From my days as a general policy wonk instead of a health policy wonk, there were two common sayings on optimal taxation policy:
“Lower rates, broader base”
and
“Tax the bads, subsidize the goods”
Yes, policy wonks are not wordsmiths, but I want to focus on the intersection of tax policy and healthcare policy that is implicit in the second shibboleth.
Taxing the bads usually means declining long term revenue as over the long term, fewer people consume the bad thing. A classic recent example is the use of high levels of cigarette and other smoking tobacco taxes to fund the Childrens Health Insurance Program (CHIP). In 2009, CHIP was reauthorized and expanded. The federal share of the program was to be paid for with a $0.61 per pack increase in the federal cigarette tax. There is a long term problem with using a tobacco tax to fund CHIP — tobacco usage is going down and has been going down for over a generation now as we as a society are starting to approach the point of having smokers fully internalize the costs of smoking. This trend will continue as cigarettes and other tobacco products are more heavily taxed.
The basic mechanism is higher cash prices for cigarettes keeps non-smokers from becoming addicted smokers because they never try or they never quickly get to a pack a day. Long term smokers will brand shift downwards or less likely quit if they are cash constrained, but cash constrained non-smoking 17 years olds will grow up to be non-cash constrained 51 year old non-smokers. We’ve decided as a society that tobacco usage is a bad that we really want to significantly reduce or eliminate over the long term. So we’ve been taxing a “bad” to subsidize a “good”, health insurance for kids.
Over the long run, tobacco taxes of any level will be insufficient to fund CHIP. But that is a long run failure that is a win. The failure will be that far fewer people will be smoking and long run health will be improved even as long run healthcare costs decrease.
The Affordable Care Act has several sets of policies where massive failure would be a greater policy win than massive “success”.
From a CBO point of view, the individual mandate and the employer mandate are expected to be significant funding sources for the coverage expansion. These are taxes on either being uncovered despite being able to afford insurance or free riding by having employees be covered by publicly subsidized insurance instead of privately paid group insurance. Less coverage (all else being equal) means higher tax revenue (and lower subsidy expenditure) so a “better” CBO score in regards to the net deficit/surplus impact of PPACA. However the policy goal of PPACA is more coverage not less. In a world where no one paid the individual mandate penalty because everyone was insured, the CBO score would look ugly but the policy goal would have been achieved. This is a situation of taxing a bad to subsidize a good.
The Cadillac tax is similar.
Sarah Kliff at Vox has a good explainer:
The Cadillac Tax places a heavy 40 percent tax on the most expensive health insurance plans. In 2018, it kicks in for individual plans that cost more than $10,200 and family plans above $27,500. The tax only hits the part of the plan above the threshold — so in 2018, an individual plan that costs $11,200 would get a $400 tax.
Traditionally, the government doesn’t tax employer-sponsored insurance. This has created a huge incentive for companies to spend more money on generous insurance plans and less on cash wages….
The whole point of the Cadillac tax was to push employers in the opposite direction, and offer their workers less robust benefit packages….
The Cadillac tax is projected to raise a significant amount of revenue both directly and indirectly as employers shift compensation from what would be highly taxed Cadillac benefits to lower taxed wages.
Employer groups and unions have been acting fairly aggressively to shift their plan designs away from possible Cadillac incurring designs even as the tax does not kick in for another three years. There are three ways to shift the cost curve to avoid the Cadillac tax. The first is to count on a general slow down of health care costs so that annual premium growth is low enough to never hit the Cadillac threshold. This is a bet on the general economy, prescription costs, health care productivity growth and demographics. It is a big bet with minimal local control. If the economy grows rapidly with decent levels of inflation (3% or 4%), presciptions costs crater as anti-trust regulation is used as a hammer, and health care suddenly becomes way more productive than the general economy, then this is massive policy win even if there is very little Cadillac tax revenue gained directly or indirectly.
