Let's calculate the tax that an employee will pay if his employer drops his health insurance coverage and pays the 8% payroll tax penalty instead. We will ignore in this calculation any other taxes that some people may pay due to taxes on very expensive health insurance plans or on sugary drinks, which are under discussion in the Democrat Congress. We are going to examine the new hidden tax, the tax which the politicians are pretending will be paid by companies.
A rational company pays an employee the sum of salary, benefit costs, and employer taxes which is justified in terms of the additional income the employee brings into the company. The employer taxes that are a real part of his compensation, despite the fact that they are of no use to the employee, are such things as the employer's contributions to social security, medicare, unemployment insurance, and worker's compensation insurance. If the cost of any of these taxes goes up, then the amount the employer pays the employee in salary and benefits should go down by an equal amount. These are all the costs of employing this individual and they are specific to this individual, unlike some other overhead costs such as for equipment, utilities, liability insurance, advertising, and many other overhead costs. They are also immediately changed upon hiring the individual or letting him go.
Let us suppose you are an employee who is being paid $100,000 per year. Your employer provides a family health insurance policy costing $13,500 a year and pays $10,500 of that cost, while you pay $3,000. After the deduction of your contribution of $3,000, you take home $97,000, ignoring the taxes that are also withheld. The company opts to stop providing health insurance and pays the 8% payroll penalty tax instead. The 8% tax is incurred because you are employed. I can tell you right now that you are going to wind up with 8% of $100,000 less compensation. You did not instantly start producing 8% more income for the company, but your employment is costing the company that amount.
Or, we can do some calculations based on that part of your compensation which is salary plus health care insurance benefit. Your salary plus paid health insurance benefit was $100,000 + $10,500 = $110,500. But now the company must pay $8,000 or 8% of your salary to keep you employed. But you are only worth $110,500 to the company, ignoring all other fixed benefits and taxes. So, the company is going to pay you $110,500 - $8,000 = $102,500. Whoopee! You have a salary increase of $2,500! Ah..... But now you get to pay for your insurance yourself. So, you pay $13,500 for your insurance. After paying for the insurance, you have $102,500 - $13,500 = $89,000 for other uses. Before your employer dropped insurance coverage, you had $97,000 for other purposes, so you lost $8,000. You might as well regard this $8,000 as a personal tax levied on you.
It is worse than this. You also have to pay your marginal income tax rate on the extra $2,500 you now have for your salary!
If you are a high-income employee or employer, Section 441 of HR 3200, the bill favored by Obama, imposes a further surcharge of 1% to 5.4% on you.
People making less money will not pay a full 8% net on their salary as you did. Depending on what their salary is, they will get a part of this back in a tax credit. But, whatever they do not get back is a tax they will be paying. Not your employer. If he does not instantly give you the extra $2,500 in salary, he may save some money for a short time. But, supply and demand in the labor market will cause him to give you your $2,500 salary increase in time.
Obama sure has designed a nice run around on his pledge not to raise taxes on the middle class or those with salaries below $250,000! He pretends he is taxing businesses, while he creates a giant increase in taxes on a great many Americans he claimed he would not tax more. He lied big time. The pretense is just too shallow for many Americans not to see through it.
On the other hand, many Americans actually do think that half the social security tax and half the Medicare tax is paid by the employer, not them. What dull poltroons they are! And they do not have a clue that their pay is reduced by the full amount of the unemployment tax and the cost of workmen's compensation insurance either. Yet, employers are mostly smart enough to take all of these costs of employment into account in setting pay and benefits packages. Those who are not, and there are some, are still driven to about the right compensation by labor market supply and demand and/or by their own company's ability to generate income.
Of course, understood this way, you and your employer should keep the company health insurance plan in place. As long as you both understand that if your company does not provide a plan, then your taxes are going up by 8% plus your marginal tax on $2,500, then he should keep the health insurance plan in place as a fully understood and valuable part of your compensation. If the plan is kept, you are making $8000 more than people with the same salary in companies without plans. They may have a salary $2,500 higher than yours, but you are in reality better compensated.
Aside from ignorance, the other big problem is that the government is going to be dictating the terms of acceptable health insurance plans in time. As it does that, the cost of such plans will increase due to the many things the government wants covered and the low deductible requirements. Preventive care, marriage counseling, mental health coverage, substance abuse, and many other requirements may add costs to the future qualifying plans. This will put more pressure on companies to drop their insurance plans. especially if their employees do not understand the consequences to them.
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