Strange winds are blowing in economic policy land. After failing to privatize social insurance, the Bush Treasury is now socializing private insurance. The Democratic presidential candidate is running on a tax reform platform that provides three times greater tax cuts for middle class families than the Republican candidate's platform. And the Republican candidate, after advocating deregulatory policies for 26 years in Congress, has now embraced the rhetoric of a populist regulatory reformer.

But the most unlikely wind of all is Senator McCain's health care proposal which by the end of his first term would increase taxes by $1362 for middle-income American families, while raising marginal tax rates on labor income by more than President Bush's tax cuts have reduced them.

Here's how the McCain plan works. Every family receives a refundable tax credit of $5000 that can be used only to purchase health insurance. Individuals receive $2500. McCain's advisers say the cost of this tax credit is $3.6 trillion dollars over ten years. They also say that their plan is revenue neutral because they introduce a new tax on employer-based health insurance that the Joint Committee on Taxation scores as raising $3.6 trillion over 10 years.

Currently, employee compensation in the form of employer-provided health insurance is exempt from both the personal income tax and FICA payroll taxes. Most employee payments for employer-based health insurance are also tax preferred. McCain's plan would eliminate these and other health-related tax expenditures.

The fact that the plan is revenue neutral means that the tax savings for families receiving tax cuts are exactly balanced by the tax increases for families whose taxes go up. But because the tax cuts are front loaded, after just a few years most American families will see their tax bills go up under the McCain plan.

What does this mean for a typical family? In 2009 the average premium for a family health insurance policy will cost about $13,600. With McCain's new tax on employer-provided health benefits, families in the 25 percent federal income tax bracket (which starts at taxable income of $65,100) will pay additional income tax of $3400, additional payroll tax of $1040, and will have their earnings cut by $1040 as their employers pass on the increase in the employer portion of the FICA tax. So the total tax on health insurance will be $5480, $480 more than the value of the new health insurance tax credit.

Because the McCain tax credit would be indexed only to inflation while the cost of health insurance has been rising at around 7 percent a year, the net tax increase will rise rapidly over time. By 2012 this typical family would receive a tax credit from the McCain plan of about $5337. But with premiums rising in that year to over $16,600, the new McCain health insurance tax would reach $6699 - for a net tax increase of $1362. By 2016, the tax credit would be $5823, while the new tax would be $8782 - a net tax increase of almost $3000.

Families in lower tax brackets will initially receive a tax cut from the McCain plan, but after a few years, they too will pay higher taxes. And millions of families with better than average health insurance plans or living in states with higher than average health care costs will see their taxes go up under the McCain plan by substantially more than is illustrated in the example above. In effect, the McCain plan punishes families with good health care by raising their taxes the most.

McCain's advisers understand the perils of campaigning for President on a platform of middle class tax increases. So they have started describing the plan differently for different audiences. When speaking publicly, they continue to describe the plan as revenue neutral with $3.6 trillion in tax increases to offset the tax credits. But when describing the plan privately to tax policy groups capable of calculating the extent of its middle class tax increases, they change the plan so that health benefits would be subject to the personal income tax but not the payroll tax. This sleight of hand allows them to avoid the accusation of raising taxes on the middle class, but it leaves the McCain plan $1.3 trillion short over 10 years. Given the current fiscal situation of the country and the fact that Senator McCain's proposals for new corporate tax breaks would cost at least $2 trillion over 10 years, adding an additional 1 percent of GDP a year to the deficit for his health plan would be a rather stunning development.

The McCain plan makes one improvement to the Bush administration plan on which it is based. By using refundable tax credits rather than an increased standard deduction, the McCain plan is more favorable to low- and middle-income families. But this income redistribution scheme comes with efficiency costs. The new McCain tax on health insurance, like a tax on any other good, reduces the incentive to work. This occurs because a tax raises the price of the newly taxed good and reduces the purchasing power of incremental earnings. Because health insurance makes up a relatively large portion of expenditures, the adverse incentive effects in this case are quite large. In an analysis of the almost identical provision in President Bush's health proposal, the Congressional Budget Office estimated that extending the Bush tax cuts would reduce the economy-wide effective marginal tax rate on labor income in 2012 from 33 percent to 31.6 percent, but that taxing health insurance benefits as Senator McCain proposes would take this tax rate back up to 33.1 percent. Since Senator Obama would extend some of the Bush tax cuts, the effective marginal tax rate under his plan will be below 33 percent and therefore lower than under McCain's plan.

Just because the McCain health care plan increases taxes on the middle class and raises marginal tax rates doesn't necessarily make it a bad idea. For years, some economists have complained that the tax exclusion of employer-provided health insurance causes people to consume too much health care. In the McCain model of deregulated health care, employer-provided health insurance will gradually wither as price-sensitive consumers instead purchase high-deductible policies from the individual market. In this brave new world, consumers will come closer to facing the true marginal cost of their care and over consumption of health care will decline.

But embarking on such a radical change in our health care system presents many risks. First, premiums are likely to rise rather than fall under the McCain plan. Today premiums in the individual market average 17 percent higher than those for employer-based insurance due to higher screening, marketing, and underwriting costs. Second, consumers shopping for insurance in this market would face a bewildering array of insurance options. In many ways, health insurance is an even more complicated product than a mortgage. Third, McCain's plan to let insurance companies sell across state lines will lead to a race to the bottom as insurance companies shift their headquarters to states with the fewest protections for policy holders.

In contrast, employers in the existing employer-based health insurance system have strong incentives to act as faithful agents for their employees in selecting a limited number of well-designed health insurance options and in encouraging insurance companies to adopt innovative approaches to cost control. Less radical reform approaches, such as Senator Obama's, that build on the existing employment-based system strike me as a much more prudent approach -- and one that is less likely to lead to government takeover of yet more insurance markets.

Jeffrey Liebman is Professor of Public Policy at Harvard's Kennedy School of Government and an economic adviser to the Obama campaign.