savings $3,000
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