Today’s Washington Post reports that the Senate Finance Committee has come up with a bipartisan plan that contains a new revenue offset (or “pay-for”) that’s more consistent with the goals of health reform (emphasis added):

Senate negotiators are inching toward bipartisan agreement on a health-care plan that seeks middle ground on some of the thorniest issues facing Congress, offering the fragile outlines of a legislative consensus even as the political battle over reform intensifies outside Washington.

The emerging Finance Committee bill would shave about $100 billion off the projected trillion-dollar cost of the legislation over the next decade and eventually provide coverage to 94 percent of Americans, according to participants in the talks. It would expand Medicaid, crack down on insurers, abandon the government insurance option that President Obama is seeking and, for the first time, tax health-care benefits under the most generous plans. Backers say the bill would also offer the only concrete plan before Congress for reining in the skyrocketing cost of federal health programs over the long term…

[A]dditional revenue — about $250 billion — would come from new taxes, primarily from an excise tax of up to 35 percent on insurance companies that sell extremely generous policies worth at least $21,000 a year for family coverage or $8,000 a year for individuals, according to aides involved in the discussions. About 7 percent of taxpayers hold such policies.

Lawmakers said insurance companies are likely to pass the cost of such a tax to policyholders, raising the price of those plans. That would create a strong incentive for employers to stop offering them, thus driving down overall health-care costs. With employers paying less for insurance, tax analysts predict, they would pay workers more in wages, increasing income tax collections by as much as $180 billion over the next decade…

This Washington Post story suggests that at least some lawmakers understand that although the tax would be levied on businesses, the burden has to ultimately fall on individuals–in their role as, for example, policyholders (higher premiums) or workers (lower net-of-tax overall compensation).  Even a tax that seems to burden “businesses” more directly (without costs “passed along” to workers or consumers) has to ultimately translate to lower income or higher expenses to some actual persons–for example, the business’ profits and hence the business owner’s personal income.

But several other stories suggest that the reason why at least some senators are going for this “excise tax on businesses” idea and not the “cap the personal income tax exclusion” (of the same employer-provided health care) idea, is because these senators think that a tax levied on businesses somehow does not ultimately burden real people (”individuals”).  For example, a story in The Hill reports (emphasis added):

Senate Democrats have identified a healthcare reform talking point they believe is a winner: No tax increases.

After a two-hour meeting Wednesday, Democrats made a special point to emphasize they will not raise taxes on any individuals, unlike House Democrats.“There’s been a lot of talk about the House plan; it has tax increases as pay-fors. We really don’t,” said Sen. Kent Conrad (D-N.D.)…

Although the final Senate bill will include new taxes– worth as much as hundreds of billions of dollars – those taxes will not target individuals.

“What we’re working on the in Finance Committee, we don’t have tax increases,” said Conrad, one of the bipartisan negotiators.

“We’re not going to be talking about any broad tax increase,” Dodd said. Dodd also said the Senate has completely abandoned a proposal to cap the currently unlimited tax exclusion on workplace health benefits, which Obama and labor unions strongly opposed. “What’s not going to happen is a tax increase on benefits,” he said.

The House bill as it currently stands would levy a “surtax” on people earning more than $350,000 a year and raise about $540 billion over 10 years.

Senate Democrats highlighting the lack of individual income tax hikes in their bill will come as a relief to nervous House Democrats who pressured their leadership to at least scale back the new tax in their bill to only affect people earning more than $1 million a year…

Yet in the same Hill story, Senator Conrad clearly understands that this excise tax would effectively raise the cost of high-end health insurance (which is a good policy idea):

Though no agreement has been reached, the bipartisan working group is eyeing a tax on insurance companies that sell health plans worth more than $25,000 a year. Many economists believe such “Cadillac” plans with rich benefits encourage people to consume unnecessary and costly medical services, driving up national healthcare spending in the process.

That tax would raise about $90 billion over 10 years but Conrad said health insurers would not be hit with the cost. Conrad said the tax’s purpose is to discourage insurers from selling the plans in the first place.

So the excise tax would reduce the availability of high-end employer-provided health care, which would reduce the tax subsidy given to individuals through the individual income tax exemption of employer-provided health care.  This is just a less-direct, more round-about way of “taxing” (placing a new burden on) those individuals (yes, individuals) who in their various roles as policyholder or employee or even shareholder in the health insurance industry currently benefit from the lack of taxes now levied on employer-provided health care.

Taxing these employer-provided health benefits is a good policy idea, but the point is you could do it by either taxing the businesses who provide those plans, or by taxing the individuals (policyholders and employees) who benefit from those plans, and the economic effects would be the same.

This is a fundamental lesson in public economics about “tax incidence”:  you can’t avoid ultimately taxing (burdening) real people (and not just “things” like corporations) by simply choosing to tax people indirectly rather than directly.

And of course, the political up-side of appearing to tax “things” rather than “real people” is that the tax then somehow doesn’t seem like as much of a tax that real people will oppose.  But the economic down-side of designing a tax to tax “things” rather than people is that you can’t tailor the tax to ultimately burden those people in the way you might think is most fair.  So, for example, Senator Dodd voiced this intention (from an article in BNA’s Daily Tax Report):

Sen. Christopher Dodd (D-Conn.), acting chairman of the Health, Education, Labor, and Pensions Committee, also stressed to reporters that the bill that will ultimately leave the Senate will not use tax increases on households to pay for reforms to the health care system.

Dodd said the bill will prevent insurance companies from denying people with preexisting conditions and will help ensure that people do not lose their coverage when they switch jobs, but “what’s not going to happen is a tax increase or a cut in benefits for people who can’t afford it.”

But the irony that maybe Senator Dodd does not quite understand is that in moving the legal incidence of the tax to businesses and away from individuals, you take away the ability to steer the actual economic burden of the tax toward those individuals who have the greatest ability to pay the tax.  So that ironically, senators like Senator Dodd might actually prefer the distribution of the burden of the House surtax (targeted very specifically to the rich) over the distribution of the burden of this new excise tax they say won’t burden individuals at all.