Debunking The Excise Tax As Wage Raiser Myth

Many people have argued the fanciful notion that the excise tax on health care plans (the so called "Cadillac" tax) will lead to increased wages. Indeed, the CBO and the JCT have adopted these assumptions in their scoring of the Senate health bill. The Economic Policy Institute, where Biden economic advisor Jared Bernstein worked prior to joining the Obama Administration, does a thorough debunking (PDF) (here is the press release (PDf) (which includes comments from Robert Reich, Rep. Joe Courtney, and EPI economists Lawrence Mishel and Josh Bivens):

One claim for the Senate excise tax has recently surfaced: that health care cost increases have been a major driving force in constraining wage growth and that wages will grow more strongly by curtailing employer health costs via the excise tax. This claim boldly asserts that health care costs are large enough (and the tradeoff with wages is large enough) to drive major changes in overall wages.


[. . .] Clearly, this “health care theory of wage determination” is wrong, and other factors explain these overall wage trends [of the 1990s.] The simple explanation is that productivity accelerated in the mid-1990s, and the low unemployment (and hikes in the minimum wage) facilitated faster wage growth. That this wage growth disappeared entirely in the 2002-07 recovery is not due to faster health care cost increases but to weak employment growth and employers’ ability to achieve increased profitability rather than pass on productivity gains to workers. This reveals a fundamental flaw in our economy: productivity gains are not passed on to higher living standards for workers.

Read the whole thing. You will see that a progressive will have to ignore the obvious to accept the fanciful theories being championed by supporters of the excise tax.

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    Speaking of wages... (5.00 / 0) (#1)
    by kdog on Wed Jan 06, 2010 at 03:41:15 PM EST
    (sorry if OT)A heads up to wage earners, the first check of the new year has a higher federal witholding amount...caused a little confusion here for the direct deposit folks who were expecting the same net as last year.

    I know I didn't change any dependents or anything...sly money grab by Uncle Sam or did I miss the anouncement?

    Not a lot or anything...my check was 3 bucks short, but still, wtf?  Thats 2 packs of Bambu!:)

    I guess I'll have to wait for the excise tax to take effect to raise my ends...lol.

    It was part of the stimulus (none / 0) (#16)
    by me only on Wed Jan 06, 2010 at 08:51:52 PM EST
    the original 2009 withholding and the 2010 charts are similar (although the mid bracket is broken).  However, you are comparing checks from late 2009 yo 2010.  The late 2009 taxes were at the revised (lowered) rate.  That was the big boost to the economy, that $3/paycheck you were getting!!!!!!!

    Go look at Circular E.


    You're right... (none / 0) (#21)
    by kdog on Thu Jan 07, 2010 at 06:41:20 AM EST
    I remember now that an extra 3 bucks did show up earlier in 2009...that explains it.  Thanks.

    Why oh why (5.00 / 1) (#2)
    by lilburro on Wed Jan 06, 2010 at 04:02:11 PM EST
    does Obama support this?  It pisses off the unions, one, and could hurt a lot of people, two.  Plus I think any dodo could figure out that it's not going to drive up wages.  

    But hey, noted non-economist Ezra Klein supports it!  

    More on the excise tax.

    Noted non-economist (none / 0) (#4)
    by Zorba on Wed Jan 06, 2010 at 04:20:40 PM EST
    Ezra Klein is either living in La-La Land, or has drunk the Obama Kool-Aid.  Or is so enamored of being part of "The Village" that he thinks that everything The Villagers deem "good" is, therefore, good.  The Senate plan needs to blow up and, frankly, the House plan is only very marginally better.  Single Payer Now!  And tax the rich, not the middle class.

    I think he is on a power trip. (5.00 / 2) (#6)
    by inclusiveheart on Wed Jan 06, 2010 at 04:27:00 PM EST
    He's salivating at the prospect of being "right" about this; and too ignorant to understand that it will end in tears.  The more I read him, the less I think he really understands how the world works in practice.  He's enamoured with his own theories which will, imo, end in tears.

