Tuesday, December 14, 2010

Sen. Sanders and Democrats’ Vote to Tax the Middle Class

Senator Sanders was just on the floor (again) haranguing about the bipartisan tax compromise.  But what’s more interesting than his objections to tax relief for small businesses (i.e., “the wealthy”) is the fact that Sen. Sanders, and all Democrats, effectively voted to impose a 40 percent tax on ALL middle-class families in the health care law.  Here’s how it will work:

  • The law imposes a tax on “high-cost” health plans, beginning in 2018.  So-called high-cost plans will be subject to a 40% tax, but the threshold for triggering the 40 percent tax will rise only according to the growth in CPI price inflation – not the growth in the general economy (i.e., GDP growth), or wages, or health care inflation.
  • Individuals and employers can initially take steps to avoid the high-cost plan tax, by raising deductibles and co-payments and making other steps to trim benefits.
  • However, the health care law also includes an “essential benefits package” – a group of benefits that individuals MUST have in order to meet the requirements of the bill’s (constitutionally dubious) individual mandate.  The cost of those benefits will likely rise faster – and quite possibly MUCH faster – than price inflation.
  • So while individuals and employers can adjust their benefit package at first to avoid the high-cost plan tax, sooner or later ALL plans will be subject to the tax – because the mandated benefits will grow faster than the threshold for triggering the tax.
  • All this means that at some point, all Americans will be subject to a 40 percent tax rate – a rate higher than ALL current income tax rates (even assuming the Bush tax relief expires).  In this same vein, at some point in the future absent legislative intervention, the revenue generated by the high-cost plan tax should exceed revenue generated from the income tax.

While some Republicans support a flat tax, few support setting the rate of that tax at 40 percent – or layering such a burdensome tax on top of the current system of taxation.  Yet that’s what Sen. Sanders and his Democrat colleagues voted for last December.  It’s an interesting point to keep in mind as the tax debate continues.