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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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  • Manstein16 12/28/2009 9:43am

    Gruber is spot on. Republicans and Democrats both agree on a need to decrease the cost of healthcare expenses. Soaking the rich won’t do that (if anything, it will just encourage their employers to take even greater advantage of the aforementioned tax break). Removing the tax break, on the other hand, will provide tremendous incentive to decrease excessive private healthcare spending (which drives up everybody’s costs). If you’re going to be taxed on the income regardless of the form it comes in, wouldn’t you rather have it as cash in hand rather than an equivalent value of medical services? I know I would.

  • spender 12/29/2009 5:41am

    Does reducing the amount or cost of care really cause wages to increase? I thought the first managed care programs started in the 70s, the same time our current decline in real wages began. Was there something special about late-90s managed care? If so, why did real wages start declining again? The article says managed care was “weakened,” but what does that mean? We still have managed care systems delivering health care; is Gruber saying there was some sort of sweet spot for making costs fall and wages rise? Can we be sure that the increase in real wages in the late-90s was really caused by lowering health spending and not by the Internet speculation boom?. There were lots of temporary, late-90s millionaires.

    Also, if real wages are tied to health care spending, why have the lowest paid workers, with the least access to health care, seen their wages drop the most since the 70s? Shouldn’t they have seen the least drop and workers with the best plans seen the greatest, not vice versa?

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