The Senate health care bill relies for much of its funding on a tax on so-called "Cadillac" health care plans. But what happens when employees and employers inevitably change their behavior in the face of different incentives?
History teaches us that tax policy has a huge effect on behavior. Witness the fact in health care the non-nonsensical fact so many people rely on their employer for health care. As we see today, this is a really bad idea, but it was hatched because tax law provided incentives for paying compensation in the form of health insurance premiums, since these are not subject to either income or payroll taxes.
Already, employers are offering employees what are effectively buy-outs of health care -- higher pay in return for reduced health care benefits. For employers, the upside risk on health care costs now outweigh the tax advantages of health insurance as a compensation tool. Given this trend, what do you think will happen when employees suddenly have the same incentive, to roll back health care coverage to get under whatever bar is set for an insurance package Congress thinks is too rich (hint: wherever the bar is set, it will be below the health insurance Congress provides itself). Employers and employees are now going to have a shared incentive to back off on health care benefits in exchange for more cash. Think of the sharp minds on both sides of a UAW contract negotiation - does anyone really think that these guys won't figure out a win-win to avoid paying the surtax?
Three to five years from now, even before the system goes bankrupt from inevitably expanding costs (you didn't really buy that stuff about the operator of Amtrak and the Post Office improving the industry's efficiency, did you?), we are going to be talking about the gross shortfall in tax revenues to support these programs, all because people change their behavior in the face of changing incentives.