Cadillac, Capital Gains Taxes of Healthcare Reform Kill Growth

History shows that cutting capital gains tax is the true economic stimulant.

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The original purpose of the just-passed changes to the U.S. healthcare system was supposedly to find a way to "bend the cost curve," to reduce the amount of money the federal government was spending each year on healthcare. According to a new report from the Congressional Joint Economic Committee, the reforms Congress passed and President Barack Obama signed miss the boat.

One component of the new law that is particularly problematic is the so-called "Cadillac Tax," the tax on high-cost health insurances plans that many allies of organized labor in Congress found especially objectionable. Bowing to political pressure, the Democrats used the reconciliation process to pare back the tax. Instead they chose to replace the lost revenues by permanently increasing the top rate for capital gains.

Specifically, the reconciliation bill moved the implementation of the "Cadillac Tax" from 2013 out to 2018 while increasing the thresholds, triggering the tax from $8,500 and $23,000 to $10,200 and $27,500 for single and family policies, respectively. The $117 billion revenue hole these changes produced over the 10-year budget window was filled by $123 billion that is supposed to come from increasing the capital gains tax and subjecting it to both the 2.9 percent Medicare tax and the 0.9 percent Medicare Surtax.

It is now well established that increasing the tax rate on capital gains--which is really a tax on savings, investment, productive economic activity, and success--actually reduces the revenue that comes into the federal government. Conversely, perhaps counterintuitively, history shows us that cutting the capital gains rate brings more money into the government.

"Rather than generate tax revenues to expand health insurance coverage through a tax that reduces healthcare costs, the reconciliation bill generates revenues through a permanent increase in a tax that discourages savings and investment, reduces productivity, and depresses wages and the standard of living," the document, produced by committee Republicans, says.

While politically more palatable to Democratic constituencies, the tradeoff is foolish economics. As the committee document explains, "While the short-term revenue effect of this switch is essentially neutral, the long-term effect will be highly detrimental to the U.S. economy." In other words, the new taxes will not produce enough revenue to fill the hole the changes to the "Cadillac Tax" have dug.

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