The Healthcare Exclusion Is (Still) the Tax Code’s Most Harmful Loophole

By Dan Mitchell.

"I wrote back in 2016 that the health care exclusion was the worst loophole in America’s monstrosity of a tax code.

Today’s column will explain why that is still true and we’ll begin with this short explainer video from the folks at Kite & Key.

When I give speeches on this issue, my main message is that America’s health system is an inefficient and expensive mess because of bad government policy.

The main symptom of that policy is what is known as third-party payer, which occurs when a consumer buys with other people’s money. And that is a perfect

description of how government has screwed up our health system.

For all intents and purposes (see cartoon), we don’t allow markets to function in health care.

Instead of buyers and sellers directly interacting, government policies have imposed layers of intervention.

Since I realize some people may not view my cartoon as evidence, here’s a chart showing the dramatic increase in third-party payer in America.

And this chart is from 2017. I’m guessing the data is even worse today (though I hope my assumption is wrong).

I’m not the only person who recognizes this problem. Far from it.

Dominic Pino wrote about the healthcare exclusion’s pernicious effect in 2023. Here are some key passages from that National Review column.

Excluding employer-provided health coverage from the income-tax base contributes to all sorts of problems with U.S. health care. …it’s really a classic story of unintended consequences. …Rather than getting money from their employers to spend on anything, including health insurance, most working Americans have part of their pay withheld from them and used by their employers to purchase group health insurance. …Other forms of insurance are not treated this way. People don’t risk losing their home insurance if they lose their jobs. Employers don’t select car-insurance plans for employees to use. Only employer-provided health insurance is exempt from the income tax, so workers’ health insurance is entangled with employment in a unique way. …Transferring control from workers to employers, as the tax code effectively does, distorts the health-care market in all sorts of ways. It lowers price sensitivity among consumers, which contributes to high prices.

As Dominic points out, and as the video explained, the healthcare exclusion results in lower wages for workers.

And here are some excerpts from an article last September by James Capretta and Bryan Dowd of the American Enterprise Institute.

The full exclusion of premiums paid for employer-sponsored insurance (ESI) from income and payroll taxation is profligate. The Office of Management and Budget (OMB) estimates it cost the Treasury $0.3 trillion in 2023 and will drain another $5.6 trillion from the government’s receipts over the coming decade. It is far and away the most expensive tax break in federal law. …encouraging excessively generous and loosely-managed health insurance at the expense of taxable wages and salaries. …The Affordable Care Act (ACA), approved by Congress in 2010, imposed…“Cadillac tax,” a new levy on employers…a somewhat clumsy effort to limit the tax subsidy without admitting that was the objective. It still faced stiff resistance from businesses and labor unions, which led to Congress repealing it in 2019.

Since Capretta mentioned Obamacare’s Cadillac Tax, I can’t resist mentioning that I liked that provision.

Not because I like taxes, but rather because I want to fix the mess of our health care system.

And the Cadillac Tax would have had a big effect, as shown by this visual.

The goal of the tax was not to raise revenue, but instead to discourage over-insurance.

In a logical and sensible system, health insurance would be like auto insurance or home insurance. In other words, it should be a way for consumers to protect themselves against large and unexpected costs.

Today, thanks to government, we have health insurance that is akin to a pre-paid, all-you-can-eat buffet.

P.S. If you want to see examples of third-party payer messing up health markets, click here and here.

P.P.S. If you want to see how free markets produce lower costs in health markets, click here, here, here, here, here, here, and here."

Meeting the Paris Climate Agreement by 2030 will be very costly

From Cafe Hayek.

"from pages 233 of Johan Norberg’s superb 2023 book, The Capitalist Manifesto (original emphasis):

And how much did the global lockdown reduce 2020’s global carbon emissions? By about 6 per cent. It is the largest reduction ever but nowhere close to what would be needed. If we were to meet the Paris Climate Agreement by 2030 just by doing and travelling less, we would need to suffer a pandemic like this every year for the next decade, without allowing us to have any recovery between the pandemics. Which, of course, would lead to an unprecedented social collapse."

Building Responsive and Adaptive Health Care Systems in Canada: Lessons from Switzerland

By Yanick Labrie of The Fraser Institute.

