Each year, the Tax Foundation honors state legislators, executives, and other individuals with its Outstanding Achievement in State Tax Reform award. As the name suggests, the honoree's accomplishments...
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- Cadillac Tax Confirms: Employers Respond to Tax Changes
Cadillac Tax Confirms: Employers Respond to Tax Changes
A report from the consulting firm Mercer, which surveyed 700 employers, found that 62% of those employers are concerned about being hit with the excise tax on high-cost health plans, also known as the “Cadillac Tax.” According to the report, many companies are already making changes in anticipation of the tax, converting to less generous plans.
In other words, the Cadillac Tax – which institutes a 40% excise tax on plans above a certain threshold - continues to work as designed. As the Obama administration correctly argued, the Cadillac Tax will slow the growth of high-cost health plans. To some extent, it repairs a distortion where health benefits were favored over other sorts of compensation – though its design is far from ideal.
Taxing something gets you less of it. This basic principle remains true for almost any good imaginable. Elasticity is a real thing. When you hear someone argue that his proposed tax changes will not affect people’s behavior, you should immediately be skeptical. Taxes on labor reduce the supply of labor. Taxes on investment reduce investment. Taxes on saving reduce saving.
Instead of consistently acknowledging this truth, politicians only use its logic when they are trying to influence people’s behavior. They only acknowledge people’s ability to respond when that is the intent behind the tax. But people respond to taxes, whether you intend it or not. Even if you don’t intend to reduce labor or investment, taxing labor or investment will have those drawbacks.
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About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.