Economists: 'Cadillac Tax' May Mean Higher Wages

One of the biggest sticking points with the plan to overhaul health care has been how to pay for it. The Senate wants to impose a so-called "Cadillac Tax." That is, a tax on the most expensive health care plans. Economists say in the long run the tax would result in companies offering less expensive health plans. The money the company saves would then translate into higher wages.

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RENEE MONTAGNE, host:

The fate of Congresss health care overhaul is unclear after this weeks election of Republican Scott Brown of Massachusetts to the U.S. Senate. One of the major issues thats been holding up the health care bill is how to pay for it. The Senate wants to impose a Cadillac tax. That is a tax on the most expensive health care plans. Executives with gold-plated plans don't like it and neither do labor unions, whose workers have generous plans. But many economists say it could help everyone in the long run. Here are Planet Moneys Chana Joffe-Walt and David Kestenbaum.

DAVID KESTENBAUM: Economists on this issue feel lonely, sad and very misunderstood.

CHANA JOFFE-WALT: Well, yeah, because economists use math and charts to make their arguments. Labor unions use emotion and advertisements featuring sympathetic characters with asthma.

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Ms. VALERIE CASTLE(ph) STANLEY(ph): I have asthma and Ive had it since I was probably 10, 12 years old. And it seems to be progressively getting worse. I pay over $1,500 a year for my medication. And I need those medications to live. And I heard some senators wanted to tax our health care benefits. I just couldnt believe it.

KESTENBAUM: Valerie Castle Stanley is a union member. She is not rich. She makes $43,000 a year working at a call center for AT&T in Southwestern Virginia. You could see the mountains behind her.

JOFFE-WALT: Economists keep making the argument, usually in the form of charts and editorials, that the tax could actually help someone like Valerie if only she could see it the way they do.

KESTENBAUM: So, we said fine, convince her, convince Valery.

JOFFE-WALT: So, I went to Virginia and in an overheated library sat Valerie Castle Stanley down with a real live economist - suspenders and all.

Professor STEVEN STEARN (Economics, University of Virginia): My name is Steve Stearn. Im the Merrill Bankard professor of economics at the University of Virginia.

JOFFE-WALT: Its pretty awkward at first. Valerie tells Steve she's never met an economist, and she hates the Cadillac tax because it means her benefits will cost more.

Ms. STANLEY: Im on budget that's going to really hit hard.

JOFFE-WALT: Steve Sterner adjusts his enormous glasses and takes a breath. First thing, yes, he says your benefits would cost you more, but only if AT&T keeps your expensive plan. Dont worry, he says they probably wont.

KESTENBAUM: And heres where Valeries eyebrows jump up.

JOFFE-WALT: And Steve continues - says no, no, no, this is okay, because AT&T will get you a cheaper plan, they'll save money, and then they will give you that savings in higher wages.

KESTENBAUM: Again with the eyebrows.

Ms. STANLEY: They are not going to give us I'm at top wage, right now. Only cost I get - only wage increase I get is the cost of living.

Prof. STEARN: But they are getting something in return. If you were to say to them, we are willing to give up $8000 of health insurance benefits, then I dont see any reason why they wouldnt be willing to do that.

Ms. STANLEY: No, they're not, its not the way it works in bargaining at all. I know they are not going to give me that.

JOFFE-WALT: What is your proof, though, how do you know that is not going to happen.

Ms. STANLEY: That hasnt changed for 18 years.

JOFFE-WALT: Economists are convinced that this will happen. They say there's lots of data showing when employers pay more for health benefits, they pay less in wages. So, it should work in reverse. Less in benefits, more money to wages.

KESTENBAUM: Union say there is no proof it works in that opposite direction.

JOFFE-WALT: And to Valerie, the idea that she should be taxed in the first place is just insulting to her. She has given up wages over the years to get better benefits, great benefits she says she needs.

KESTENBAUM: Steve pauses, and says well, maybe not.

Prof. STEARN: When was the last time you had a medical emergency?

Ms. STANLEY: I went to the ER seven years ago when I broke my arm.

Prof. STEARN: It sounds like you dont need the health benefit plan that you have. On the whole, my guess is youre losing money on your health insurance. You would benefit from having a worse health benefit plan and taking that extra money and getting higher wages.

Ms. STANLEY: I disagree.

Prof. STEARN: But you should change your mind.

JOFFE-WALT: Economists like Steve see the Cadillac tax as a win-win. It will force us into more sensible health care plans, finally begin to drive down the cost of health care, people like Valery will get more money in their paychecks and will be just as healthy.

KESTENBAUM: But unions see it as a lose-lose. They worry people like Valery would get worse health benefits and they say there is no way employers will voluntarily raise wages, simply because they are saving money on health care.

JOFFE-WALT: And at the moment, the health care bill is locked right in the middle of this conversation. Im Chana Joffe-Walt.

KESTENBAUM: And Im David Kestenbaum, NPR News.

MONTAGNE: You are listening to MORNING EDITION from NPR News.

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