qotd: ‘Cadillac tax’ hits middle class hardest

International Journal of Health Services
Online March 9, 2016
The "Cadillac Tax" on Health Benefits in the United States Will Hit the
Middle Class Hardest
Refuting the Myth That Health Benefit Tax Subsidies Are Regressive
By Steffie Woolhandler, David U. Himmelstein

Abstract

U.S. employment-based health benefits are exempt from income and payroll
taxes, an exemption that provided tax subsidies of $326.2 billion in
2015. Both liberal and conservative economists have denounced these
subsidies as "regressive" and lauded a provision of the Affordable Care
Act — the Cadillac Tax — that would curtail them. The claim that the
subsidies are regressive rests on estimates showing that the affluent
receive the largest subsidies in absolute dollars. But this claim
ignores the standard definition of regressivity, which is based on the
share of income paid by the wealthy versus the poor, rather than on
dollar amounts. In this study, we calculate the value of tax subsidies
in 2009 as a share of income for each income quintile and for the
wealthiest Americans. In absolute dollars, tax subsidies were highest
for families between the 80th and 95th percentiles of family income and
lowest for the poorest 20%. However, as shares of income, subsidies were
largest for the middle and fourth income quintiles and smallest for the
wealthiest 0.5% of Americans. We conclude that the tax subsidy to
employment-based insurance is neither markedly regressive, nor
progressive. The Cadillac Tax will disproportionately harm families with
(2009) incomes between $38,550 and $100,000, while sparing the wealthy.

http://joh.sagepub.com/content/early/2016/03/08/0020731416637163.abstract

PNHP press release:
http://www.pnhp.org/news/2016/march/'cadillac-tax'-on-health-benefits-will-hit-middle-class-hardest-study

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Comment by Don McCanne

The "Cadillac tax" is an excise tax on premiums of more expensive
employer-sponsored health plans. It was included in the Affordable Care
Act partly as a revenue source to help pay for ACA, partly to offset the
tax subsidies for employer-sponsored insurance that were more generous
for higher income individuals, and partly to reduce the incentive to
purchase more insurance than necessary under the theory that making
patients more sensitive to health care costs will prevent spending on
supposedly excessive health care services (certainly a contentious point).

Because of the high costs of health care, we do need funding mechanisms
that result in a transfer to those less able to pay. The Cadillac tax is
a problem because, instead of disproportionately assessing the very
wealthy, it impacts primarily working families. Not only is the tax
unfair, the health plans will likely have their benefits reduced in an
effort to escape the taxes.

In a PNHP press release (link above), Steffie Woolhandler, one of the
co-authors of the report, stated, "Taxpayers should be paying directly
for health care through Medicare-for-All, not indirectly through tax
subsidies to private insurance. However, removing the tax subsidies – as
Obamacare will do – without setting Medicare-for-All in place is a step
backwards. It's shameful that economists have provided cover for this
tax that will hit middle-class families and largely spare the wealthy."

The Cadillac tax is just one more example of the flawed policy patches
required simply because the architects of reform decided to build on our
current dysfunctional, fragmented financing system instead of replacing
it with a more efficient, effective and equitable single payer
Medicare-for-all program. That doesn't mean that we have to live with
our highly flawed system. We can still change it.