Pitfalls Seen in Plan for Tax Simplification
I read with interest a Times poll (Jan. 22) about taxpayer reaction to the Treasury Department proposal for tax simplification. While the people you polled supported equitable tax reform, they were also equally concerned about changes that adversely affect themselves. While I understand the need for reform, I would like to call to your readers’ attention several items that would have disruptive and adverse consequences for the public we serve.
One item concerns the tax-favored status of employee benefits. Millions of American workers are provided life, health and pension benefits by their employers. Health insurance is perhaps the most important benefit to most employees.
Currently, these employer-paid hospital and medical insurance premiums are tax-exempt. The tax proposal would change these employer contributions to medical insurance to taxable income for the employee. Any premium amount paid over $70 a month for a single person and over $175 a month for a family would be taxed.
If this tax is put into effect, some of the young and healthy workers may drop preventive health coverage to avoid taxation. As people opt out of health plans, the cost rises for older and less healthy workers. The tax would be regressive, hitting hardest at those least able to afford it. It would badly hurt small businesses, which generally pay higher premiums because they have fewer employees. Taxing these employee benefits, or imposing a cap on them, as is suggested by another proposal, would not reduce the need for such benefits, but would tend to reduce the coverage provided by the private sector. Government at all levels would come under pressure to make up the shortfall.
This country’s employee benefits system provides flexible, comprehensive programs for most American workers. It exists in large part because Congress established social support programs and encouraged private enterprise through tax incentives to join in this effort. If this tax incentive is taken away, the inevitable result will be the destruction of this system.
Another point concerns the millions of individuals who buy life insurance policies. The Treasury Department proposes to tax the “inside buildup” of a life insurance policy; that is, the increase during the year of the value of an individual life insurance policy.
The Treasury Department proposal disregards the social utility of ordinary life insurance. The “inside buildup” of a life insurance policy is incidental to its primary purpose of providing permanent, whole life insurance protection. Subjecting it to tax will have the effect of increasing its cost to the consumer, which will inevitably result in a reduction or termination of that protection.
Again, however, the need would remain and would lead to the expectation that the government should provide the protection, but I believe it has been demonstrated that the government cannot provide such protection as efficiently and cost-effectively as the private sector.
I would hope that those who favor tax reform will look carefully at the implications of these points, which will directly affect their personal tax situation and financial security.
WALTER B. GERKEN
Newport Beach
Gerken is chairman of the board and chief executive officer of Pacific Mutual.
