Saturday, January 9, 2010

The Socialized Medicine Scheme: Cadillac Health-Care Plans

Proponents of the socialized medicine scheme
want to pay for the $1 trillion price tag of
socialized medicine by levying a tax on so called
Cadillac health-care plans (1). What is a Cadillac
health care plan? Will everyone end up with a
Cadillac health-care plan? Who will pay the tax?
What is the amount of the tax?

Cadillac health-care plans defined

The term "Cadillac" was first used to define a category of health-care plans in the 1970's. The term was used again in the 1980's. Then it was used extensively in the 1990's when Hillary Care was proposed. Basically the term was meant to distinguish the perception of luxury health-care plans.(2)

However, the proponents of the current socialized medicine scheme have arbitrarily defined a Cadillac health-care plan in terms of the level of annualized premium. Individuals have a Cadillac plan if the annual premium exceeds $8,000. A family is deemed to have a Cadillac plan if their annual premium exceeds $21,000. (3)

Will everyone end up with a Cadillac plan?

In order to find the answer to the the question posed above you first need to understand a predominant phenomena of taxation. The phenomena is: when you introduce or increase a tax on an item you will get less of that item. For example, if government levied a $1 tax on a loaf of sliced bread, consumers will demand less sliced bread and hence sliced bread supply will fall as demand for sliced bread falls.

Therefore, if government levies a tax on Cadillac plans, then demand for Cadillac health-care plans will fall hence we will have less Cadillac plans. Employers will buy more modest plans for their employees. (4) In other words, employers will exercise tax avoidance.

However, a problem then occurs for the revenue stream needed by proponents of the socialized medicine scheme. As the Cadillac tax reduces the number of Cadillac health-care plans , then tax revenue will fall as less taxable items exist to in fact tax. Its the Laffer Curve and associated arguments by Dr. Art Laffer. (5) What then?

This problem has been solved by socialists by merely not indexing for inflation the $8,000 individual and $21,000 family thresholds mentioned above. (6)

Looking back in time, an income earner once suffered tax bracket creep. That is, inflation pushed up wages of the income earner and the income earner being also a tax payer, moved from one tax bracket into another tax bracket due to inflating wages. However, prices were inflating simultaneously. Hence the income earner's purchasing power remained unchanged with wages following prices. Yet the income earner's tax bracket changed and the income earner paid more tax thus suffering diminished purchasing power due to tax bracket creep. That is, constant purchasing power as wages follow prices yet higher taxes ended in dimished purchasing power.

Tax bracket creep was deemed unfair and hence the introduction of tax brackets indexed for inflation.

Ah the evil of it all! What is good for the goose is not good for the gander when it comes to tax revenue needed to fuel the $1 trillion dollar socialized medicine scheme. Socialists have merely gone back to the taxation concept of tax bracket creep. In this case one might call it health plan creep.

The Kaiser Family Foundation states that the average family plan premium is $13,375. (7) Kaiser goes onto to mention the average price increase for family health care plans from 1999-2009 was 8.7%. Hence the average family plan will become a Cadillac plan by 2015. (8)

Its rather simple mathematics to see that everyone will eventually have a Cadillac health-care plan.

Stepping back for a moment, and looking at the term "Cadillac" from the perspective of Political-Economy, socialists are simply using the specific term "Cadillac" as a sham. Its merely a term used for a class warfare and misdirect strategy. Socialists are using the term Cadillac to make John and Jane Q. Public think only people with very rich benefits aka Cadillac plans are going to carry the water for the funding of the socialized medicine scheme. Hence John and Jane Q. Public are class warfare baited and their attention is directed away from the fact that John and Jane Q. Public will soon, themselves, have a Cadillac plan. Oops! Oh yes! The dollar threshold of a Cadillac plan is unadjusted for inflation hence through the compounding of inflation everyone ends up with a Cadillac plan.

Hence John and Jane Q. Public's modest benefit plan soon morphs into a Cadillac plan due to inflation. Like tax bracket creep, socialists have now introduced health benefit plan creep. Its merely a matter of time when everyone has a Cadillac plan. Which means its merely a matter of time when everyone pays the tax. John and Jane Q. Public are being duped.

Who pays the tax and at what tax rate?

Another phenomena of tax is that the ultimate payer of any tax is always the consumer. (9) (10)All taxes are passed onto consumers. Hence the concept that the Cadillac tax will be levied against insurance companies is yet another class warfare and misdirect argument to throw John and Jane Q Public off the real subject at hand.

What is the tax rate? Try 40%. (11)

Within a very short period of time, all consumers of health care insurance, through health benefit plan creep, via non-indexed thresholds and inflation, will have a Cadillac plan and the consumer of health benefits will be taxed at a 40% rate.


(a) the picture above is the Titanic beginning sea trials 04/02/1912. Seemed appropriate.

(b) the Cadillac tax has been proposed by politicians through expert analysis and confirmation by MIT economist Jonathan Gruber. However, it has been uncovered that Gruber has a major conflict of interest. Please see the following post by Donald Luskin of Trendmacro entitled Where's the Outrage:












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