• Canada’s health-care system is increasingly unable to meet patient needs, with wait times reaching record lengths—over 30 weeks for planned care in 2024—despite significantly rising public spending and growing dissatisfaction among patients and providers nationwide.
• Swiss health care outperforms Canada in nearly all OECD performance indicators: more doctors and nurses per capita, better access to care, shorter wait times, lower unmet needs, and higher patient satisfaction (94% vs. Canada’s 56%).
• Switzerland ensures universal coverage through 44 competing private, not-for-profit insurers. Citizens are required to enroll but have the freedom to choose insurers and tailor coverage to their needs and preferences, promoting both access and autonomy.
• Swiss basic insurance coverage is broader than Canada’s, including outpatient care, mental health, prescribed medications, home care, and long-term care—with modest, capped cost-sharing, and exemptions for vulnerable groups, including children, low-income individuals, and the chronically ill.
• Patient cost participation (deductibles/co-payments) exists, but the system includes robust financial protection: 27.5% of the population receives direct subsidies, ensuring affordability and equity.
• Risk equalization mechanisms prevent risk selection and guarantee insurer fairness, promoting solidarity across demographic and health groups.
• Decentralized governance enhances responsiveness; cantons manage service planning, ensuring care adapts to local realities and population needs.
• Managed competition drives innovation and efficiency: over 75% of the Swiss now choose alternative models (e.g., HMOs, telemedicine, gatekeeping).
• The Swiss model proves that a universal, pluralistic, and competitive system can reconcile efficiency, equity, access, and patient satisfaction—offering powerful insights for Canada’s stalled health reform agenda.

Why Do We Care How Much We Spend on Medicaid?

By John C. Goodman.

"In evaluating the success of Obamacare in general and Medicaid expansion in particular, reporters and commentators have tended to focus on only one measure: the increase in the number of people with health insurance. At the same time, in evaluating the health consequences of the House Republican reconciliation measure, almost all the focus has been on the number of people who will lose health insurance.

The implicit premise in all of this is: more health insurance means more health care and less health insurance means less health care. That has been the premise behind virtually every important piece of health care legislation going all the way back to the creation of Medicare and Medicaid in 1965.

Yet the premise ignores a fundamental economic principle: no matter what happens to the demand for care, there won’t be a change in health care delivered unless there is a change in supply.

Under Obamacare, we are certainly spending more money. The annual cost of Medicaid expansion is $130 billion and the cost of exchange subsidies is more than $60 billion. What are we getting in return for all this extra spending?

Although there has been a substantial increase in the number of people with health insurance, one study finds that there has been no overall increase in health care. In fact, the nation may be getting less care.

In 2023, 13 years after the passage of the Affordable Care Act (Obamacare), the number of hospital admissions per capita was 19 percent lower and the number of hospital days was18 percent lower than the year the act was passed. In the 9 years following the passage of Obamacare, doctor visits per capita declined by 18%.

Further, our health care resources appear to be quite skimpy in comparison to other developed countries. Today, the United States has 2.7 doctors per 1,000 people, while the European average is 4.1. The U.S. has fewer than three hospital beds per 1,000 residents. The EU has more than five.

And our country doesn’t seem to be getting any healthier. Life expectancy in 2024 was lower than it was ten years earlier.

As for Medicaid, numerous studies through the years have produced conflicting results on what difference the program makes for enrollee health. Yet these studies suffer from all the problems that are inherent in making inferences from population statistics.

One study was different. The Oregon Health Insurance Experiment was a randomized controlled trial (RCT) that examined the medical condition of real people. Medicaid enrollees were selected by lottery and after two years the investigators compared the medical condition of those who enrolled with those who didn’t.

The results: enrollees had less financial stress and were less likely to be depressed, but there was no difference in their physical health.

One of the Oregon investigators, MIT economist Amy Finkelstein, helps us understand those results. People without health insurance, she notes, still get about 80 percent of the health care that Medicaid enrollees get. And when they are confronted with high medical bills, they actually pay only a small portion of them.

You might suppose that Medicaid enrollees are less likely to rely on hospital emergency rooms. The reverse is true. Once they enroll, Medicaid patients increase their trips to the emergency room by 40 percent.

This may explain why Medicaid enrollees place a very low value on enrollment. If you were to offer to buy their Medicaid insurance coverage, it appears that the average enrollee would sell her insurance for as little as 20 cents on the dollar. Moreover, among the lottery winners who were offered enrollment in Oregon, more than half turned the offer down! By implication, these folks placed no value on the opportunity to enroll.

These findings have convinced Finkelstein (certainly no right-winger) that rather than giving low-income families more Medicaid, we should give them cash instead.

