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The Dirty Little Secret of the Teacher Tax

photo: vistavision via Flickr

photo: vistavision via Flickr

Defenders of the Senate health care bill are just sure that the excise tax on Cadillac plans will increase wages. Here’s an example from CBPP. Senate Democrats are so sure of it that they are counting on the taxes on the increased wages to offset the costs of the health insurance company protection act.

Labor unions apparently believe they can bargain for wage increases before the tax would affect them, as they have cut a deal with the White House. I’d guess the vast majority of workers who aren’t union members won’t be getting raises. With 10% unemployment, it seems more likely that employers will keep the savings on health insurance premiums. Larry Mishel, who studies wage trends, has years of data to show how unlikely it is that wages will rise.

Jonathan Gruber is one of many people who operate on this assumption. In this paper (abstract only) from 2000, he discusses the use of tax subsidies to increase the number of Americans with health insurance.

For example, for those workers whose firms drop their health insurance coverage, we assume that their wages will rise to reflect the fact that their employer is no long paying for health insurance, and can therefore afford higher wages. These higher wages will then be taxed, raising new revenues, and offsetting the cost of their takeup of the new insurance subsidy. For those who switch from group to non-group insurance, we assume that the cost savings to the employer is passed back to workers on average in the form of higher wages (although not specifically to the switching employees), once again raising revenues. And revenues also rise since employers react to this policy, to some extent, by lowering their pre-tax contributions for health insurance, and once again raise wages to compensate for this.

Gruber didn’t bother to support this assumption with a citation to research showing that lower health insurance premiums translate into higher wages across the board, and may I say that I too believe in unicorns.

But here is the dirty little secret. The excise tax will produce increased revenues whether not not it translates into higher wages. If the employer keeps the money, tax revenue goes up. As Gruber puts it:

As we discuss in the Appendix, how this is modeled depends critically on one’s assumptions about the incidence of reductions in employer spending on health insurance. The key issue is that money saved by employers through reduced group insurance spending must go somewhere, and as a result will eventually be taxed. We assume that the savings accrue to wages, either in a worker-specific way (for firm dropping) or on average across all workers (for switching from group to non-group insurance). If we assumed instead that some of these savings accrued to profits, the revenue offset would be similar, as the corporate tax rate is similar to the average individual’s income tax plus payroll tax rates.

Fn. 7, p. 14-5. So there you are. People can bray all they want to about the impact on wages, and on health care utilization, but in the end, the Teacher Tax is about the revenues, and those go up regardless of what happens to your paycheck.

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