If fairness is the goal, Liberals should tax health and dental plans

I suppose we can say the trial balloon is still aloft, and gaining altitude. Since my colleague John Ivison reported the Liberal government was considering taxing employee health and dental benefits, various government officials have had ample opportunity to shoot down the story as the usual “baseless speculation” or whatnot. None has, including the Prime Minister at Monday’s press conference.

No one’s confirming anything, but that no one is denying it is significant in itself. The move, which economists have been urging for years, is nevertheless the kind that would usually be dismissed in political circles as “courageous,” in the Yes, Minister sense.

It would, after all, tax as income a benefit that millions of Canadians are used to receiving tax-free — a break worth $2.9 billion in all — and as such would be subject to the same braying objection as the carbon tax: it’s a tax, all taxes are bad, therefore this is bad. You can already see the opposition critics warming up their larynxes.

But as important as the size of government is its shape. It’s valid to insist that, before governments seek to raise more revenues from the taxpayer, they should first give evidence that existing revenues are well spent: new spending is best financed out of old.

But that is not the same as objecting to any and all tax changes, however much there may be to recommend them otherwise, merely because they happen to yield more revenue. The point is to reduce needless government intrusion in the economy; a failure to tax where a tax is warranted is as much a distortion as the imposition of one where it is not.

At base, the argument for taxing employee health benefits as income is simple: they are income. Like any benefit, they have a value that can be expressed in dollars. They are a part of the total compensation package unions negotiate on behalf of their members, the same as salary (or, for that matter, life insurance, which oddly enough is taxable).

Indeed, rather than purchase health insurance on your behalf, your employer might have paid you the same amount in cash, with which to purchase it yourself.

Had it paid you in cash, however, it would have been taxable to you, and so to provide you with the equivalent to your current health benefit, after-tax, your employer would have had to pay you an additional amount to cover the tax. The non-taxation of benefits, then, is as much a subsidy to employers as it is to employees, allowing companies to pay their workers more than they could otherwise, and charge the difference to the taxpayer: that is, to those in other workplaces, not so well favoured. Indeed, that’s a big part of why companies provide them.

That doesn’t make it good policy, however. Not only is it inequitable — it may not surprise you to learn that the workers who benefit from this arrangement, mostly employed in government and large corporations, are generally better off than the ones paying for it — but it’s also inefficient.

Because neither employers nor employees bear the full cost of the benefit, neither has an incentive to bargain as hard with private insurance providers as they might. And because the benefit is tied to the workplace, it acts as a disincentive to workers to change jobs.

So there is a good argument for treating health benefits as taxable income, even if it means the government collects more revenues. Just as the benefit of the tax break was shared between employers and employees, over time unions would recoup much of the cost of its withdrawal at the negotiating table, in the form of higher wages. While some employers might respond by cancelling their plans, their employees would have more money to purchase their own.

The non-taxation of benefits is as much a subsidy to employers as it is to employees, allowing companies to pay their workers more than they could otherwise

Still, it probably makes sense, politically at least, for the government to use some of the revenues from ending the tax break on employer health plans to assist individuals to purchase their own. A tax preference that now mostly benefits higher-paid workers, and only in certain workplaces, could be replaced by a credit that was portable, universal, and targeted at those on lower income.

The government may yet decide the idea is too risky. We might as well have this discussion, however, because there are plenty more inefficient, unfair tax breaks where that came from. The Liberals have a panel of tax experts looking at the dozens of similar “tax expenditures” with which the system has become encrusted, worth tens of billions of dollars. As the name implies, these are effectively spending programs by another name. It may please governments to deliver them through the tax system, but it’s an illusion to suggest they lower the overall tax burden. They merely redistribute it, from one group of taxpayers to another, usually to no good purpose.

How much better and simpler it would be to trash them all, and use the revenues to — well, there’s the question: what should we do with the revenues? Liberals being Liberals, they will be tempted to spend it, much as they will with carbon taxes, or road tolls, or other user fees governments are now beginning to charge, appropriately, to cover costs previously socialized.

That leaves the opposition, particularly the Conservatives, with a dilemma: do they go for the easy, but dumb play, defending every tax preference, no matter how bone-stupid, in the name of “fighting taxes”? Or do they demand, as they should, that the revenues be used to cut other taxes?

Or do they campaign, as they should, that the revenues be used to cut other taxes?


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