Cadillac Tax

The inimitable Taranto brings up one problem with the Cadillac tax in Obamacare because, as Ezekiel Emanuel predicts, firms may drop health insurance and at best no more people will be insured through Obamacare.  It is a fun exercise in logic but this is not the biggest problem with the tax.

The tax estimates are an example of what goes wrong when you expand a trend over a very long period of time.  As the American Action Forum explains the tax grows exponentially because insurance is expected to grow the same way.  The presumption is that insurance costs paid by businesses in 60 years will be fourteen times the current cost.  So for businesses currently at the $27,500 threshold for the tax, that means that heath insurance in 2174 would cost $385,000.  So assuming two-and-a-half percent productivity growth over the next 60 years, and a current employee earning $40,000 in cash wages and $27,500 in tax free benefits, that current employee would be worth $297,000 in 60 years.  Such an employee would need to have negative cash wages of about $88,000 to be worth employing.  Of course, MWG is leaving the 40 percent tax out of this back of the envelope computation so the problem is substantially more acute.  Employers and employees have strong incentives to avoid this outcome.

A more rational expectation of what will happen with the tax is reported in Bloomberg:

“I don’t think there’s any employer that’s going to pay the tax,” said Wojcik, whose Washington-based trade group represents employers such as Wal-Mart Stores Inc. (WMT)American Express Co. (AXP) andTarget Corp. (TGT)

The CBO is already dropping expectations for the current decade.  If Wojcik is right then the funding for Obamacare is the out years is short one percent of GDP in about 40 years and three percent in about 60 years.  Rational reactions by businesses will put a bigger stress on Obamacare while causing enormous problems on the budget side.  Of all the poorly thought out mechanisms in Obamacare, the Cadillac tax might be the worst.


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