Here is one way to do that.

Private companies managing Medicaid (or the state itself) should be able to make deposits to Health Savings Accounts (HSAs) that would cover, say, all primary care. Enrollees would be restricted to using the money for health care during an insurance year. With these funds, they would be able to pay market prices (instead of Medicaid fees) at doctor’s offices, walk-in clinics and urgent care centers—allowing them to buy medical care the way they buy food with food stamps. This would allow low-income families to have the same health care opportunities that middle-income families have.

At the end of the insurance period, they could withdraw any unspent funds for any purpose. If there were no taxes or penalties for non-medical withdrawals, health care and non-health care would be trading against each other on a level playing field under the tax law. People wouldn’t spend a dollar on health care unless they got a dollar’s worth of value.

An early study by the RAND Corporation suggests that these accounts could reduce Medicaid spending by 30 percent. Excluding payments for the disabled and nursing home care, the savings would amount to almost $1 trillion over ten years. This saving would be shared by the beneficiaries and the taxpayers who fund Medicaid.

This is one way to resolve the impasse in the Senate over the House reconciliation bill. HSAs for Medicaid are a way to make the program better for enrollees and cut spending at the same time."

From Nutrition to Nannying: Texas SB 25 and the New Public Health Overreach

By Jeffrey A. Singer of Cato. Excerpt:

"A group representing 60 members of the food industry wrote a letter to Texas lawmakers urging them to reject the bill, arguing it “could destabilize local and regional economies at a time when businesses are already fighting to keep prices down, maintain inventory, and avoid layoffs.” The Consumer Brands Association stated in a letter to Governor Abbott urging him to veto the bill:

The ingredients used in the US food supply are safe and have been rigorously studied following an objective science and risk-based evaluation process. The labeling requirements of SB 25 mandate inaccurate warning language, create legal risks for brands and drive consumer confusion and higher costs.

Emerging research links certain ingredients in ultra-processed foods to health risks, but the science is still in its early stages. Most evidence comes from animal or observational studies, which cannot prove cause and effect. Ingredients can vary significantly across products, and factors such as dose, frequency, and individual susceptibility complicate the identification of specific harms. Additionally, it’s challenging to separate the effects of one ingredient from those of others in these complex food mixtures.

Like the architects of the now-discredited Food Pyramid, the MAHA movement—and Texas lawmakers—are rushing to judgment based on assumptions and intuition. But policy should follow evidence, not vibes.

More significant than any economic costs or unintended health effects is the bill’s substantial expansion of government control over personal choices. My book, Your Body, Your Health Care, emphasizes the importance of individual autonomy and illustrates how, in recent decades, government overreach has increasingly eroded the relationship between patients and their health care providers.

A key idea in liberal thought is the harm principle, laid out by John Stuart Mill in On Liberty. He argued that the only reason to limit someone’s freedom is to prevent harm to others—not for their own good. This principle frequently arises in policy debates about health and safety, where the government intervenes not to protect people from themselves but to reduce harm to others, such as secondhand smoke or contagious diseases."

No Exit, No Entry (when it is hard to fire workers fewer get hired)

By Alex Tabarrok.

"In our textbook, Modern Principles, Tyler and I contrast basic U.S. labor law, at-will employment—where employers may terminate workers for any reason not explicitly illegal (e.g., racial or sexual discrimination), without notice or severance—with Portugal’s “just cause” regime, which requires employers to prove a valid reason, give advance notice, pay severance, and endure extensive regulatory and court involvement before terminating any workers.

Portugal’s laws look pro-worker until you realize that making it more difficult to fire also makes it more difficult to get hired: As we write in MP:

Imagine how difficult it would be to get a date if every date required marriage? In the same way, it’s more difficult to find a job when every job requires a long-term commitment from the employer.

As a result, European unemployment rates—especially for youth and high-risk groups (minorities, immigrants, the less-educated)—tend to exceed those in the U.S. and dynamism is lower.

Like Portugal, India makes it very difficult to fire workers, especially for firms with more than 100 employees. As a result, Indian firms are too small to succeed. Rajagopalan and Shah write:

India’s business regulatory framework consists of an overwhelming 1,536 laws, 69,233 compliance requirements, and 6,632 filings at the Union and state levels cumulatively, which Manish Sabharwal has dubbed India’s “regulatory cholesterol.” This regulatory cholesterol incentivizes firms to limit their size or operate in the informal sector to avoid compliance costs, thereby bifurcating the labor market into a small formal workforce and a large group left vulnerable in the informal sector. India’s labor laws are among the most rigid, contributing to jobless growth and increasing informality.

