Cadillac-ac-ac-ac Tax-ax-ax-ax

by Thomas Casey

You oughta know by now, (you oughta know by now), the government lacks a deft fiscal tact, but that isn’t a surprise.

In 2015, President Barack Obama set out a big plan to boost revenue for his doddering rollout of the Affordable Care Act. He needed some major cash flow to keep the exchanges alive and thriving, so in order to seal the deal, the President fell back to a common scapegoat. President Obama rolled out his noble plan to tax the rich and to bring healthcare to everyone else. In theory, the idea sounds a-OK. When the full policy came out, everyone had serious doubts. You see, a real issue with the government lies in its policy-ideology disconnect. The government sends out some noble goals that sound nice, but releases a completely unproductive policy that fails to remotely accomplish those stated goals. Anyway, President Obama swings out with his goal to make the rich pay for everyone’s healthcare. Then, in the same breath, he lugs out his policy that absolutely does not accomplish his goal: the Cadillac Tax.

The Cadillac Tax would apply a 40% excise tax on health care plans that are considered luxurious. If healthcare plans went above a certain dollar threshold, the government would slap an additional 40% on the price of the plan and reap the revenue. The idea is that only the very wealthy people can afford these costly plans. Since only the rich will purchase them, they will be the only ones paying into the tax. Overall, the whole deal sounds like a win-win. Then why would nearly every participant in the market be against it? Unions, companies, taxpayers, Republicans and Democrats have denounced the so-called tax only on the rich.Those groups, unlike those in the executive position, feel the harsh effects of misguided policy pushes. You see, the government already tried this whole Cadillac Tax thing and it was a total failure.

About two years after swearing “no new taxes,” George H.W. Bush signed into law a sweeping tax on luxury items. Bush targeted jewelry, yachts, furs and other expensive material objects. He had the same rationale as President Obama. Only the rich would feel these taxes. Shortly after signing the bill into law, Bush saw the actual effects of his policy push. The Bush luxury taxes strained a sensitive aspect of the market: price elasticity of demand.

Elasticity deals with how much people’s behavior responds to the price of a good. When people react greatly to a price change, the good is elastic. When people barely respond to a price change, the good is inelastic. To illustrate this, let us look at some extreme examples. Say we took a very specific, trivial good. Let’s say a double espresso latte with milk, whipped cream and caramel. Imagine if Starbucks raises the price of this drink from $3 to $8. People would cease purchasing this almost entirely. Why? Because coffee drinkers could snag the near-identical double espresso latte with milk, whipped cream and chocolate syrup for the same old $3. Overall, trivial goods that have plenty of alternatives are elastic. On the other hand, let’s examine a vital, vague good. Imagine if a gloriously crony corporation landed a coveted monopoly on Earth’s oxygen supply. The corporation raises the price of Daily Life Saving O2 from $3 to $8. Would people stop buying it, as they did with the Starbucks offering? No way. It’s not like consumers could purchase Delicious Nightly Nitrogen instead. Air, water, milk, eggs and similar products are vital and without quick alternatives. Thus, they are inelastic.

Now that we’ve covered elasticity of goods, we can look again at the Bush luxury tax. Jewelry, yachts and furs are clearly elastic. When the tax hit these items, their prices rose significantly. How did the wealthy Americans react? They just stopped buying the goods. Instead of jewels, furs, and yachts, the rich got summer homes, fancier food, or old wine. The rich just shifted their buying habits. The drop in luxury consumption was so significant that the luxury tax brought in less than a fourth of its projected revenue. The lack of incoming funds wasn’t even the worst part. When the rich abandoned the luxury goods, the industries accompanying those goods collapsed. The jewelry industry began shedding jobs. Yacht builders halted production en masse. The employees of the industry lost their longtime positions as the market dried up. The tragic result of a myopic, horrendous policy landed mainly on, not the rich, but the working class. H.W. thought he could milk the rich for revenue, but he ended up putting the little man out of work.

So here the government stood once again in 2015 debating a similar policy. H.W.’s luxury tax attempt raised very little revenue and threw tons of working class Americans out of their jobs. The really sad fact is that the lost income tax from the workers most likely completely offset the meager gains the luxury tax trickled in. In the end, the policy may have lost the government revenue and ruined American industries. Luckily the unions, Democrats, Republicans and taxpayers remembered this history lesson. They oppose President Obama’s Cadillac Tax because the rich will shift their health insurance buying patterns. The tax will put doctors, nurses, health experts out of work .Those that can’t wiggle out, namely unions and large employers, would slam workers with joint programs with higher costs. The good news is that the combined pressure has halted the tax implementation. After this battle, the government should finally learn that a luxury tax on the rich doesn’t exist in a vacuum. The misguided policy will slam the workers, not the wealthy, and probably won’t raise revenue at all. Until the mythical tax on only the rich comes along, you’ll need to pay Uncle Sam with the overtime. But really, is that all you get for your money?   

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