The other two ways of controlling exposure to the Cadillac tax at the employer group level. It is a matter of reducing cost per service and/or the number of services being offered. Cost per service control can happen through a combination of narrowing networks, bundled payment reforms, reference pricing, pre-authorization and PCP gatekeeping requirements. The bluntest tool to limit service utilization is through the increase in cost sharing by either higher deductibles or higher co-insurance/co-pays. This system does a good job of reducing utilization over all. It does a tremendously horrendous job of reducing only unneeded or extraneous care.
Cost control measures through narrowing networks that exclude high cost or ineffective or inefficient providers are a net win as that lowers both local group costs, and long run costs as the excluded providers either get their acts together, lower prices or leave the market so average cost per service trend decreases. That would be a massive policy win even if Cadillac tax revenue comes in under expectations. Utilization reduction through blunt measures is more of a mixed bag.
A good long term measure if PPACA is working as intended is if Cadillac tax collections are coming in at or below projections. Lower levels of Cadillac collection is a net good thing even as it providers a financing problem.
Cervantes
Thought you’d be interested to know that one of this year’s McArthur Fellows is a health-policy wonk: Heidi Williams (MIT).
And there’s also Gary Cohen (Health Care Without Harm).
Right to Rise
Here’s another good axiom: “Dont tax success”. Punishing the successful via high marginal and capital gains rates is not only bad for economic growth, discouraging entrepreneurship and investment, but immoral. The government should live within its means and only take what it absolutely needs.
By far the vast majority of federal income taxes are already paid by the “rich”, btw, so spare me the whining about “fair shares”. The successful are already paying their fair share and then some.
p.a.
I really appreciate all the work you do here on healthcare/ACA. But in what fucking universe will companies return money saved on health insurance to its workers as wages? Is there some actuarial formula somewhere in one of the myriad laws/rules requiring this? And corporate/union cooperation to ease workers into sub ‘Cadillac’ plans? WHAT UNIONS? 7% of private workers are unionized, and probably 50%+ of these unions struggle just to maintain their viability. They are in no position to force companies to compromise on major issues like health care. Disclosure: I’m an IBEW (telecom not elec) retiree.
Southern Goth
@Right to Rise:
This is the problem of using tax code to manipulate behavior as opposed to using tax code to pay for stuff that needs to be done.
Though you and I have a wildly different idea of what needs to be done.
Belafon
@Right to Rise: “Dont tax success”
1) There are lots of people making a lot of money who aren’t contributing anything back. Adam Smith called them rentiers, and suggested they needed to be taxed at a higher rate.
2) That’s a bullshit suggestion anyway. The people who succeeded didn’t do it on their own. They had people up and down the line help with their success, from teachers when they were younger, to people growing their food, policing the streets, etc. They can pay taxes because they succeeded.
FlyingToaster
@Right to Rise:
Actually, no. If you don’t believe me, you can ask Warren Buffett :)
As a percentage of income, back when I was a starving grad student in the Midwest, I paid ‘way more of my disposable income in taxes than I did 5 years later, working full time in high-tech in Massachusetts. And I was at the bottom end of the payscale here, but I moved from a flat-tax state to a progressive-tax state.
Progressive taxation, in the specific instance of the People’s Republic, means that you don’t pay taxes on clothing items under $175. So basic clothing is not taxed. You don’t pay taxes on unprepared foods: i.e., groceries. You have a renters deduction of 50% (with a 3K cap).
We don’t have use fees for our state facilities: pools, beaches, parks, conservation land, bike paths, etc. Some towns do, and those are the towns where we don’t go and buy lunch when we’re going to the beach.
So you don’t hose the poor, the several hundred thousand students, and we old, successful folks pay for our fun.
Tax avoidance by Romneyites (both BCG and Bain are here, after all) is a real problem, and our DOR spends their time chasing those bastards down.
A Federal top marginal rate like 90% that was in place under Eisenhower is insane, and does punish successful entrepeneurs. But our 1% (or .001%) aren’t even paying the ~50% that they’re supposed to be paying, because the Federal code has let them not pay taxes AT ALL on certain types of income. See again Romney.