    I think the Senate bill assumes $150 billion of (5.00 / 2) (#3)
    by Buckeye on Wed Jan 06, 2010 at 04:18:57 PM EST
    excise taxes will be collected.  I also read at Firedoglake that Obama's own staff knows they will not collect the money as only 18% of companies/individuals will pay the excise tax and the remainder will lower benefits to stay below the threshold.  They also know these savings will not be passed onto their workers.  I do not even criticize companies for this as health care inflation has been eating them alive.  Replacing health care savings from benefits reductions (to stay below the excise threshold) with wage inflation would not help them.  They need health care savings that hits their bottom line and the problem of passing productivity improvements to employees while still showing earnings growth for their investors requires a different solution.  I also read that with a normal rate of growth in health care costs, over 30% of the workforce will be in a 'cadillac' plan - meaning many workers face the risk of losing benefits (dental, optical, prenatal, etc.) as well as higher deductibles and co-pays.

    So, if only 18% of these taxes will be collected will no offset, then of the $150 billion, only $27 billion will actually materialize - leaving $123 billion hole in the CBO estimates.  That is $1.23 trillion over the next ten years and $2.46 trillion over the next 20 years.  Net that against the $100-$150 billion CBO score over the next 10 years and $1.3 trillion in the following ten years and this bill grows the debt substantially.

    Well, we will just have to accomodate (5.00 / 2) (#8)
    by KeysDan on Wed Jan 06, 2010 at 05:14:42 PM EST
    the shortfall with even more "savings" from Medicare.

    Through the Looking Glass. (5.00 / 2) (#5)
    by inclusiveheart on Wed Jan 06, 2010 at 04:24:06 PM EST
    Amazing that we would ever have to debunk that myth - especially amazing that it would come from so-called Democrats, progressives or liberals.  Just goes to show that there is still no shortage of stupid or mendacious in this country.

    I am glad (5.00 / 2) (#7)
    by Steve M on Wed Jan 06, 2010 at 05:12:26 PM EST
    to have an actual argument to review, as opposed to the rampant know-nothingism that continues in this very comment thread. I look forward to reading the report.

    If your eyes are still crossed from (5.00 / 2) (#9)
    by Anne on Wed Jan 06, 2010 at 06:29:27 PM EST
    looking down your nose, you might not have the optimum reading experience...



    Really! (none / 0) (#17)
    by gyrfalcon on Thu Jan 07, 2010 at 12:44:47 AM EST
    Good grief!

    Heh (none / 0) (#11)
    by Big Tent Democrat on Wed Jan 06, 2010 at 07:11:35 PM EST
    Know Nothingism.



    Let's quote a comment (none / 0) (#12)
    by Steve M on Wed Jan 06, 2010 at 07:44:43 PM EST
    Amazing that we would ever have to debunk that myth - especially amazing that it would come from so-called Democrats, progressives or liberals.  Just goes to show that there is still no shortage of stupid or mendacious in this country.

    It is quite vexing, as someone who has looked at the evidence and done his best to draw a conclusion, to hear that doing so makes one not a real progressive.

    Is this level of analysis something to be proud of?  "I knew this was wrong before I even looked at the evidence!"

    Having read the report, I accept the narrow conclusion it draws, but I think it debunks a much stronger argument than many proponents of the excise tax are making.  And the way employers respond to lower costs is not necessarily probative of the way they will respond to higher costs.


    Which proponents? (none / 0) (#14)
    by Big Tent Democrat on Wed Jan 06, 2010 at 08:11:30 PM EST
    It debunks Gruber and Klein.

    And yes, on some level, the debunking was self evident imo.

    Was the invective stupid? Sure. But the glad handing on the excise tax was even stupider imo.

    I found Gruber and Klein moronic on the issue.


    BTW (none / 0) (#15)
    by Big Tent Democrat on Wed Jan 06, 2010 at 08:12:15 PM EST
    Your last line ALSO debunks Gruber and Klein.

    I'm beginning to think that (none / 0) (#10)
    by Anne on Wed Jan 06, 2010 at 07:05:19 PM EST
    "ignoring the obvious" is a prerequisite to being a Democratic member of Congress; there's way too much of it going around.

    Not just Congress (5.00 / 1) (#18)
    by gyrfalcon on Thu Jan 07, 2010 at 12:46:53 AM EST
    AP apparently has a report that Obama is FINALLY twisting arms on the health care bill-- to force the House folks to go with the Senate's excise tax rather than the wealth tax.

