Finance tops DOJ and other miscellany

Senate Finance Committee Annual Hearing on the Tax Filing Season--tax preparer scams and other problems

The Senate Finance Committee is holding a hearing tomorrow on the kinds of tax filing scams that taxpayers should avoid.  One of the people they want to have testify is serving jail time for identity theft and tax fraud.  The Department of Justice didn't want the witness testifying to Congress and so tried to quash the subpoena for the witness.  But Finance won, and the witness will appear tomorrow.  See this release at the Finance Committee website (with links to the habeas corpus petition and other information).

Makes me very curious about this particular witness--just what kind of id-theft information is so secret that Congress shouldn't know about it?  Tune in after the hearings, and we should all know.

Health Care, Tax Deductions, and Presidential Proposals.

As most everyone is aware by now, the President's FY 2008 budget proposes significant tax changes related to health insurance and health care by taxing employer contributions to health insurance, eliminating the current deductions and exclusions, and instead creating a new standard deduction for all taxpayers who obtain insurance.  The idea is to push taxpayers to purchase their own insurance and eliminate the employer-provided insurance system.  The plan claims to increase coverage and reduce health care costs by making taxpayers responsible and reducing the incentive to overconsume.

Len Burman and several other people at the Urban Institute/Brookings Institution provide an extensive analysis of the budget proposal in the March 12, 2007 issue of Tax Notes.  To quote the abstract:

The basic thrust of the proposal--leveling the playing field for health insurance--is laudable.... But the plan fails to address some of the most significant problems in today's market for health insurance and actually threatens many of the most vulnerable families....  Id. at 1013

Here are a few of the concerns the authors raise about the proposal:

• the change to a standard deduction will likely increase demand for insurance without providing the risk pooling provided by large employers, with the likely effect of reducing group coverage and fragmenting risk pools since business owners and managers would not have to offer insurance to workers to qualify for a tax break on their own insurance; and the erosion of employer-provided insurace might lead to many workers deciding to forgo insurance altogether (ultimately leading to higher health care costs for everyone)
• The net effect of the loss of employer-provided coverage could be a very slight increase in the number of insured Americans or an increase in the number of uninsured.  In either case, it is likely that "the households that would lose insurance would tend to be sicker, older, or poorer, and thus unable to purchase coverage in the individual market as now structured, while the households that would gain insurance would tend to be healthier, younger, and financially better off."  Id. at 1017
• even while tending to push people off employer provided health insurance, the proposal inappropriately expands the tax breaks for health savings accounts rather than eliminating them
• although the current tax breaks for insurance are regressive (the largest tax benefits go to families in higher tax brackets or with larger employer contributions to insurance), the proposed deduction is also regressive, since it is of more value to higher bracket taxpayers than to lower bracket taxpayers.

"The bottom line is that, although the new proposal would increase the progressivity and targeting of health insurance tax subsidies, it would still be worth relatively little to low-income families who most need help." Id. at 1020.

Of particular merit is Appendix 4: Effects of the Proposal on Low-Income Taxpayers (at page 1024).  The report notes that the proposal might be helpful to certain low-income families that have health insurance through their employers, since the insurance would count as wages, thus increasing their Earned Income Tax Credit and providing a considerable benefit.  But since most low-income workers do not have health insurance through their employers, that benefit is not likely to materialize.   Furthermore, for low-income workers who do have employer-provided insurance and incomes between $16,740 and $30,100, the analysis shows that the change would instead increase their tax liability.