So no, the rich aren’t paying enough taxes. Go back under your bridge, ¿Jeb?-troll.
Belafon
“Tax the bads, subsidize the goods”
Like using fines to pay for government services rather than raising taxes.
jake the antisoshul soshulist
At the risk of providing sustenance to our troll, I do ask if we should really consider a fraction of a percentage of the population acquiring the great majority of the results of increased productivity to be “success” that we want to reward.
Al Capone was very successful in his business plan until we decided to punish him through the IRS. Economic growth is artificially constrained by the near monopoly on Capital by 1%.
SP
@p.a.: I was going to make the same comment:
“incentive for companies to spend more money on generous insurance plans and less on cash wages….The whole point of the Cadillac tax was to push employers in the opposite direction…”
This argument is also common w.r.t. employer portion of payroll taxes, that if we stopped charging them wages would magically rise instead of employers pocketing the difference as profit. Prevailing wages are set by competition in local markets and historical trends- every company of more than ~20 people has an analysis of salary bands, “equity”, etc. and those aren’t going to magically bump up just because the company has more money.
richard mayhew
@Right to Rise: You know, if you actually do the math to figure out where the peak is on the Laffer Curve and thus where the cut-off point between a marginal tax increase raising or lower total net revenue, the evidence strongly suggests in the US that the peak on the Laffer Curve is someplace in the high 70s to low 80s%. We are way to the left of that point so marginal changes in revenue lead to a much more notable tax revenue gain then supply side lost.
http://www.nber.org/papers/w17860
http://www.bradford-delong.com/2012/05/supply-side-effects-are-small.html
http://conversableeconomist.blogspot.com/2011/12/should-top-income-tax-rate-be-48-or-73.html
Cervantes
@Right to Rise:
So what? It stands to reason that those with high incomes pay more in income taxes. For example, tax-payers with adjusted gross incomes above $250K send in roughly half of all the money collected as income tax — paying at a rate of 25% on average — whereas those earning less than $50K send in about 6% of what is collected — at a rate of about 4%. So what?
Besides, less than half of what the Feds spend comes from income taxes. About a third comes from payroll taxes. Most families — 80% of us — pay more in payroll taxes than in income taxes. What can you tell me about this?
As for corporate income tax, which used to bring in about 30% of Federal revenue in the ’50s, it now brings in only about 10%. Since the Reagan era, GDP has gone up by about 150% whereas corporate tax receipts have gone up by only about 80%. (These measures are adjusted for inflation.)
In a recent survey (Pew), only 20% of respondents said they were bothered a lot that “some poor people are not paying their fair share of taxes.” Asked about their own taxes, only 27% were bothered a lot by the amount they themselves paid.
Whereas about 65% — a large majority — of respondents said it bothered them a lot that “some corporations do not pay their fair share of taxes,” and 61% — another large majority — said the same about “some wealthy people [failing to pay] their fair share.”
Belafon
@Cervantes: He’ll tell you payroll taxes should be cut, and the magic fairy that didn’t exist in the early 1900s will come and keep all the elderly out of poverty.
Gin & Tonic
@richard mayhew: You know, if you actually do the math
I’m sure you know, but you’re attempting to converse with someone whose only demonstrated ability is to parrot talking points written by someone else. There is no actual intelligence behind this persona, and no ability nor interest in “doing math.”
Cervantes
@Gin & Tonic:
Nor is the “Laffer Curve” worth taking seriously, except as propaganda.
(I’m not taking exception to what Richard said about it — he’s not wrong.)
Frank Bolton
I always wonder about the mentality of people like Right-to-Rise. They’re not even making an argument out of naked self-interest; I know economic conservatives from the upper and upper-middle class and unless they were recently promoted to the upper-middle income strata from the middle or working class (i.e. they’re an engineer or lawyer or C-level manager right out of college) they wouldn’t be caught dead on blogs like this. What do they gain from shilling for the overclass that they will never be apart of?
