Im interviewing a job applicant and she tells me that she doesnt need the NCPAs health insurance because she has better coverage at her husbands place of work. Since she wont need that fringe benefit, she asks if I will add the money we would have spent on it to her salary and pay extra wages instead.
Can I do that? I would like to be able to. But the IRS wont let me.
In another case a part-time worker has the opposite problem. She offers to take a cut in pay if we will allow her to join the NCPA health plan. I would like to be able to do that too. Ah, but the IRS wont let me do that either.
When I say the IRS wont let me, thats not technically correct. It wont stop me from doing these things; it will just impose draconian penalties if I do. Allowing even one employee to choose between taxable wages and non-taxed fringe benefits could enable the IRS to constructively treat our entire health plan as a taxable benefit and it could then tax every employees health insurance the same way it taxes wages. (For most of our employees, that would be a 25% tax; for some it would be a 45% tax.)
These problems affect men just as much as they affect women, of course. But the problems mainly arise because the most important economic and sociological change of the past half century (the entry of women into the labor market) is completely at odds with a tax law written years ago by men who thought that full-time male workers with stay-at-home wives is the way life would be lived.
I am woman, hear me roar
There are other features of the tax law that are also relics of bygone assumptions. As a result, the highest tax rates in our economy are paid by women wage earners. In fact, women earning only modest incomes can pay taxes at rates that are twice those paid by such billionaires as Warren Buffet and Bill Gates. Consider that:
- When a woman leaves the home and enters the labor market, she will be taxed at her husbands tax rate, even if she earns only the minimum wage. When all taxes and all costs are considered (including the cost of child care and other services she was previously providing as a homemaker), a woman in a middle-income household working a full-time minimum wage job can expect to keep only about 32 cents out of each dollar she earns.
- If the womans husband dies prematurely, Social Security will provide a modest benefit as long as she stays home and takes care of children; but if she works, the combined effect of direct taxes plus loss of benefits will create a marginal tax rate of 75 percentleaving her with only 25 cents out of each extra dollar she earns.
- Once the widows children are grown, Social Security benefits will cease and she will be on her own to fend for herself; but if she previously responded to the systems anti-work incentives, by remaining out of the labor market, she will now have to enter the market without job skills.
- If the woman receives government assistance, she will confront a newly reformed system that is supposed to encourage work; however, when explicit taxes are combined with loss of benefits, her marginal tax rate will be about 72 percentleaving her with only 28 cents out of each dollar of wage income.
- When the woman reaches the retirement age she will once again qualify for Social Security benefits, but if she tries to supplement those benefits with wage income, special taxes on the elderly will make her marginal tax rate 50 percent higher than young people earning the same wage.
The tax law is not the only institution that is out of touch with the way modern families live. Here are some other examples:
- Both men and women workers pay the same unemployment insurance taxes, but because women are more likely to work part-time and because they voluntarily move in and out of the labor market more frequently (for example, to raise children or care for a parent), they are less likely to receive any benefits in return for the taxes they pay.
- If a woman temporarily leaves the work force to raise children and then returns years later, she will lose most of the credits she accrued and run the risk of being ineligible for Social Security disability benefits.
- Because Social Security taxes are levied on all earnings until capped at a high income level, dual-earner households generally pay considerably more in taxes than single-earner households, but they will get only a minimal increase in Social Security benefits.
Women are adversely affected by public policies in other ways. In contrast to some other developed countries, the United States encourages employers rather than government to provide such benefits as health insurance and pensions. Our private employee benefits system is not the result of free market forces, however. Instead, it has been shaped and molded by federal law designed to accommodate a full-time worker with a stay-at-home spouse and penalize any other arrangement. For example:
- Because they are more likely to work part-time, women are less likely to qualify for employer-provided benefits.
- Because they move from job to job and in and out of the labor market more frequently than men, women are more likely to be burdened by employee benefit programs that penalize job switching (e.g., lack of vesting in a pension plan).
- When people acquire health insurance and save for retirement on their own (not through an employer), the tax system is far less generous.
Many changes are needed to bring aging institutions into sync with the way people are living their lives in the 21st century. Here are a few suggestions:
- We need a fairer tax system for two-earner couples, ideally a flat tax that taxes all income at one low rate.
- The law should give the same tax relief for health insurance, retirement savings, etc. to everyoneregardless of whether they obtain the benefit at work or purchase it on their own.
- Employee benefits law should permit flexibility, making it easier for dual-earner couples to obtain higher wages rather than unneeded, duplicate benefits and for part-time workers to accept lower wages in return for more valuable health and retirement benefits.
- We need flexibility in labor law, making it easier for workers (especially parents with young children) to choose alternatives to the traditional 40-hour work week.
- We need to repeal laws that prevent employers from purchasing health insurance that is portableso that people are not penalized when they switch jobs.
- If disability insurance and unemployment insurance were private and individually owned (the way they are in Chile), women would avoid most of the arbitrary unfairness of the current system.
- We need a completely new approach to the treatment of spouses receiving Social Security retirement benefits and widows receiving survivors benefits.
Unlike the left wing approach to womens issues, these reforms do not assume that in order for some people to be successful we must limit the freedom or raise the taxes of others. Instead, we need to liberate women from outdated institutions that unfairly penalize them. Women in our society are capable of making choices that are right for them and they are perfectly capable of living productive, satisfying lives, provided that misguided public policies do not hold them back.
|John C. Goodman is a Senior Fellow at the Independent Institute. The Wall Street Journal and the National Journal, among other media, have called him the Father of Health Savings Accounts.|