The Congress-Does-Nothing Deficit Reduction Plan

This David Kamin article on future tax revenues and bracket creep is worth reading. Here are a couple highlights:

Because of some long-standing elements of our system as well as clever provisions in the Affordable Care Act, taxes will actually go up as a share of Americans’ incomes in the decades ahead—without Congress so much as lifting a finger. And that could be a huge deal. Over the long term, the effect of these measures would be much, much larger than the recent tax increases on highest-income Americans that everyone’s been hearing so much about. […]

Obamacare applies a new surtax on high-income individuals. That’s a 0.9 percent tax on incomes above $250,000, plus another 3.8 percent on investment income. Importantly, that $250,000 threshold is not indexed to inflation at all, and so as both incomes and inflation rise, this tax will apply to more and more people—hence producing more and more revenue.

An even bigger source of future federal revenue comes from Obamacare’s excise tax on “Cadillac” health insurance plans. That tax is scheduled to start in 2018 and apply a 40 percent tax on plans above certain, very high thresholds. (We’re talking family plans at $27,500 a year and more.) The threshold for the tax is indexed to a broad measure of inflation, which means that, as with bracket creep, if health care costs grow faster than inflation (and most experts expect that they will), more and more plans would eventually fall under the excise tax.

The upshot? This excise tax is essentially a way of gradually ratcheting down the tax exclusion for employer-provided health insurance—one of the code’s largest tax expenditures. People might pay the excise tax, or, more likely, employers might shift from compensating their employees with pricey tax-

HT: Richard Rubin

About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar.
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