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On the January 24 edition of MSNBC News Live, host Norah O'Donnell falsely claimed that President Bush's health care proposal "is tax credits." In fact, Bush did not propose a "tax credit" but, rather, as the White House's fact sheet on the proposal states, "A Standard [Tax] Deduction For Health Insurance." Tax credits and tax deductions are different, as the Internal Revenue Service explains as part of its "Understanding Taxes" education program: "A tax deduction reduces income subject to tax," while a "tax credit is a dollar-for-dollar reduction in the tax liability." Critics of the president's plan have argued that a credit would more effectively help those who cannot afford health insurance because credits are worth more to those who earn less.
For example, a taxpayer who owes a 15 percent tax on $20,000 in taxable income would owe $3,000 in taxes. If she received a $3,000 tax deduction, that would reduce her taxable income to $17,000, and she would instead owe $2,550 -- $450 less -- in taxes. But if she received a $3,000 tax credit, it would reduce her tax bill to zero. Also, as a percentage of taxable income, tax credits are worth more to those with less taxable income, while, as The Washington Post pointed out on January 25, tax deductions are worth more to the affluent: "Wealthier families who benefit from the deduction would get a much greater value than less-affluent families. The $15,000 deduction would be worth $5,250 to a family taxed at 35 percent but only $1,500 to one taxed in the 10 percent bracket."
Some have criticized Bush for proposing a deduction rather than a credit, which, critics argue, would be more effective at helping those with lower incomes. As Tax Policy Center director Len Burman, Brookings Institution senior fellow Jason Furman, and Urban Institute principal research associate Roberton Williams stated in a January 23 report examining Bush's proposal:
However, as under current law, the subsidy will be more valuable for high-income people than for those with lower incomes who most need help. In fact, low-income households with no income tax liability would get virtually no help, as is true under the current structure. These limitations could easily be addressed by converting the proposed standard deduction into a flat credit or even a sliding-scale credit that is larger for low-income families.
The report commented that, "[d]espite its limitations, the proposal marks an encouraging departure from current policies that underprovide incentives to purchase insurance and encourage families to be over-insured and underpaid." It concluded: "Adoption of a substantially revised and expanded version of the proposal could increase insurance coverage and help stem the rapid rise in American expenditures on health care."
O'Donnell's guest, Washington Post staff writer Anne E. Kornblut responded by noting that "[t]here are a variety of complaints" against the plan. She added, "I think what's going to be tricky as we talk about this debate is that the devil is going to be in the details."
From the 1 p.m. ET hour of the January 25 edition of MSNBC News Live:
KORNBLUT: He [Bush] is pitching a proposal that they say would lower overall health care costs, in which, any health care pro -- any health care plan -- excuse me -- that is over $15,000 would be taxed. The amount over $15,000 would be treated like taxable income and taxed. The idea there is to create an incentive for people to seek out less expensive health care and thus bring down the entire market.
O'DONNELL: And, Anne, as far as the president's plan, which is tax credits, and the Democrats' plan, which is essentially expending with the -- expanding with federal government coverage -- I mean, that's just sort of the simple difference in the plans -- but the Democrats say the president's plan for tax cuts is pretty much dead on arrival, right?
KORNBLUT: Oh, absolutely. There are a variety of complaints: that it would punish people who choose very elaborate plans; that it could reduce the money that's spent in hospitals -- there's any sort of number of criticism the Democrats have already unloaded on it. I think what's going to be tricky as we talk about this debate is that the devil's going to be in the details.