(Bloomberg Opinion) -- Congress is likely this week to eliminate two taxes designed to help pay for Obamacare, one of which has never even taken effect. Ironically, that’s the one Congress should keep.
It’s a mistake to repeal the so-called Cadillac tax, which has never actually been collected, because it would have made the tax code more progressive and health insurance more affordable. By contrast, eliminating the medical-device tax, which was in effect only from 2013 to 2015, is a sensible move that will encourage growth and sacrifice little revenue.
When Congress passed Obamacare in 2010, it also approved more than a dozen tax increases, some of which were not scheduled to take effect for years. The deal to end the 2018-19 government shutdown delayed the implementation of several taxes still further.
One of them was the Cadillac tax, so called because it would have been imposed on expensive insurance plans, some of which pay for services that are not generally considered medical necessities. These plans are both tax deductible for employers and tax-free for employees. Thus they serve as a way for companies to effectively increase compensation without them or their employees paying any tax.
These types of extravagant plans are typically enjoyed by well-compensated employees, so the Cadillac tax would have been progressive. Perhaps more important, such plans increase the demand for medical services overall, driving up the cost of health care. The Cadillac tax would have discouraged companies from choosing these types of plans, thus lowering the price of insurance for everyone else.
The case for the medical-device tax is harder to make. For the couple years it was in effect, there were heavy losses in jobs and in investment in the medical-device industry, which some observers attribute to the tax. Regardless, its design was always a bit perverse. The working theory seemed to be that, since Obamacare would be subsidizing the purchase of health care, it would also increase the demand for medical devices. This increased demand would lead to greater revenue for medical-device companies, some of which the tax would recover.
What this theory failed to account for is the fact that many medical-device manufacturers are small companies with little market power compared to the large hospital groups they do business with. Those companies would be forced to pay the tax, eating into their profit margin.
Larger manufacturers would be able to pass the tax along to hospitals, patients and, ultimately, insurance companies. Insurance companies would respond by raising prices. Because Obamacare subsidizes many insurance plans with tax credits, this would result in more spending by the federal government.
Together those two possibilities meant that either the government would be collecting little revenue, or that it would be imposing a large burden on small companies with little market power. This made the tax highly inefficient — and a good candidate for repeal.
It’s common to think of taxes, particularly those used to pay for expanded health care, as a trade-off between economic growth and efficiency on the one hand, and economic fairness and progressivity on the other. In this case, however, these two taxes score very differently. One is still clearly worth trying, while Congress was right to abandon the other.
To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation.
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