Question

1. What is the policy goal of the "Cadillac Tax" which is (allegedly) going to be a part of the Affordable Care Act?

2. Consider the market for used cars and let X = value of the car. Sellers know the value of the car they sell and their utility is U(X) = X. Buyers only know that car value is uniformly distributed on (50,150) and their utility is 1.5×X. Suppose the posted price for used cars is 90. Will consumers buy a car at this price? Explain.

Answer 1

The Affordable Care Act’s excise tax on employer-sponsored plans, commonly referred to as the “Cadillac tax,” imposes a 40 percent excise tax on employer-provided health benefits with a cost in excess of specified thresholds. Following were the policy goals with this tax :

• Discouraging employers from offering gold-plated insurance plans in order to control utilization more carefully, and
• Encouraging employers to provide more cash compensation to employees, since health insurance premiums paid by employers were being excluded from income.