High hiring/firing costs aren’t the only exit barriers. British/American bankruptcy law, for example, aims to reduce the transaction costs of bankruptcy–quickly and efficiently shifting ownership to creditors, for example–in order to maximize the “scrap value” of a firm. Bankruptcy law in other countries often aims to discourage liquidation. Until ~2017, India had no well-specified bankruptcy law. Even today, the bankruptcy law is honored more in the breach as politicians and judges interfere in large bankruptcy proceedings. Thus, it can take more than 4 years to close a firm in India, if all goes well, and much longer if there are intervening factors. As a result, India has a very high percentage of “dormant firms,” firms–often with employees–but zero output.

In No Country for Dying Firms: Evidence from India, Chatterjee, Krishna, Padmakumar, and Zhao use firm‐level data and a structural model to estimate various exit costs and their effects. Their findings: exit barriers reduce entry, investment, and aggregate productivity.

Three points stand out. First, a simple but often overlooked point. Exit costs trap resources in unproductive firms, depriving more efficient firms of the inputs they need to grow. Second, governments typically focus on entry—offering tax breaks, land, and subsidies to attract firms—because ribbon-cutting is politically rewarding. But the author’s models suggest it’s more effective to subsidize exit. Picking winners is hard; picking losers is easier. Of course,  direct subsidies for exit are unlikely and unwise but reforms like streamlined bankruptcy, faster courts, and lower firing costs achieve the same goal and the losers self-select.

Third, the authors argue that improving bankruptcy law—more broadly, reducing the cost of capital reallocation—should take time-priority over reducing firing costs. Capital reallocation raises employment by moving resources to more productive firms. Once that groundwork is laid, labor law reform is more likely to succeed and endure politically.

Thus, unusually, these economists offer not just policy prescriptions but politically savvy guidance on sequencing reform."

How a Lawsuit Against Realtors Went Sideways

By Craig Richardson. He is a Professor of Economics at Winston-Salem State University.

"On March 15th, 2024, the Chicago-based National Association of Realtors (NAR) came forward with a stunning announcement: in response to two 2019 class-action lawsuits, it finally agreed to a settlement sum of $626 million and promised dramatic changes in the real estate business. The lawsuit charged that the NAR had excessive market power that allowed them to create handsome commissions for their agents, resulting in higher housing prices for prospective home buyers. 

A year later, a few law firms earned millions of dollars, but the settlement provided scant benefits to prospective homeowners other than some important clarifications about the structure of agent commissions. Indeed, the lawsuit was all based on a mistake about the scope of NAR’s market power. That mistake led to a domino effect of further errors in how to fix the supposed problem. 

The major “fix” proposed by the lawsuit hinged on shutting down online information about buyers’ agent commissions. The idea was to put more power in the hands of home buyers to freely negotiate with their agent what the commission would be. But what sounded good in theory to some was actually a naive misunderstanding of how well the real estate market was working in practice.  

One lesson learned: a lawsuit bent on trying to suppress valuable market information is a fool’s errand with unintended consequences that can hurt more than they help. A second one: sometimes what looks like excessive market power is actually a result of buyers and sellers freely deciding on the price of a service which provides high value.

Some history and more details:  in the past, when a house sold, a traditional 6% fee came out of the selling price, which was typically split between the buyer’s and seller’s agent, each getting a 3% cut.  The theory of the lawsuit was that if the commission could be lowered, that would also lower home prices across the country.  

Here’s how the lawsuit promised to upend the home real estate market and lower home prices.  

First, it pushed for a ban on information about how commissions would be paid on the multiple listing services (MLS) so buyers wouldn’t be steered by their agents to listed homes with the highest commissions.  After the settlement, no information on commission splits is allowed on the listing service. 

Second, it added clarity that home sellers could freely pick their own commission structure instead of the traditional 3%-3% split. For example, a seller could pay his listing agent, say 3%, and the buyer’s agent 1%. Or maybe pay 3% to the listing agent and 0% to the buyer’s agent. The buyers could instead come up with their own agreed upon commission rate and negotiate terms with their agent directly.

The idea was to empower buyers and sellers by handing them the negotiation keys with endless possibilities to lower agent commissions. 