Does bootlicking the powerful make them feel powerful as well, like a snobby court jester or consort delivering orders from their masters? How comically pitiful.
benw
For those of us on the receiving end of those blunt measures, I can tell you the bag is just mixed suck.
p.a.
@benw: yes yes yes. Everyone raise your hand if you access the American medical system because it is soooo much goddamned FUN.
Southern Goth
@p.a.:
That kind of logic is pretty heavily applied to dentistry. Yes, I just love going to the dentist. I’m just like Bill Murray’s character in Little Shop of Horrors.
Bobby Thomson
@benw: the welfare queen rhetoric around the Cadillac tax is what pissed me off the most about ACA. People don’t use health care because it’s fun. It’s not fun to take at least a half a day off to sit in one room after another being exposed to germs before a 5 to 15 minute visit. People use health care because they need it. Don’t lower health care costs by artificially lowering demand. Do it by increasing supply.
p.a.
@Southern Goth: I was shocked to find that people can get novocaine for a cleaning.
Southern Goth
@Southern Goth:
We must be ever vigilant against frivolous root canals.
burnspbesq
@Right to Rise:
That’s the worst fcuking axiom ever. Feel free to gargle with Drano.
Cervantes
@burnspbesq:
Succinct!
burnspbesq
@burnspbesq:
ETA: and attempting to artificially limit a discussion of the incidence and impact of taxation to income taxes is deeply dishonest.
Sales taxes, FICA, unemployment, and disability are all sharply regressive. Overall Federal and state taxation isn’t very progressive at all. And if you have any clue about the relationship among income, wealth, and marginal propensity to consume, intellectual honesty (if you can summon up any) will require you to concede that sales taxes are the most unfair taxes of all.
Read Piketty and Saez on optimal tax rates, asshole. It’s an eye-opener.
burnspbesq
@Cervantes:
I have my occasional lucid moments.
mclaren
This perfectly summarizes everything that’s evil and stupid about Richard Mayhew’s policy proposals.
Given the choice between (A) limiting health care service utilization to reduce health care costs and (B) reducing the actual price of America’s insanely overpriced health care procedures in order to reduce health care costs, which does Mayhew choice?
To limit health care service utilization.
This is evil in its purest form.
U.S. spends too much on health care? No problem, says Richard Mayhew — just prevent poor children from getting access to health care by pricing it out of reach. They’ll use fewer medical prcoedures and, presto! Change-o! Overall health care costs decline!
Yes, overall costs will decline because you’re killing poor people, you’ll killing middle class people, you’re killing children and you’re killing old people and you’re killing pregnant women by restricting their access to health care.
Mayhew glibly sneers “Tax the bads, subsidize the goods.”
Let’s take that literally. The worst of the bads in health care are the insanely overpriced medical device and grotesquely overpriced medical procedures that drive health care costs up — insanely overpriced medical procedures like $78,000 hip replacement surgeries in America compared to $8000 hip replacement surgery for the exact same procedure in Spain.
Insanely overpriced medical devices like charging $57,000 for an insulin pump that costs $15,000.
Insanely overpriced medical utensils like a $40 American plastic medical retractor used in surgery that gets billed out at $1200 by the hospital. Whereas the same plastic retractor in Europe gets billed for $50.
Insanely overpriced tests like an American MRI that costs $3500 whereas in France the exact same MRI using the exact same machine costs $250.
So let’s tax the bads in health care, Richard Mayhew — let’s tax every overpriced American medical device and every overpriced American medical procedure at 12,000%. Greedy corrupt doctors want to charge $78,000 for an operation that costs $800 in Spain? No problem, let’s tax the greedy corrupt American doctors $12,000 so they wind up paying more in taxes than the insanely overpriced medical procedure costs. No profit to the doctors. And we use the tax revenues to provide free medical care for poor people.
Medical devicemakers want to charge $57,000 for a $5000 insulin pump? No problem, we tax the greedy corrupt medical devicemakers 12,000% so they can’t make any money off their little (not-so-little, actually) scam.
