Thursday, February 04, 2010

Cadillac Health Insurance Tax

In the comments of an old post, a reader asked my opinion of the Democrat's proposal to tax "Cadillac" health insurance plans. My initial reaction was that I didn't understand the plan because when you tax things you get less of them. So taxing citizens with very nice health insurance plans would result in less health insurance. I was right. However, loyal reader and friend Justin Scott pointed out that this might not be so bad.

Justin pointed me to a short podcast from Planet Money that discussed how taxing those with large health insurance benefits would actually encourage them to get less lavish insurance and result in them purchasing less health care. The decrease in health care services would presumably be the procedures that would yield very little benefit in the first place (they were only doing them because the insurance paid for it). Instead of getting their pay check plus huge health insurance benefits, these workers would now get a bigger pay check will less health insurance coverage. They get paid more, they consume less health care, prices go down.

So a tax on health insurance would actually decrease the price of health care for most people. Confused yet? Although I agree with the underlying logic, it is incredibly convoluted. The government is proposing that we tax "Cadillac" health insurance plans, which are given by employers because they receive a tax break from the government. So why don't we just remove the employer tax break for insurance like I proposed last year? If you goal is to get consumer to feel the cost of their health care, having them buy it themselves is the best way. My guess is because it doesn't sound very good to the voters.

One final worry. The tax has two purposes, make consumers count costs and raise money. However, the two are opposing. If it encourages people to cheaper health insurance to avoid the tax, then health care costs decrease. If people avoid the tax, no one pays. I wonder how much they accounted for that in the $150 billion it is suppose to raise?


  1. "So why don't we just remove the employer tax break for insurance like I proposed last year?"

    Have you tried to find the answer to this question? If so, what are the arguments?

  2. I haven't, but I'm not sure where to look. Let's just assume I'm right and that no one has ever thought about it before... :)

  3. Haha I assume you're referring to this.


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.