Tax free income

On friday I wrote that I receive $6,600 in tax free income from Duke each year. This is the amount Duke pays in premiums for my insurance. The fact that Duke pays premiums and I pay no taxes means I am shielded from the cost of my insurance. This has been going on with little fanfare since WWII in the U.S. system, and has lead to employees getting used to someone else paying for a large portion of their insurance. Like I tell my students, many workers think the benefit fairy brings insurance.

The monthly premium I pay ($335/month) is paid for in pre-tax dollars. My salary is reduced by paying this premium, but I get a subsidy from the U.S. treasury (e.g. all taxpayers) equal to the amount of tax that I don't pay on whatever I spend on premiums. I benefit by paying premiums on a pre-tax basis. An indivdiual calling up a private insurance company and getting a policy would pay premiums using after tax dollars.

I benefit from both of these (Duke paying premiums and me not paying taxes on that amount) and me paying premiums and not paying taxes on that amount. I think the second is less distorting than the first because: (1) I at least know that I am paying premiums, and how much I pay; and (2) there are cheaper options available from Duke, meaning I have exercise some choice in which plan I select. But, some readers felt I was trying to under-represent the amount of subsidy that I get from how insurance is now set up.

The way I see it, self employed people do not get tax free income, because there is no employer paying premiums on their behalf that they do not have to pay taxes on. They do get a subsidy similar to what I get when they purchase insurance in pre-tax dollars, thus saving payroll and income taxes. But, the premium cost is deducted from their income.

The total figure quoted in the column I wrote ($250 Billion) includes these costs, but also several other types of tax expenditures, such as money put into flexibile spending accounts (used to pay out of pocket expenses such as eye glasses and prescriptions--you guessed it, I've got one of them too), and the fact that out of pocket health care expenditures greater than 7.5% of gross income are deductible from anyones taxable income when you file an income tax return.

Here is a paper focused on tax year 2004 (total cost to treasury that year, $188 Billion) that walks through the details of various ways in which the tax code subsidizes health insurance premiums and health care expenditures.