Let’s jack up taxes on every hospital administrator who makes more than $200,000 a year until they’re paying 50,000% in taxes. That way, hospitals will stop paying their administrators insane amounts of money.
Let’s jack up taxes on every hospital that bills out so many insanely overpriced medical procedures that they’re making 150% profit margins, tax those hospitals by 100,000% so they go broke if they try to get profit margins that high. So hospitals can’t charge that much.
Let’s jack up taxes on every greedy corrupt doctor who makes 3 million dollars a year by doing insanely overpriced medicla procedures along with taking bribes from big pharma companies until the doctors go broke if they make 3 million a year. Set the cutoff point at the income doctors in France or Germany make — $80,000 a year. Doctors who make more that that get taxed 200,000%.
Yes, Mayhew, let’s tax the bad and subisidize the good — starting with the worst of the bads in U.S. health care, the greedy corrupt medical devicemakers and the greedy corrupt hospitals and the greedy corrupt doctors.
See “Health care prices: America’s are insane,” Matthew Yglesias, Slate online, 2012.
benw
@Bobby Thomson:
Also, if you “lower demand” by making people not want to use their insurance because you’ve jacked up the co-pays and out of pocket maximums, you’ve really screwed the people who can’t avoid using their insurance all the time. Healthy people will use their insurance less, and the sickest, people with long term managed care like diabetes or cancer who have expensive meds and have no choice but to see specialists multiple times a year, they’ll pay right up to the max because otherwise they are dead. “The rich stay healthy and the sick stay poor.”
burnspbesq
@Cervantes:
Well, not exactly. The idea captured by the Laffer Curve follows more or less obviously from what conventional microeconomics tells us about declining marginal utilities of income and wealth.
However, as Richard correctly points out, the empirical evidence strongly suggests that the inflection point on the Laffer Curve occurs at tax rates well above any rates currently observed in the real world–and I would argue, based on what we observed in the United States during the 1950s and early 1960s, that the inflection point is actually higher than what Piketty and Saez estimated.
burnspbesq
@mclaren:
Suggesting, without a shred of evidence, that Mayhew is advocating what he is describing is both stupid and dishonest. In other words, it’s mclaren, WAI.
MPAVictoria
Now this may sound crazy but how about we just cover everyone with a simple, government funded universal health care system?
/Nah….
Roger Moore
@SP:
This is a more reasonable supposition than you suppose. It’s not as if insurance costs are actually going to drop. What will happen instead- and what has actually been happening- is that they’ll grow more slowly. Total compensation most certainly does go up over time, even when employers use factors like prevailing wages as part of their negotiating position. Now, less of the pie will go toward health insurance, leaving more to go to wages. I’ve noticed that my employer has stopped using rising health insurance costs as an excuse for why they can’t give us raises.
Richard mayhew
@MPAVictoria: how do we pay for it?
mclaren
@Richard mayhew:
Mayhew clearly hasn’t heard of that mysterious event known as “progressive marginal taxation.” It was typical from 1932 up to 1982. In the Eisenhower administration, the top marginal tax rate exceeded 90%.
But of course Mayhew will lie to us that the standard tax rates typical throughout postwar America are today “politically impossible” because SHUT UP, that’s why.
Mayhew is a compulsive socioapthic pathological liar whose posts are a smokescreen for enriching without limit already-wealthy greedy corrupt doctors and greedy corrupt hospitals and greedy corrupt medical devicemakers.
Roger Moore
@benw:
Not to mention that if you’ve discouraged them from using preventive care, you’ve shot yourself in the foot on cost savings. Preventive care- shock- actually helps to prevent more expensive problems from coming up in the future, reducing overall costs. This is why plans that cover only catastrophic care- including our current system of giving anyone care in the ER regardless of their ability to pay- are such a bad idea. When people are only covered for catastrophic events, they’ll put off minor, treatable conditions until they become catastrophes. Why anyone thinks this is a good idea is a mystery.
