Paul Howard and Yevgeniy Feyman explain at National Review Online why they believe the Affordable Care Act’s “Cadillac tax” ought to be scrapped.
Unions want to repeal the tax, or at least modify it so that it doesn’t hit their members. This presents a golden opportunity for conservative reformers to offer the middle class a tax break while making health care more efficient and affordable.
If you subsidize something, you get more of it. That’s what we’ve done with employer-provided health insurance. By allowing employers to offer insurance on a tax-free basis (as opposed to wages, which are subject to taxation), a dollar of wages is worth less than a dollar of health insurance. This phenomenon offers a particularly convincing explanation for the U.S.’s high health-care costs: Employers have overinvested in health insurance, making workers less sensitive to health-care prices and giving providers more leeway to raise them. …
… The basic flaw is this: The Cadillac tax imposes the highest income-tax rate in America on all employees above the threshold – applying the tax rate for the top 1 percent to the other 99 percent. Jettisoning the Cadillac tax (with no replacement) would make Obamacare even more expensive for taxpayers and reduce pressure on unions to “right-size” their health benefits. So instead of penalizing lower-income workers, the deduction for employer-sponsored coverage should simply be capped. That way, workers who pay taxes on the excess amount will do so at their own marginal rate, not a punitively high maximum rate. John McCain proposed this in his 2008 health-care plan, and the Patient Care Act, along with Senator Rubio’s health-care proposal, would do the same thing.