On the first count, the MLS information ban has been pretty much a joke in terms of stopping information about commission splits. It shows that when information is valuable in the marketplace, people will always find a workaround. 

Reportedly in some homes for sale, listing agents leave three cookies on the kitchen counter, a key fob with the number 3, or even the movie Three Amigos playing on the television to slyly indicate the commission of 3% paid to the buying agent. A recent story in The New York Times turned this into a story of real estate agents acting as supposed villains who are evading new policies. 

In fact, it is a rational response to an irrational policy solution of attempting to quash market information.  

Indeed, aside from a few reported stories like these, most agents aren’t engaging in such colorful behavior. Without MLS indicating commission splits online, it’s just a far more clunky system. A buyer’s agent who is intent on showing ten homes to a client has to make 10 phone calls or texts to find out the structure of the commission split.

Second, the plaintiff’s theory was that after buyers and sellers had the power to negotiate lower commissions, commissions would drop and so would home prices. Yet a year later, very little has changed except that now agents have an upfront conversation with their buyers about who will pay them. That’s the one benefit of the lawsuit. 

 “It has created a higher level of transparency between buyers and their agents, which I think is terrific,” said Harvey Blankfeld, a Las Vegas-based real estate agent who was quoted in a recent article on the subject. Home buyers now need to sign an upfront contract with their agent as to the structure of the commission and promise to pay if the seller doesn’t. “However, it has not impacted costs here in Vegas,” noted Blankfeld. 

The plaintiffs in the lawsuit seemed to forget that few buyers want to come up with the cash themselves to pay their agent when previously the seller paid for it.  Putting them on the hook creates more stress and pressure around a home purchase. 

As a result, sellers who thought they would save money by paying, say 3%, to their own agent and 0% to the buyer’s agent faced a lot of problems they didn’t anticipate. When buyers discover this arrangement, more than likely it’s time to move onto another listing that pays their agent. A smaller pool of buyers will translate into fewer offers and lower home prices. This explains the lack of change in the commission structure a year later. The traditional 3%-3% split seems to be an equilibrium towards which the market naturally gravitates. 

Indeed, the largest change from last year is that the plaintiff lawyers got massively rich. The plaintiff’s lawyers walked away with a third of the settlement- $208 million- and the estimated 50 million affected homeowners will pocket $8 on average, if they bother to apply for past damages. 

The NAR is not an all-powerful oligopoly, contrary to The New York Times reporting. Companies like Open Door and Redfin often pay commissions closer to 2% but they are not that popular, with less than 1% of the market. For sale by owner (FSBO)  is another option for every homeowner. Most pass because they will get a lower home price, and more hassle in selling their home. The FSBO market share hit an all-time low of 7% in 2023 according to NAR statistics. 

In other words, even though there are alternatives, most buyers and sellers aren’t seeing the value proposition. Any hungry new real estate company could enter the market paying lower commission splits, yet this is rare. More than 9 in 10  home buyers and sellers apparently prefer the traditional approach of having a highly personal interaction with an agent from a trusted real estate company.  

The reason: Buyers and sellers got a reminder that agents provide value that is both tangible and intangible, and often difficult for newcomers to foresee. They have connections to reputable service providers, checking on everything from plumbing to roofing, understand the fair market value of a home relative to other homes in the area, and provide intuition on the negotiating position of the buyer or the seller. 

In addition, there are intangibles that include an agent navigating a client’s idiosyncratic tastes that may differ from the spouse, local environment, style of the home, and much more.

By attempting to shut down important information about disclosing commissions on MLS, the unintended consequence of the NAR lawsuit could have been a decline in new homeowners,  unable to come up with cash payments for their agents. Luckily, the market innovated with information hacks that helped these prospective homeowners dodge a bullet. 

The nearly 80-year-old custom of sellers paying buyers’ agents about a 3% commission may have its faults, but the principal advantage of having commission-based norms is simplicity and open information that greases the wheels for complex and highly emotional transactions. As we have seen, people are never more clever when there is money to be made. 

A year after the judgement, in most cases we are right back where we started, with regard to the 5%-6% commission split paid by the seller.  Buyers and sellers transmitted signals to the market that this outcome is what they preferred in most cases, but flexibility still provides options like FSBO. We didn’t need an expensive lawsuit to tell us this. 

While greater transparency of the commission structure between buyers and sellers was a needed and welcome outcome, some simple modifications to the buyer’s agent agreement could have spared us the $600 million legal bill that primarily enriched the lawyers."