The idea that would've been better than the excise tax
I'm more optimistic than Cato's Thomas Firey that the excise tax will bend the cost curve, but we're in full agreement that it would've been better to stick with Max Baucus's original idea and cap the employer tax exclusion, and it would've been far better to embrace Ron Wyden's proposal to convert the employer tax exclusion to a standard deduction.
From a progressive standpoint, the advantage of ending the tax-free treatment of health benefits rather than slapping a new tax atop them would have been that if compensation in the form of health benefits wasn't tax free, it would've been treated like wages.
And wages are taxed progressively. The excise tax, by contrast, does not have progressive rates -- it's just a flat 40 percent. If health benefits were treated as wages, then a middle-class worker with a $27,000 health-care plan would've paid much less in taxes than a Goldman Sachs trader with a $27,000 health-care plan. With the excise tax, the two will pay the same rate.
But unions partnered with House Democrats to fight the cap on the employer tax exclusion, and the Obama administration realized that it couldn't defend a policy that it had attacked John McCain for proposing, and then everyone ended up with a policy that did basically the same thing as capping the exclusion but did it in a less progressive fashion. And that's how a bill becomes a law.
January 15, 2010; 11:42 AM ET
Categories: Health Economics
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