Legal Commentary

When Benefits Equal Income

By Big Tent Democrat

Kevin Drum is engaged in a discussion with Scott Winship about whether middle class wages are stagnating. It is an interesting discussion, but I want to focus on one part of Winship's analysis:

[T]he Economic Policy Institute estimates that the median male worker’s hourly wage was $16.88 in 1973 and $16.85 in 2007. However, EPI’s figures show that when fringe benefits are taken into account, the median male worker’s hourly compensation increased by somewhere between 5 and 10 percent over this period.

(Emphasis supplied.) Setting aside the accuracy of Winship's analysis, what is striking is the inclusion of fringe benefits as income. The biggest fringe benefit is of course health insurance. Currently, health insurance benefits are not taxed. But the proposed excise tax would indeed tax them. As R.J. Eskow notes, even given the rosy assumption of a 1:1 transfer of fringe benefit value to wages, such transfer will lead to a reduction in after tax income:

There is]a relationship between wages and health care costs – a fact which few deny. [. . .][This is] moot where the excise tax is concerned. The excise tax is not designed to find wasteful or excessive spending. It’s just designed to reduce what health insurance spends. Heck, you could reduce that to zero tomorrow. Just outlaw health insurance! The remaining costs would be covered by people out of their own pockets – to the extent they could afford care.

That’s what the excise tax does: it shifts cost back to individuals. So if Baicker and Chandra are right, some employees will work 2.4% more hours. But that income will be taxed. Instead of receiving a dollar’s worth of coverage, they’ll work to earn that $1 and only have seventy cents or so left after taxes. That’s a net loss of roughly 30%, and they’ll have to work more hours to get it.

Such a deal.

(Emphasis supplied.) It is true of course that the excise tax will increase the taxes paid by wealthy people who carry health insurance above the excise tax limit. But it also will either reduce the health insurance benefit offered to some middle class workers OR increase the taxes paid by middle class workers, more and more over time.

That means, even if you believe the 1:1 transfer theory of the excise tax proponents, it means less after tax income for middle class workers. If we must have the excise tax, it should be means tested.

Speaking for me only

Full post as published by TalkLeft on January 13, 2010 (boomark / email).