The Congressional Budget Office’s guesstimate on October 7 of the federal budget cost of the unwritten Senate Finance Committee bill it sent on yesterday contains $83-billion of tax collection revenues that the CBO and the Congressional Joint Committee on Taxation themselves call an “assumption.” That assumption, representing about 10% of the net federal budget effect guessed by CBO, is highly questionable.
Basically, the assumption is that increased federal taxes will be received on the increased wages “to hold total compensation roughly the same” that employers will provide to offset employees’ loss of current employee benefits.
I’ve searched the web to find studies that provide adequate support for that assumption. There are conflicting inferences, but nothing adequate. Neither does it make common sense.
Commenters have been silent. ObamaCare advocates don’t want to expose what will likely be a cut in employees’ total compensation or increase in the federal deficit, nor do business interests want to expose they will largely pocket the labor-cost savings. Page 5 says: …other budgetary effects, mostly on tax revenues, associated with the expansion of federally subsidized insurance, which would reduce deficits by $83 billion.
Changes in the extent of employment-based health insurance affect federal revenues because most payments for that coverage are tax-preferred. If employers increase or decrease the amount of compensation they provide in the form of health insurance (relative to current-law projections), CBO and JCT assume that offsetting changes will occur in wages and other forms of compensation—which are generally taxable—to hold total compensation roughly the same. Such effects also arise with respect to specific elements of the proposal (such as the tax credits for small employers), and those effects are included within the estimate for those elements. For example, a 2006 survey of the economics literature by The Center For A Changing Workforce, a decidedly pro-health care reform think tank, found that, “In a review of 11 studies on health insurance and labor market outcomes, Currie and Madrian (1999) found five studies showing a positive relation between wages and benefits, three studies with a negative relationship, and three inconclusive studies.”
Essentially, in a tight labor market or under union duress some employers may increase wages some to offset cuts in employee benefits. Meanwhile, there’s no incentive to do so otherwise, aside from some wanting to cushion the morale and, maybe, productivity impacts.
We’re not in a tight labor market, nor are we expected to be in one for the foreseeable future. The power of unions is largely in the government jobs sector, and that is realizing increasingly stiff resistance from bankrupt local and state governments, taxpayers resisting hikes in rates, and everyone else suffering services cuts.
$83-billion, poof!
UPDATE: Economist, SmartMoney columnist, blogger of The Conspiracy To Keep You Poor And Stupid Don Luskin writes me:
In one of the earlier House versions of the bill, there was a specific provision dealing with the opposite problem. Specifically, employers were forbidden from cutting wages on workers for whom they would have to offer health coverage for the first time, in order to keep total comp even. Therefore, the House lawmakers must believe that employers will take every chance they can to minimize total compensation. Why would they not have this inclination in the face of a subsidy of their costs?
Ed Morrissey has two important posts: the Congressional Joint Committee on Taxation says the Finance Committee bill will increase insurance premiums and depress wages; the former CBO Director says the bill's costs will triple in the second decade.
Let's change my former concluding remark from "$83-billion, poof!" to "$trillions, poof!"
Megan McArdle adds about the $83-billion, "it's not exactly revenue I want to count on."
