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Gruber on the "Cadillac" Health Care Tax

December 28, 2009 - by Donny Shaw

For those of you being kept up at night wondering which financing mechanism is better for health care reform, the House’s surtax on the rich or the Senate’s tax on expensive “Cadillac” health plans, MIT economist Jonathan Gruber has an argument in defense of the latter today that you’ll probably want to read. His main argument seems to be that it’s not actually a new tax, but an elimination of an existing tax break for firms that provide these expensive insurance plans. “Under current law, if workers are paid in wages, they are taxed on those wages. But if they receive the same amount of compensation in the form of health insurance, they are not taxed.”

I think this is his stronger argument:

Moreover, most experts and Congress’s Joint Committee on Taxation assume that most companies would not end up paying this tax but would instead reduce their insurance spending to below the threshold for the tax. And when firms reduce their insurance generosity, they make it up in higher pay for their workers. We saw this in the late 1990s, when the rise of managed care temporarily lowered insurance costs, and wages rose in real terms for the first time in many years. But as soon as managed care was weakened and health costs rose again, we once again saw flat or declining real wages in the United States.

By my calculations the excise tax in the Senate legislation will raise U.S. worker wages by a total of $223 billion over the next decade, which would mean about $660 in extra annual earnings per employer-insured household by 2019. Moreover, the vast majority of those wage increases accrue to middle- and lower-income households; 90 percent would go to families with incomes below $200,000.
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