Some things are worth repeating

There is a common misconception doing the rounds in South African health care policy debates, namely that deductions for contributions to private medical schemes are subsidies. This is incorrect.

A tax deduction or exemption in respect of medical expenses is a government decision to refrain from taking money in the form of tax from taxpayers who are paying their own medical expenses and generally not using publicly provided medical care. A medical expense tax deduction is therefore not a subsidy. Government cannot subsidise you with your own money. Unlike subsidies, tax exemptions are far less prone to political manipulation. Tax exemptions benefit the intended beneficiary directly by lowering their tax liability. Subsidies, however, can be used for political reasons and, usually, are channelled to special interest groups – after government has taken its cut for acting as intermediary. Taking one person’s money in order to pay for another person’s medical care is a subsidy.

Proposing to scrap tax deductions for medical scheme contributions is therefore simply a straw man. The reality is that government is intent on getting more money out of taxpayers at the expense of the private medical care sector. Eliminating tax deductions related to medical care will drive up the cost of medical scheme contributions, making it unaffordable for new members to join and forcing those at the margin to drop out.

Author: Jasson Urbach is an economist with the Free Market Foundation.

FMF Policy Bulletin/ 26 April 2011