Why the Cadillac tax matters

I’ve enjoyed (more than I should) the excitement around Austin’s posts on Senator Cruz’s health care subsidies. This is partly because we originally made this point more than two years ago. But since you’re all paying attention now, I think it’s worth a brief explanation on why the Cadillac tax matters.

The first thing the Cadillac tax does is apply downward pressure on the cost of health insurance. In other words, it tries to get companies to avoid plans that cost more than $40,000 a year (what do you get with that?) and instead shunt more money into wages instead of benefits. But the second thing it does is limit the “subsidy” that goes to the well-off.

In other words, think of that 40% tax on amounts above the Cadillac tax limits as a means of recouping the ~40% subsidy that people are getting for their insurance. In other words, the Cruz family would get a subsidy only on the first $27,500 of their insurance. The subsidy they would then get is still a LOT ($9900 by my calculation), and would cover a number of people on Medicaid, but at least there would be a limit. Unless you think people who do get $40,000 a year just in health insurance deserve more than $10,000 from the government in subsidies to help pay it.


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