James Capretta explains for National Review Online readers why a recent attack on health care reform plans from leading Republican presidential contenders falls short of the mark.

Ezekiel Emanuel recently published an article in the Washington Post in which he criticized the health-care reform plans offered by Republican presidential candidates Scott Walker and Marco Rubio. Emanuel seems to think he exposed the fatal flaw of these plans. What he actually revealed, however, is that he does not understand what these GOP candidates are proposing or how the provision of employer-sponsored health care works in a competitive labor market.

Emanuel’s argument is that the Walker and Rubio plans would ultimately eliminate the federal tax preference for employer-paid health-insurance premiums and provide in its place a federal tax credit that is woefully inadequate. He claims that these tax credits would leave many middle-class families paying several thousand dollars more for their health insurance than they do today.

His first error occurs because he does not understand the plans offered by Walker and Rubio. He is correct that Senator Rubio proposes a ten-year phase-out of the tax preference for employer-paid premiums, with a refundable tax credit gradually taking its place. But that same concept is not in the Walker health-care proposal. Governor Walker proposes to leave job-based health plans intact and as is, and in fact would lower the costs of employer-sponsored plans by eliminating the many rules and requirements of the Affordable Care Act (Obamacare). The tax credits Walker offers are for people who do not have access to employer coverage. …

… Emanuel adds to the confusion by fundamentally misrepresenting how employer coverage is financed. He notes that the average premium for family coverage offered by employers is about $16,800. If the employer pays 100 percent of this premium for an employee, the entire premium is excluded from the taxable income of the worker. This is in contrast to cash wages, all of which is subject to both income and payroll taxes. The exclusion of this premium from taxable income implies a federal tax break of about $6,720, assuming that the worker is in the 25 percent income-tax bracket (the payroll tax brings the total effective tax rate to about 40 percent).

Beyond this tax subsidy, where does Emanuel think the rest of the money comes from? The economists at the Congressional Budget Office (CBO), and every other academic institution for that matter, could have told him that in a competitive labor market, it comes out of the total compensation an employer is willing to pay the employee. So, for instance, if a worker is valued at $75,000 by a firm and health insurance costs $16,800, then the firm would be willing to pay this worker $58,200 in a salary. In short, the employer doesn’t pay the premium, the worker does.