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Tax credits. They pop up somewhere in the discussion of nearly any Republican reform plan, from welfare to education, but especially health care.

Indeed, many conservatives have embraced various tax credit schemes as a great way to increase freedom by putting money back into the hands of We the People. But not all tax credits are created equal, and that tension is evident in the debate over replacing Obamacare.

Many well-known conservative and Republican health care plans rely on using refundable tax credits to help individuals purchase health insurance. “Refundable” means that if you owe the government less in taxes than the amount of the credit, the government not only waives your tax bill, but also pays you the difference. Those who support limiting government should find the use of refundable credits troubling for (at least) two reasons.

First, the tax-credit-for-insurance model of helping Americans afford health insurance functions as a sort of “soft mandate.” How onerous this mandate is depends on how it is set up, but what a tax credit tells you is that you only get to keep more of your own money if you buy the product the government expects you to buy. And the government gets to decide what sort of product qualifies for the credit, meaning that once the system is in place, it’s easy for future politicians to start monkeying around with what kind of what sort of plans you can get reimbursed for.

Second, at the lower end of the income spectrum, they add to the direct redistribution of wealth that is already occurring through the tax code. It’s one thing when a tax credit or deduction merely lets people keep more of what they have earned. But when a credit is refundable to the point of actually paying out an extra refund, it becomes a negative income tax, directly taking tax dollars contributed by higher income Americans and handing it over to those who are less well off.

Twenty percent of Americans already receive a net payout from the IRS, largely thanks to the Bush era expansion of the refundable Earned Income Tax Credit. Adding a huge refundable health care tax credit to this existing system would drastically expand this percentage, which should give any non-socialist pause.

These problems are why I was initially quite alarmed when I saw that a refundable tax credit was central to Sen. Rand Paul’s new Obamacare Replacement Act used a tax credit. But instead of the IRS simply writing checks to people, Paul’s plan allows health insurance premiums that exceed the amount of the credit to be deducted from payroll taxes. Anyone who earns a paycheck has a significant chunk of their earnings automatically withdrawn by the payroll tax. Thus Paul’s tax credit would benefit even the lowest income Americans by simply letting them keep more of what they earn.” [Author’s note: This article has been updated to correct an inaccuracy in my description of how the Obamacare Replacement Act’s tax credits and deductions work.]

Many Republicans and even some conservatives would rely on those refundable tax credits to 'nudge' you into sending that money to the insurance products they approve.

Paul’s credit also weakens the “soft mandate” created by a tax credit as much as any tax credit can, by allowing the money to be deposited into a health savings account and vastly reducing the restrictions on how people can use their HSA funds. So taxpayers still have to use that money they keep for health care purposes generally, but they can choose whether to use most of it to pay for a Cadillac third-party payment plan or to buy a cheap insurance plan and use the money for wellness programs or alternative medicine.

Take that freedom to keep your own money and use it for whatever care best suits you, and compare it with the other options that are at the forefront of today’s health care debate. The Left would stick all of us with a slightly fixed Obamacare, maybe with a “public option.” That means more expensive “one-size-fits-all” health insurance plans, where your money is being taken and poured straight into the insurance industry and government bureaucracies. Many Republicans and even some conservatives would rely on those refundable tax credits to “nudge” you into sending that money to the insurance products they approve. If you’d rather use that same money some other way, too bad.

Free market, patient-centered health care reform should instead look more like Sen. Paul’s bill — focused on freeing people to keep more of what they earn out of the hands of grey-suited central planners to use on whatever care best meets their needs.

Editor’s note: The author has corrected an error in the seventh paragraph, beginning with “These problems are why,” explaining the way Senator Paul’s tax credit/deduction system works.

Josh Withrow is an Associate Editor for Conservative Review and Director of Public Policy at Free the People. You can follow him on Twitter at @jgwithrow

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