Jonathan Gruber and How the President Went from Critic to Supporter of Taxing Health Benefits

November 19, 2014

Back in 2008, one of the Tax Foundation’s tasks was to fact-check the fiscal policy statements by the candidates. We documented a lot of the misleading rhetoric and advertisements that came from both sides. Personally, most of the work we did is forgotten, but one area of the 2008 campaign that is hard to forget is then-candidate Barack Obama's constant criticism of John McCain's health care plan. I was reminded of this again this week as the Jonathan Gruber story made headlines.

One of President Obama's oft-repeated criticisms of his opponent was that McCain's health care plan would "tax health benefits for the first time ever." This criticism was featured in a very popular Obama television ad. This ad was so popular that the Washington Post claimed earlier this year that it is the "single most-aired political ad in the last 10 years."

In speeches, then-candidate Obama called McCain's plan "radical," while Biden mocked it, saying, "They want to tax your health-care benefits; I am not making this up."

Fast-forward two years to when the Affordable Care Act is passed by Congress and signed by President Obama. One of the provisions of the law is the so-called "Cadillac tax," which is a 40 percent excise tax on high-cost health insurance plans scheduled to go into effect in 2018. Legally, the tax is to be paid by the insurance companies. (See here for an explainer of this provision of the law from Kaiser.)

So how in a span of two years did Barack Obama go from being Paul Revere warning that McCain was coming to tax your health benefits to turncoat president whose biggest achievement was a law that taxed your health benefits?

Enter MIT economist Jonathan Gruber. Gruber, one of the nation's leading economists on both tax policy and health care policy, was advising the president and others crafting what would become the Affordable Care Act. Like most economists (left and right), Gruber viewed the fact that employer-provided health care benefits were not subject to income tax as an undesirable policy worthy of changing given that such a policy encourages excessive health care consumption and drives up health care costs.

But President Obama was kind of in a quandary. His health care experts such as Gruber were advising that he pursue a proposal that he had just a year ago demagogued during the election. Numerous post-election stories (see here and here) documented this dilemma, pointing out how many left-leaning health care experts were uncomfortable with candidate Obama's barrage of attacks against that specific provision of McCain's plan. They, after all, knew that this was a policy issue that President Obama should probably address as president as part of any health care reform.

So what was the president and his team to do? The recently unearthed videos of Gruber shed some light on how they decided to get themselves out of this pickle — take advantage of the "stupidity" of the American public on economic policy matters, most notably the question of tax incidence.

In one of the videos, Gruber spoke about how to go after the aforementioned exclusion of employer-provided benefits: "The only way we could get rid of it was first by mislabeling it, calling it a tax on insurance plans rather than a tax on people when we all know it's a tax on people who hold those insurance plans."

Gruber is admitting that the administration was taking advantage of the fact that the American public doesn't understand the difference between the legal incidence of a tax and the economic incidence of a tax. That is, while a tax may legally be imposed on one party, it may end up primarily costing a different party as it is passed forward (or backwards) to the other party.

As CNN’s Jake Tapper noted, the White House messaging team was told to sell the Cadillac tax as being a tax on the insurance companies and not a tax on individuals. When then-Press Secretary Robert Gibbs was asked at a White House briefing whether or not the Cadillac tax violated President Obama’s campaign promise not to raise taxes on families making less than $250,000 per year, Gibbs responded: “I would disagree with your notion that it is a tax on an individual since the proposal is written as a tax on an insurance company that offers a plan.” The questioner then followed up raising the point that the insurance companies would likely just pass these costs along to the consumer, which Gibbs responded by saying “I'm not an insurance company broker.”

Looking back, this episode reflects two sad realities about the political economy of taxation in the United States. First, the American public doesn’t understand tax policy issues very well. And second, politicians will exploit this lack of understanding in campaigns and policy making by deliberately misleading the American public in order to win elections and get their policies enacted.


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