Tax Lawyer's Blog

The St. Petersburg Times has a column written by MIT economist Jonathan Gruber who claims that the tax on Cadillac insurance plans isn’t really a tax increase after all:

The assessment proposed in the Senate is not a new tax; it is the elimination of an existing tax break….

Under current law, if workers are paid in wages, they are taxed on those wages. But if they receive the same amount of compensation in the form of health insurance, they are not taxed. As a result, the tax code has for years provided a large subsidy to the most expensive health plans — at a cost to the U.S. taxpayer of more than $250 billion a year.

The Senate assessment on high-cost insurance plans doesn’t walk like a tax or talk like a tax — because it is not a tax. It is an innovative way of financing the health reform we so desperately need.

Mr. Gruber is not only a revered MIT economist, he is apparently an expert in Orwellian Newspeak?

The elimination of a tax break is a tax increase because it increases taxes. 

Imagine for a moment that Congress repealed the refundable Earned Income Tax Credit (EITC). I’d be willing to bet that Professor Gruber would call that a tax increase on the poor even though by definition it would not increase the taxes paid by poor people by a single cent?

Whether or not the elimination of a tax break (or any entitlement for that matter) is a tax increase depends on whether you are in favor of it or opposed to it. Proponents of the tax increase will call it “jabberwocky” before they call it a tax increase because they know that calling it by its true name will make garnering public support of the measure more difficult. Of course, the reverse is also true. Opponents regularly call funding bills tax increases in order to arouse public opposition.

In any event, even economists should know that a taxpayer’s income tax liability can only be increased in one of the following ways:

• An increase in tax rates
• A decrease in income exclusions
• A decrease in deductions

Politicians naturally understand that tax rate hikes exact a steep political price, which is why they are always hunting for indirect ways to tax the electorate. The tax on Cadillac plans is just another one of those indirect ways.

By the way, if Mr. Gruber is right in suggesting that only increases in tax rates count as new taxes, then all Congress would ever have to do is make legislation that scales back tax deductions. Then, citing Gruber, the politicians would be able to claim that they are merely repealing a tax break and not enacting a new tax law.

The truth is Gruber has gotten it exactly backwards. The luxury tax on Cadillac plans does, in fact, walk and talk like a tax. Had the professor used Occam’s Razor, the modern version of which says “the simplest answer is usually the correct one,” he would have arrived at the following correct conclusion:

The levy on Cadillac insurance plans is a tax because it increases taxes.

Postscript: The government’s discouragement of top flight health insurance plans constitutes a rationing of healthcare. No doubt some people will keep their cushy plans and pay the tax, but many, if not most, will trade their plans for ones that are under the Cadillac limits thereby rendering themselves less well-insured so that others can be well-insured. Marx coined a phrase for this kind of thinking: “From each according to his ability, to each according to his need.”

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