Tuesday, October 13, 2009

The Incidence of the Cadillac Tax

I have written previously about the tax on so-called Cadillac health plans. Bottom line: It is a reasonable policy from the standpoint of economic efficiency, but it very clearly breaks President Obama's "read my lips, no new taxes unless you're rich" campaign pledge.

Today, Kevin Hassett looks the numbers on the incidence of this new tax:

Senator Orrin Hatch, Republican of Utah, asked the Joint Committee on Taxation to perform the distributional analysis nobody else would. The committee's analysis was provided to him in a letter dated Sept. 17. I received a copy a week later.

The report focused on the main revenue-raising step of the Baucus plan, an excise tax on high-cost insurance plans. At the time of the analysis, the Baucus plan held that if you have an insurance plan with a high premium (exceeding $8,000 per individual or $21,000 per family), your insurance company would pay a tax of 35 cents for every dollar that your plan exceeds the threshold.

The goal of the tax is to raise revenue to cover the uninsured and to discourage these so-called gold-plated plans, which some say encourage excessive medical care.

Ostensibly the excise tax is a tax on insurers. But as with other excise taxes (gasoline, cigarettes), the cost would undoubtedly be passed on to the consumer, in the form of more expensive insurance. Or firms might stop offering generous plans and increase wages commensurately, which would also increase tax revenue.

The analysis by the Joint Committee on Taxation concluded that tax payments would indeed rise. And it found that the middle class would be stuck with the tab.

The report projected that the excise tax would raise about $52 billion in 2019. Of that, about $8.9 billion would come from taxpayers with incomes of less than $50,000; about $19.4 billion from taxpayers with incomes between $50,000 and $100,000; and about $17.4 billion from taxpayers with incomes between $100,000 and $200,000.

Add those up, and you see that about 87 percent of the revenue in the original Baucus proposal to finance Obamacare would come from individuals with incomes of less than $200,000.

Baucus and the Senate committee have since upped the proposed tax to 40 percent, and the trigger thresholds to $9,850 and $26,000, tweaks that shouldn't change the basic thrust of the story....

The remarkable thing is that this revenue comes from low- and middle-income people who already have insurance. Many members of organized labor have these "gold-plated" plans. And they would be worse off, not better, because of Obamacare.