    The man is drinking his own Kool-Aid, apparently.


    I'm so sick of the stoopid (none / 0) (#13)
    by Militarytracy on Wed Jan 06, 2010 at 07:58:39 PM EST
    I have nothing more to add except that the unions need to go to the mattresses.  It has been generations since we've been in this nuts of a place though.  Are we smart enough to go now or will things have to get worse first?

    Big Tent, what is the gripe? (none / 0) (#19)
    by Gerald USN Ret on Thu Jan 07, 2010 at 04:11:56 AM EST
    Supposedly one thing progressives like is a progressive tax system.  
    For years some people in both the middle class and the upper class have been getting a tax break that the majority of the people don't get.  The higher cost of their premium health care plans has been tax free.

    Let us have an even playing field for everyone.  I thought that was the "progressive way."

    If someone gets something extra, then they should be taxed on it.

    I would think the more (none / 0) (#20)
    by Militarytracy on Thu Jan 07, 2010 at 04:39:05 AM EST
    progressive tax in this situation is the wealth tax considering that middle class America is the engine of our economy and it has experienced loss of real wages this year and is projected to experience the same again this year.  You on other hand sound like our family and got a raise this year along with your Tricare for Life.

    MilitaryTracy (none / 0) (#26)
    by Gerald USN Ret on Thu Jan 07, 2010 at 10:26:07 PM EST
    I have worked every day since I left the Navy. I have to, to support a few wives and a lot of children.  But that was my choice, and I don't complain but only say it to explain why I am not just spending all my time sailing (two fluid) around the world in my twilight years.

    This last decade made for a lot of business opportunities for me, and for that I assume I am personally blessed even as our country and many other people have struggled due to 9/11 and President Bush's stupid overreaching in Iraq.

    And I agree that when the opportunity has come to put money in a "pre-tax medical" account I have taken it.

    But still as a new era seems to dawn with health care, I think that every thing should be on the table and counted, and or taxed.

    I am willing to give up any "special status" such as it might be.  "Tax free" just shouldn't penalize anyone.

    Now besides that, taxing the really rich folk a bit more doesn't bother me either.  I remember as a kid when I only knew about taxes because the ball players Mickey Mantle and Willy Mays were taxed at 92% because they made more than $100,000.  Taxes changed over the years for reasons that were considered constructive to much lower rates.
    If it is now time to raise taxes so that Americans can have health care, then so be it.  If the Government is in it, controlling it then it should be equitable for everyone.

    But "tax free" for a few people just doesn't ring true in this great country.

    Now if GM or some other company wishes to pay all the bills of anyone, then that is fine, but the company (or someone) should pay the taxes on that amount of money as well.


    Point of clarification (none / 0) (#24)
    by jbindc on Thu Jan 07, 2010 at 11:10:28 AM EST
    For years some people in both the middle class and the upper class have been getting a tax break that the majority of the people don't get.

    Um...don't the people in the middle class make up the majority of the people, so who do you think is getting a tax break?


    How about bonuses? (none / 0) (#22)
    by DancingOpossum on Thu Jan 07, 2010 at 09:07:08 AM EST
    If someone gets something extra, then they should be taxed on it.

    Does that include Wall Street bonuses? Sure, tax them at 90%. That's a whole lot of "extra" they're getting, after all. But I have a feeling you wouldn't agree to that.

    And, as MT says, the middle class (and working class, AND poor) have been giving and giving and giving until there' no more "give" left. It's not just wage decreases this year--family income, adjusted for inflation, has been declining for decades among the not-wealthy. What more are you asking them to "give"?

    I am curious about (none / 0) (#23)
    by lilburro on Thu Jan 07, 2010 at 09:22:33 AM EST
    the disproportionate impact this seems to have on women and older folks.  This was a conclusion also drawn by the EPI here.

    Truth is... (none / 0) (#25)
    by Walter in Denver on Thu Jan 07, 2010 at 11:56:13 AM EST
     no one really knows what the excise tax will do to wages. To the extent the EPI report acknowledges that then good for them. Market forces will determine what employers will do with any savings gained through the excise tax, and those forces are in constant flux.