Tax Analysts Blog

The ‘Cadillac’ Tax Shows Why Obamacare Was Never Built to Last

Posted on Oct 5, 2015

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.

Read Comments (6)

AMTbuffOct 5, 2015

Obamacare was principally conceived as a way to get more people insured.

No. Its primary objective was to gradually disrupt the status quo while
building up the political pressure necessary to enact Medicare For All.

Obamacare's unsustainability helps to achieve this long-term objective,
provided that the failure of Obamacare is gradual, occurring only after the old
system has been eliminated. That's where drafters of the law erred. Their other
error was in presuming that a law jammed through Congress with not one vote
from the other party could be refined and perfected later. One slight shift in
the political winds eliminated that possibility even before final passage.

The future of health care financing in the US is a mess. Nobody knows what kind
of mess. The left's vision is Medicare For All. The right's vision is
fragmented, but might include guaranteed issue bare bones catastrophic health
insurance as Fiorina appears to propose. What's not on the menu is everyone
getting the best possible care without paying for it.

edmund dantesOct 7, 2015

AMTBuff--I completely agree with you. In case you missed it, there are more
comments to this column over at taxnotes.com (which, IMHO, is a real downgrade
to the blogs). They crosspost from here to there, but not back.

EMSIG BEOBACHTEROct 7, 2015

Now you know why economists rarely run for public office and why, if they do,
are rarely elected. Economists extol the virtues of economic efficiency,
equity, rationality, and neutrality. None of these virtues appeal to people's
emotions or sense of "fairness."

edmund dantesOct 7, 2015

"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)."

What evidence do you have for this proposition? The opposite is true--extending
coverage to 26-year-old dependents is not a quality improvement. I get my
health insurance through my employer, and it has been ruined by Obamacare.
Higher premiums, higher co-pays, higher deductibles, required drugs no longer
covered, limited doctor choices, but I do have pointless mandated coverage I'll
never need (pediatric dental for a 63-yr-old male with grown children, full
obstetrical care should I become pregnant this year). Before Obamacare the
insurance was pricey but worthwhile, now it's almost worthless to me.

That's because I work for a small business. The real point of Obamacare is to
ruin everyone's health insurance in the name of "fairness" and to "pay for"
coverage for the uninsured. It's "not fair" that some people have better health
insurance than others. First Obamacare ruined the individual market, then the
small business market. The Cadillac tax brings the ruination to large companies
and public employees. In that sense it is fair, because they should suffer too,
just like the rest of us.

The Cadillac tax is one of those perverse taxes that, if it really works, you
don't collect anything. Like speeding tickets. If everyone obeys the law you
collect nothing, and that's the measure of maximum success. Given that the
Cadillac tax is explicitly intended to change behavior, I've always been
puzzled why it nevertheless is scored at raising enormous revenue. I doubt it
will raise anything near the projections.

As the reality of the Cadillac tax hits the public sector unions, expect the
political pressure to repeal it to reach a fever pitch. I agree with you that
the better solution is to eliminate the exclusion for employer-provided health
insurance. I would do that by eliminating the employer deduction, rather than
impute income to the employees. That, at least, could be politically feasible,
but the politicians are afraid to try it.

MIKE55Oct 7, 2015

"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)."

What evidence do you have for this proposition? The opposite is true--extending
coverage to 26-year-old dependents is not a quality improvement. I get my
health insurance through my employer, and it has been ruined by Obamacare.
Higher premiums, higher co-pays, higher deductibles, required drugs no longer
covered, limited doctor choices, but I do have pointless mandated coverage I'll
never need (pediatric dental for a 63-yr-old male with grown children, full
obstetrical care should I become pregnant this year). Before Obamacare the
insurance was pricey but worthwhile, now it's almost worthless to me.

That's because I work for a small business. The real point of Obamacare is to
ruin everyone's health insurance in the name of "fairness" and to "pay for"
coverage for the uninsured. It's "not fair" that some people have better health
insurance than others. First Obamacare ruined the individual market, then the
small business market. The Cadillac tax brings the ruination to large companies
and public employees. In that sense it is fair, because they should suffer too,
just like the rest of us.

The Cadillac tax is one of those perverse taxes that, if it really works, you
don't collect anything. Like speeding tickets. If everyone obeys the law you
collect nothing, and that's the measure of maximum success. Given that the
Cadillac tax is explicitly intended to change behavior, I've always been
puzzled why it nevertheless is scored at raising enormous revenue. I doubt it
will raise anything near the projections.

As the reality of the Cadillac tax hits the public sector unions, expect the
political pressure to repeal it to reach a fever pitch. I agree with you that
the better solution is to eliminate the exclusion for employer-provided health
insurance. I would do that by eliminating the employer deduction, rather than
impute income to the employees. That, at least, could be politically feasible,
but the politicians are afraid to try it.

Blog EditorOct 8, 2015

“Thank you Edmund Dantes for being so observant about the posting of blog
comments. We will take additional steps to ensure all are posted in the right
location going forward. We truly appreciate your feedback and that of all of
our readers – especially those who take the time to leave thoughtful comments.
Please accept our apology – and keep the comments coming!

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