Cap Health Benefits Is A Middle Class Regressive Tax

I will soon write about the many problems inherent in trying to cap the exclusion for employer provided health insurance benefits at a set level and taxing the value above that as income. But I feel I need an entire post to explain why a cap on the exclusion would be a middle class regressive tax. Politically, that is the worst possible tax and a terrible way to raise money for health care reform.

An exclusion cap would not affect low income individuals. It would primarily raise all its revenue from middle class workers and upper income individuals, but the burden would fall disproportionately on the middle class.

Take, for example, a teacher making $40,000 a year and a corporate lawyer making $500,000. They both receive the same very good health care plan valued at $21,000. If the exclusion is capped at $17,000, that extra $4,000 would be taxed as income. For the teacher that would be a whooping 10% increase in taxable income. For the lawyer it would be a mere 0.8%.

The size of health benefits do not vary nearly as much as income. It is very rare for insurance benefits to exceed a value of $30,000. While a CEO may make 30 times what one of his mid-level employee makes, it is not unusual for them to have health benefits of nearly identical value. Teachers, firefighters, policemen, etc... often are paid little but receive very good health insurance.

Good health insurance benefits can makes up a substantial portion of middle class individuals' total compensation. But they make up a relatively small percentage of the compensation for the rich.

Depending on the cap, less than 4% of the money raised from a cap on the exclusion would come from the richest 1% of the population. That is highly regressive given that the top 1% earns over 20% of all individual income in this country. In comparison a flat surtax on all income for all Americans would get over 20% from the richest 1%.