This content is provided by the Americans for Tax Reform Foundation.
Current Law
In calculating taxable income, companies can claim a deduction for the “reasonable” compensation of its employees. Generally, this deduction is limited to $1,000,000 per employee. This deduction is reduced to $500,000 for companies which received government bailout money from the Troubled Asset Relief Program (TARP).
Scheduled Change
Obamacare includes a provision which limits the compensation deduction of health insurance companies to $500,000 per employee. This provision begins January 1, 2013.
ATRF Analysis
Disallowing deductions previously available to insurance companies increases their overall tax burden. The Obamacare provision is thus a tax.
It is also a backdoor attempt by President Obama to cap executive pay. It is not his first attempt: a similar measure to “take the wind out of golden parachutes” was imposed on recipients of TARP.
It is not clear that this tax will have the intended effect, however. History is illustrative in this regard. As part of his 1993 tax increase, Bill Clinton limited the compensation deduction for all industries to $1,000,000. On paper, this was meant to reduce executive pay. In practice, the opposite occurred: executive pay tripled in the decade following the tax's enactment, as companies shifted compensation around it from income to stock options (which yielded handsome returns). The corporate tax lawyers had outfoxed the government tax collectors, and there’s little reason to suspect they can’t repeat their performance today.
The likely outcome of the Obamacare tax is that companies will keep employee pay the same and pass the added tax burden on to consumers. This would constitute an $800 million increase in premiums over the next decade — an unacceptable burden on insurance consumers, given ballooning health costs.
But suppose companies do not pass these costs on to consumers, and instead lower executive compensation. When it comes time to hire new executives, health insurance companies will be put at a competitive disadvantage because of their low pay relative other industries which are not affected by the Obamacare tax. Top talent would choose other, higher-paying industries, resulting in “brain drain” within the health insurance sector. Given the scope and importance of the health insurance industry, having less competent and less qualified executives at its helm would be a disaster for the millions of Americans who rely on their services.
Regardless of whether health insurance policyholders or health insurance providers bear the burden of the Obamacare tax, it is a decided negative for the United States. It should not stand.
10 Year Cost to Taxpayers
Joint Committee on Taxation: $800 million
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