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What the wonky case for Obamacare's Cadillac Tax misses

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The so-called Cadillac tax has rapidly emerged as one of Obamacare's most politically vulnerable provisions. It doesn't poll well, conservatives hate it, and first Bernie Sanders and then Hillary Clinton endorsed its repeal. But bad poll numbers alone aren't normally enough to unravel an element of something like Obamacare — a program the Democratic Party has invested a lot of blood, sweat, and tears into.

The Cadillac tax's real problem isn't that the mass public doesn't understand the wonky case for it. It's that even if you take the wonky case for it seriously, it really is bad for key groups of people: people who happen to have a decent amount of political clout, and whose clout happens to be distributed in a way that is uniquely well-suited to making things happen even in an era of deep political polarization.

The wonks' case for the Cadillac tax

The key to the wonks' case for the Cadillac tax, restated in the New York Times by Zeke Emanuel and Bob Kocher, is that taxing very generous health insurance plans will ultimately raise cash incomes. Employers have an overall budget of what they are willing to spend on employee compensation, and they don't really care if that spending takes the form of insurance premiums or cash wages.

  • The current tax code encourages employers to give people more in insurance subsidies and less in cash wages than a neutral tax code would.
  • The Cadillac tax pushes in the other direction, giving people less generous insurance plans but higher pay than they would otherwise have.

This is well-grounded in economic theory and in empirical evidence. But it's important to understand what the theory says, namely that you will see this effect take place across the entire economy.

Powerful groups lose out under the Cadillac tax

Now look at who is opposing the Cadillac tax:

  • Rich people, who don't want to pay higher taxes
  • Large labor unions, which have many members who are hit by the Cadillac tax
  • Health insurance providers

For rich people, the switch from insurance subsidies to cash wages is a huge problem, because their cash wages are taxed at a relatively high 39.6 percent rate (even higher in New York, California, and other blue states). Emanuel and Kocher acknowledge this earlier when they say that non-taxation of health benefits is regressive. That's true. But it's also true that rich people have a lot of political clout in the United States, and they are not mistaken in thinking that this is a big tax hike on them.

Now on to the labor unions. Randi Weingarten is head of the American Federation of Teachers, one of the biggest unions in America. She's also personally and politically close with Hillary Clinton, and AFT's endorsement of Clinton is an important firewall against Bernie Sanders's button that's angered many rank-and-file teachers.

If you think for a minute about how wages and benefits are set for public school teachers, then you can see that it obviously doesn't look like the economists' abstract model of the overall economy. Teachers' pay is set by a series of political bargains, and teachers are currently operating in a political climate where most of the levers of state government are held by a political coalition is that is averse to spending lots of money on teacher compensation. If old political bargains giving teachers generous health benefits get unwound, there's no reason to believe that money will be plowed into higher teacher salaries or more teacher hiring. It's true that in equilibrium, it should lead to more take-home pay for someone. But that could be firefighters or prison guards, or it could take the form of lower taxes.

Last but by no means least, people who work in the health-care industry — doctors, nurses, hospital staff, etc. — correctly perceive that if you give people stingier health insurance but more cash, they are likely to use fewer health-care services and buy more other stuff instead. That could mean higher pay for people who serve food and sell cars, but it means lower incomes for health-care workers.

None of that means the Cadillac tax is bad policy.

But it is a policy with diffuse benefits (slightly higher pay for most people) and concentrated costs (higher taxes for rich people, worse benefits for many union members), which is a classic tough sell in politics. And this is a particularly bad set of concentrated costs for a policy to have, because it involves one pillar of the GOP coalition and one pillar of the Democratic coalition, making repeal an inconveniently bipartisan cause.