Roger Moore
@Richard mayhew:
And how do we get it through Congress?
Cervantes
@burnspbesq:
I was referring to the (ludicrous) notion that Arthur Laffer’s cartoon, christened and published by Jude Wanniski and his ilk at the WSJ, is a brilliant piece of economic analysis that inevitably leads us to recommend lower taxes on the wealthy. In calling it propaganda I was being kind. It has been called a “crank doctrine” — and I agree.
Yes, which is why I also wrote this: “I’m not taking exception to what Richard said about it — he’s not wrong.”
Goblue72
“tax the bads, subsidize the goods” – an excellent prescription for taxing the rich – The oligarchs are a cancer on the republic and must be brought to heel. Taxing their Scrooge McDuck piles of gold will go a long way towards controlling them – and help fund stuff for the “goods” – the rest of us, the 99%.
Goblue72
@Cervantes: Agreed. The only thing accurate about the Laffer Curve is that it’s laughable.
Brachiator
@Right to Rise:
I like “Don’t mess with Texas” better if you want to get into goofy axioms.
J R in WV
@richard mayhew:
Richard, Richard, Richard!
Do the Math for our troll? I bet he can’t do a square root without help from TI or some gadget like that.
RtR may not even be quite sure what a square root is, let alone know how to go about calculating one. I’ll even spot him pencil and paper, because I know that won’t really help.
Let alone working on an economics curve. You silly, Richard!! ;-)
No offense to anyone but RtR, of course.
Brachiator
@mclaren:
Some Balloon Juicers keep referring to this as though it was meaningful, and as though America was the land of milk and honey between 1932 and 1982.
It’s wrongheaded and stupid. There were obviously plutocrats during this period. I don’t think that there were fewer plutocrats between say, 1900 and 1932 and 1932 through 1982.
The high marginal tax rate did not result in a greater flow of incomes to other groups. And the effective tax rate, which is more important than the marginal tax rate, was never, never, I repeat, never 90%.
Among the reasons for low effective tax rates (from a slightly biased but accurate WSJ story):
Babble about tax rates by itself is an uninformed waste of time, as is the fantasy that progressive tax rates alone are an effective means of redistributing incomes.
And applying this nonsense to discussions about health care and medical costs is doubly meaningless.
Frank Bolton
@Brachiator:
Who cares what’s the raw population or population % of the overclass? What’s important is their wealth or more-to-the-point power. If the Lannisters and Boltons were completely wiped out in the plague but their holdings and wealth were picked up by the other Houses, that doesn’t impact the power of the aristocracy in Westeros as an institution even if their ranks are significantly thinned.
At any rate, if you measure income inequality, which is much more important, you’ll see that the mid 40s-late 70s the United States had the lowest income inequality post-ACW. Unsurprisingly, this is when tax rates for the wealthiest hovered between 70 and 93%. When taxes were cut to ~30%, income inequality exploded. When Clinton, raised taxes to 40%, income inequality started to dip until Congress cut the capital gains tax — which is the real money-maker of the 0.1%. Wealth holdings for the top 95-99% moved by about 2% over his term, while for the top 0.1% went up by about 5%.
You are correct, however, that progressive tax rates aren’t enough to solve income inequality. Not only do the lower income strata need a wage boost, but capital gains taxes need to be raised massively, since this is the real cause of the 0.1%’s illegitimate holdings post-Reagan. There’s no non-plutocrat bootlicking reason why they should ever be lower than income taxes.
Comrade Luke
Richard, sorry if I missed this in a previous post of yours, but I need some info to refute the latest claim from one of my wingnut friends. He posted this on Facebook, with the comment “Facts are a bitch aren’t they? They make liars and their statements hard to ignore, and far harder to defend.”
Health Premiums Have Climbed $4,865 Since Obama Promised to Cut Them $2,500
I really don’t know enough about all of this to easily tell him he’s full of it, but I’m sure he is (his latest posts are about how great Ben Carson is).
Any help would be greatly appreciated.