When Benefits Equal Income

Kevin Drum is engaged in a discussion with Scott Winship about whether middle class wages are stagnating. It is an interesting discussion, but I want to focus on one part of Winship's analysis:

[T]he Economic Policy Institute estimates that the median male worker’s hourly wage was $16.88 in 1973 and $16.85 in 2007. However, EPI’s figures show that when fringe benefits are taken into account, the median male worker’s hourly compensation increased by somewhere between 5 and 10 percent over this period.

(Emphasis supplied.) Setting aside the accuracy of Winship's analysis, what is striking is the inclusion of fringe benefits as income. The biggest fringe benefit is of course health insurance. Currently, health insurance benefits are not taxed. But the proposed excise tax would indeed tax them. As R.J. Eskow notes, even given the rosy assumption of a 1:1 transfer of fringe benefit value to wages, such transfer will lead to a reduction in after tax income:

There is]a relationship between wages and health care costs – a fact which few deny. [. . .][This is] moot where the excise tax is concerned. The excise tax is not designed to find wasteful or excessive spending. It’s just designed to reduce what health insurance spends. Heck, you could reduce that to zero tomorrow. Just outlaw health insurance! The remaining costs would be covered by people out of their own pockets – to the extent they could afford care.

That’s what the excise tax does: it shifts cost back to individuals. So if Baicker and Chandra are right, some employees will work 2.4% more hours. But that income will be taxed. Instead of receiving a dollar’s worth of coverage, they’ll work to earn that $1 and only have seventy cents or so left after taxes. That’s a net loss of roughly 30%, and they’ll have to work more hours to get it.

Such a deal.

(Emphasis supplied.) It is true of course that the excise tax will increase the taxes paid by wealthy people who carry health insurance above the excise tax limit. But it also will either reduce the health insurance benefit offered to some middle class workers OR increase the taxes paid by middle class workers, more and more over time.

That means, even if you believe the 1:1 transfer theory of the excise tax proponents, it means less after tax income for middle class workers. If we must have the excise tax, it should be means tested.

Speaking for me only

< More Than 100,000 Feared Dead in Haiti | Dems Do Not Know How To Bargain: Example XXX >
  • The Online Magazine with Liberal coverage of crime-related political and injustice news

  • Contribute To TalkLeft

  • Display: Sort:
    What is interesting is that there (5.00 / 1) (#3)
    by inclusiveheart on Wed Jan 13, 2010 at 02:13:28 PM EST
    is a contingent of people advocating in favor the excise tax who keep insisting that this tax will not affect the individual policy holder.  While the reality is that the whole purpose of the excise tax is to force policy holders into choosing cheaper plans as a means of keeping premium prices from rising at their current rate.

    Therefore, in order for this scheme to work, the excise tax must affect a larger proportion of the population.  Means testing would undermine the end goal.

    Worth keeping in mind when you're debating with someone who believes that this is an effective cost control measure; and who actually understands why it is part of the bill.  I don't really believe it will be effective, but for those who want it that's why they are fighting for it.  And they want to clip as many people as possible in the process.  In that context, one has to wonder if it is a worthwhile pursuit to negotiate a "better" excise tax model since it won't really work if the only people affected by the tax could afford to pay the difference.

    Sure (5.00 / 1) (#5)
    by Big Tent Democrat on Wed Jan 13, 2010 at 02:25:36 PM EST
    Krugman is particular has been nonsensical on this point.

    I still can't figure out why anyone (5.00 / 4) (#8)
    by inclusiveheart on Wed Jan 13, 2010 at 02:45:09 PM EST
    thinks that this scheme will amount to anything more than poorer health plans than most people already have now; and how or why they think that there would be any incentive for the health insurance companies to do more with less - it stands to reason that they will just do less with less.

    It is amazing.  I guess some of these people are really just too deep in their statistical data to see that an overall decrease in health costs does not in any way, shape or form result in better or more healthcare.  Oh well...


    Isn't the excise tax one of the ways (none / 0) (#9)
    by oculus on Wed Jan 13, 2010 at 02:56:12 PM EST
    the Senate plans to fulfill Obama's promise HCR would not increase the federal deficit by a dime?  Decreasing medical care expenses or health insurance costs for the average consumer doesn't seem to be on the table.

    Not really. (5.00 / 1) (#12)
    by inclusiveheart on Wed Jan 13, 2010 at 03:14:02 PM EST
    It is meant to be a cost control measure.  If they really wanted to make some money for the effort they'd go with the House plan which would be much more lucrative.  In fact, if it works as the proponents would like it to, it would actually generate very little revenue because people would in theory opt for plans that would not be affected by the tax.

    It is supposed to work just like a cigarette tax.  It is supposed to deter you from participating in purchasing high priced premium plans.  From my perspective, it is a really shallow response to a much more complex problem.


    If we could define (5.00 / 1) (#14)
    by Anne on Wed Jan 13, 2010 at 04:00:34 PM EST
    whose costs are being controlled, it might make it a fairer fight.

    I think when people hear "cost controls," they want to believe it is their costs that will come down, but I don't think that's the end result in this case.

    Having the government hand over billions in subsidies to the health insurance companies with one hand, and use the other hand to take money, ultimately, from individuals, is doing nothing to control either the government's costs or the costs to the individual.

    But the insurance companies, it seems to me, win on every possible front.

    That is just insane.


