Why counting health benefits as income makes sense

The New York Times had a very interesting article yesterday talking about something that looks fairly irrelevant: are health care benefits income?

In July, the Congressional Budget Office — the nonpartisan arbiter of the costs and consequences of government spending — decided that we had not been valuing these benefits enough. In a report on how income and taxes are distributedacross the population, it decided, for the first time, to value health benefits provided by the government at every penny they cost.

Is this money?

The decision stoked a long-simmering debate about how much health care is really worth to poor families who may not have enough to eat. The reclassification of health benefits added $4,600 a year to households in the bottom fifth of income. It shrank the nation’s yawning income gap and muted the increase of inequality over the last three decades. And it changed the picture of what the government does for Americans.

The article has a good discussion on this specific debate, and how it affects official poverty numbers in the US. For instance, many seniors and very low income families now considered poor would move out of these categories, while working families would actually move much closer to the bottom of the income scale.

I  largely agree with the CBO with this new calculation – both from a statistical point of view and a political point of view.

For statistics, one very simple reason: that’s how it is usually counted elsewhere in the world. OECD numbers count health care as a fiscal transfer, and it makes sense for the CBO to do the same. After all, it is real money that the government is spending in a real good; if instead of SNAP we had government run soup kitchens it would still be seen as an almost-cash transfer, and this works the same way.

From a political point of view, this change makes clear that the government is very effective getting people out of deep poverty. It really is! There are many, many people in the US and elsewhere that would be much worse off if the Federal government was not around. Medicare has been extremely effective keeping seniors out of poverty, but the numbers barely reflect that.

The new calculation method also makes more clear a big issue with the US safety net and its over-reliance in means tested programs: the huge, crippling fiscal cliff that poor families face when their income starts to slowly creep up towards the middle class. We wrote about this with some detail a few weeks ago, but it is important to keep this in mind. The marginal tax rate of a family moving from 100-125% Federal Poverty Level (FPL) to 185-200% FPL is absurdly high if we take into account benefits loss. "Earning yourself out" of Medicaid / Husky is often a huge blow for a family that lacks health insurance and now has to pay full price for it.

Leaving that aside, the big problem, and something that the revised numbers make more clear, is that right now the US welfare system is pretty terrible moving people from not-so-terrible poverty to self sufficiency. But income mobility and pathways to success deserve their own blog post.

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