Cadillac Tax Confirms: Employers Respond to Tax Changes

March 14, 2014

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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