    All they are trying to do is bring (5.00 / 1) (#16)
    by inclusiveheart on Wed Jan 13, 2010 at 04:11:17 PM EST
    down that GDP number - that's as far as I can tell the only objective.  They don't seem to care about whether or not the healthcare investment in this country delivers better value for our dollar.

    Yes, when the bromides are (none / 0) (#13)
    by KeysDan on Wed Jan 13, 2010 at 03:52:34 PM EST
    brushed aside, the idea  embraces the cigarette deterrence notion for control of health costs (the shiny object that seduced Professor Krugman) and increased income taxes on the 1:1 transfer to wages from benefits.  The "Cadillac" part makes it sound like it will affect only the high rollers when, in fact, the new revenue affects many middle-class workers.  Of course, the cost control outcomes and the 1:1 transfers are speculative, if not specious--and the excise tax, other than for its engineering function, is expected to play a minorl role in actual revenue generation.

    I just had to do some researching (5.00 / 0) (#7)
    by Inspector Gadget on Wed Jan 13, 2010 at 02:34:41 PM EST
    IRS definition of Fringe Benefits in Publication 15-B

    on taxable fringe benefits.

    Years ago I had a job where it fell to me to track personal vs. business mileage on a fleet of over 160 company vehicles to calculate how much each sales person would have placed on his/her tax forms as added pay. These things add up real fast.

    I sure would hate to have to pay income tax on $6000 that was under the complete control of others. Gov't mandates I have to have it. Employer picks the plans to offer. Employer negotiates my premiums. And, I rarely to never use the purchase in any 12 month period. Now, if they want to mandate my employer gives me $6000 annually that I can use to buy a policy where I negotiate what's covered and how much I pay, then I would be a bit better with paying taxes on that income.

    Right now, we have the added benefit of being able to purchase some medical benefits with pre-tax dollars.

    I wonder how much of the increase in fringe (none / 0) (#10)
    by esmense on Wed Jan 13, 2010 at 03:00:10 PM EST
    benefits can be attributed to the transition to a service economy and the various working expense allowances and perks sometimes provided to higher end service workers?

    Has there been an increase? (none / 0) (#15)
    by gyrfalcon on Wed Jan 13, 2010 at 04:08:52 PM EST
    I don't know that.  My guess is any increase because of higher-end service workers is more than offset by the drastic reduction in unionization and the huge increase in lower-end service workers and part-time work.

    You just made me think of something (5.00 / 2) (#18)
    by Inspector Gadget on Wed Jan 13, 2010 at 04:39:36 PM EST
    very interesting in this mandate for insurance.

    Temporary workers has been a huge draw for employers specifically because they don't have to pay the benefits package on these people, or even make insurance available to them. Nor do the temporary agencies have to make benefits available...and, those that do make the worker put in nearly a full 6 months of working hours before they are eligible to get the benefits.

    Will the HCR bill now make it mandatory for temporary agencies to make insurance available to the workers immediately, and raise their hourly rates to the employers to cover that? If they don't, who is going to seek temporary work if they get less than minimum wage after they pay for their own insurance?!!


    Great question (none / 0) (#20)
    by gyrfalcon on Wed Jan 13, 2010 at 11:12:42 PM EST
    I haven't heard that addressed anywhere.

    That is a great question (none / 0) (#21)
    by esmense on Thu Jan 14, 2010 at 11:25:12 AM EST
    So many of the unanswered questions about these proposed "reforms" seem to apply to those people who are most ill-served in our current system. It is very hard to tell how well served they will end up being in a "reformed" one.

    When benefits are income, you then (5.00 / 4) (#11)
    by scribe on Wed Jan 13, 2010 at 03:07:36 PM EST
    enshrine in law the conclusion that access to affordable health care is a privilege and not a right.

    FWIW (5.00 / 1) (#17)
    by gyrfalcon on Wed Jan 13, 2010 at 04:12:12 PM EST
    I've read that the level of plans taxed as "Cadillac" plans is indexed to inflation in the Senate bill-- ie, it actually occurred to somebody that inflation would eventually put everybody's health insurance in that category and they put in a measure to at least keep general inflation from doing that.

    If health insurance premiums rise faster than inflation, as I expect they will, the same thing will happen anyway, but not quite so rapidly.

    The thresholds rise (none / 0) (#19)
    by KeysDan on Wed Jan 13, 2010 at 06:06:32 PM EST
    with inflation (CPI plus one percentage point), but less than the anticipated rise in health spending and insurance premiums.  So, you are right, it seems that it will capture  more and more into the Cadillac category over time.

    Technically (none / 0) (#1)
    by jbindc on Wed Jan 13, 2010 at 02:03:06 PM EST
    Winship does not include fringe benefits as "income".  According to his statement,

    "However, EPI's figures show that when fringe benefits are taken into account, the median male worker's hourly compensation increased by somewhere between 5 and 10 percent over this period."

    he is including it in total compensation, which by definition, always includes benefits, from health insurance, to vacation days, to stock options (if available) and does not limit itself strictly to income.

    Your title makes my spelling sirens go off... (5.00 / 1) (#4)
    by Anne on Wed Jan 13, 2010 at 02:17:34 PM EST
    you've transposed some letters in the word BENEFITS.

    Thanks (none / 0) (#6)
    by Big Tent Democrat on Wed Jan 13, 2010 at 02:25:49 PM EST