The “Cadillac” tax – Obamacare’s signature albatross – was never a good idea. Sure, it was good policy, as more than 100 economists pointed out last week. But it was always bad politics. And when it comes to building durable social programs, politics matter.
There are good reasons to like the Cadillac tax. It raises lots of money, which is always nice. More important, it promises to mitigate the expensive side effects of our decades-old tax exclusion for employer-provided healthcare plans. As my colleague Marty Sullivan pointed out in Tax Notes this week, that exclusion provides “an enormous incentive for the overconsumption of medical care.” Which makes healthcare less affordable for everyone.
Repealing the exclusion would be the best move. Alternatively, some sort of cap would be helpful. The Cadillac tax is a third-best alternative, approximating a cap and dodging some of the political fallout that would come with more transparent limits on the exclusion.
Which is why economists have embraced the levy. “Repeal of the excise tax would be a colossal mistake,” Marty contends. “It would be a step backward for healthcare and tax reform. If anything, the tax should be expanded.”
Marty is right on all counts. But even a good tax can be a bad idea when it threatens broader policy goals. The Cadillac tax – along with the eclectic array of other taxes used to finance the Affordable Care Act – was always the law’s weakest point. Over the short term, other elements of the legislation posed a more immediate threat. But the law’s tax components threaten the long-term viability of the ACA in a way that Hail Mary lawsuits do not.
The history of American social policy strongly suggests that programs are most secure when they are most nearly universal. Social Security is the best example. There were good arguments advanced in the 1930s to make Social Security more progressive, focusing benefits on the poor and costs on the well-to-do. But Franklin Roosevelt decided (against the advice of key advisers) that the system needed to be universal in terms of both benefits and taxes.
That Social Security remains with us today should be proof enough that FDR was right. But confirmation can also be found in poll data, which show the FICA payroll tax is remarkably well tolerated, despite its steady upward creep over the last half-century.
Benefit theories of tax fairness may be out of fashion with public finance experts, but they make sense to voters. Americans clearly see the link between Social Security taxes and Social Security benefits. And that’s been enough to keep Social Security safe for three generations.
By contrast, Obamacare offers no similar value proposition. Neither its benefits nor its costs are universally distributed. That’s by design, of course -- Obamacare was principally conceived as a way to get more people insured. But (of necessity) it spread the cost of that added coverage to people who wouldn’t benefit from it directly. Sure, there are reasons why we all come out ahead if more people are insured. And Obamacare has improved the quality of health insurance for people who get their insurance the old-fashioned way (through the exclusion for employer-provided health benefits).
But those are weak arguments, at least in political terms. Universality is the secret sauce of social welfare in America. It has guaranteed the viability of Social Security (and Medicare) for decades.
And in this case, the exceptions truly prove the rule. Medicaid, which is not universal, is also much more vulnerable. So, too, are other nonuniversal benefits, like food stamps.
Personally, I wish things were different. I wish the United States could provide a social safety net to those most in need and not drive up costs by offering benefits to those who don’t need them. But history suggests that such a wish is unlikely to come true.
All of which suggests that Obamacare will be in trouble for a long time. It’s possible, of course, that the political climate may change – that Americans will embrace large-scale, nonuniversal social programs. But it’s more likely that Obamacare – with its targeted benefits and haphazard funding – will be vulnerable for years to come.