Posts Tagged ‘luxury tax’

Cadillac Plans and Yacht Taxes

Monday, September 21st, 2009

A key component of Sen. Max Baucus’ proposal to pay for health care reform is a 35% excise tax on so-called Cadillac insurance plans, defined as those costing $8,000 for individuals and $21,000 for families. This revenue is designated to cover $215 billion of the $856 billion estimated cost of the bill, while, according to President Obama’s comments, discouraging insurers and employers from offering more coverage then the Administration claims employees need.

Leaving aside the rather dubious claim that $667 per month buys one unnecessary protection (funny how other people’s desire for coverage can seem like hypochondria when a sneeze gets you choppered to Bethesda), you may already have detected some of the contradictions in the reasoning behind this tax. If the President is correct and demand for higher-end plans collapses due to this surcharge, the revenue produced by the excise tax will also vanish, thereby failing to fund reforms at the anticipated level.

It’s a Republican president, George H. W. Bush, whose policies provide evidence Obama’s prediction might be correct. In 1991, Time magazine reported Bush’s tax on luxury boat purchases almost immediately preceded an 88% first quarter drop in  South Florida sales of such vessels (I’ve no stats on Kennebunkport transactions). Of course this was during a period of pronounced economic weakness not unlike the present one, but then that’s when even a 10% levy like Bush’s boat tax can most depress demand.

Unlike would-be weekend mariners hard-pressed to build their own boats, consumers unwilling to accept the government’s judgment on what procedures and treatments they need insurance for have a “do it yourself” option: to save and self-insure against uncovered expenses, perhaps using increased compensation paid by employers in lieu of Cadillac plans. If they can do so in certain retirement accounts, the excise tax and immediate income taxes are avoided. However, depending on income and other factors, some may self-insure with after-tax dollars, meaning Baucus’ surcharge can effectively lead to higher income taxes. If Cadillac plans do disappear, this is one way their demise could lead to at least some revenue for the Baucus plan, though I suspect far less then the projected excise figure.

The bottom line is the tax on Cadillac plans amounts to the government telling citizens that if they buy health insurance in excess of what Washington feels is reasonable they must also contribute to the purchase of coverage for others. This leveling policy’s acceptance depends on voter’s altruism to less fortunate Americans, possibly at the expense of their own health care, and on people’s faith in government deciding how much health insurance they need, inevitably translating into which treatments they receive.

There are strong moral and public health arguments for subsidizing the medical  care of the disadvantaged. But leveling health care is going to mean leveling with voters as well, and when one looks through the rhetoric to the underlying economic reasoning (as many seem to be doing) you can see why this is a hard sell.