(Bloomberg View) — Everyone likes having health insurance. Nobody likes paying new taxes. So the growing campaign against the Patient Protection and Affordable Care Act (PPACA) tax on expensive health plans was to be expected. But this Obamacare tax deals with a root problem in the U.S. health care system, and it would be better to fix its eminently fixable flaws than to kill it outright.
See also: Let’s ax the “Cadillac tax”
The tax is meant to address a critical weakness in the way Americans pay for their health insurance: The coverage they get from their employers — unlike salaries and other forms of compensation — is not subject to income or payroll taxes. This exemption is wildly expensive, costing the federal government $151 billion this year, more than any other tax expenditure. It’s also regressive: The top 10 percent of earners get 30 times the financial benefits as the bottom 10 percent, because they’re in higher tax brackets and they tend to have costlier health plans.
Worst of all, leaving employer-provided insurance untaxed distorts the market, leading companies to provide more of their compensation in the form of health coverage and less as wages. That helps explain why 18 percent of U.S. economic output goes toward health care — almost twice the average for industrialized countries. (That extra spending, as we’re frequently reminded, hasn’t led to better health outcomes.)
PPACA is meant to change things, starting in 2018, by levying a tax on so-called Cadillac employer-sponsored insurance plans — the slim minority that cost more than $10,200 in premiums for an individual or $27,500 for a family. The tax amounts to 40 percent of the cost above that threshold. The goal is to get companies to keep their spending below the threshold and direct the savings toward higher wages. Taxes on those new wages are meant to generate $87 billion over a decade toward the cost of Obamacare.