Healthcare Tax: What's Going On Here?

Diane Lim Rogers (who appears to be in San Francisco, and who I would be inviting to meet us for lunch tomorrow at Tasty Salted Pig Parts at the Ferry Building but for the fact that my wife appears to have the swine flu) reads the news and notices that the Senate "Group of Six" wants to tax insurance companies and not people.

From Raising Taxes Without Taxing People?:

[In] today’s Washington Post [Shailagh Murray and Lori Montgomery] reports that the Senate Finance Committee has come up with a bipartisan plan that contains a new revenue offset... 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...

And Jeffrey Young reports in The Hill that Senator Conrad promises that insurance companies won't actually pay any more taxes:

[T]he bipartisan working group is eyeing a tax on insurance companies that sell [family] health plans worth more than $25,000 a year.... 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...

Nevertheless, Murray and Montgomery report that CBO will score the insurance excise tax as:

increasing income tax collections by as much as $180 billion over the next decade...

What is going on here? Young again:

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.... 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...

And Murray and Montgomery:

Lawmakers said insurance companies are likely to pass the cost of such a tax to policyholders.... That would create a strong incentive for employers to stop offering them.... 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...

So Senators Conrad and Dodd are saying: (a) we are going to tax insurance companies; but (b) insurance companies won't pay the tax, instead they will stop selling the expensive policies that the tax hits; and so (c) employers will have more money as they offer cheaper plans; (d) thus they will pay out more in salaries as they bid against each other for workers and pay more in dividends to shareholders out of their higher profits; and (e) the government will collect more in income taxes because even though it has not raised tax rates households will be reporting higher taxable incomes, but (g) Democrats and Republicans will claim that "we did not increase tax rates on a single household).

Diane Lim Rogers summarizes:

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.... 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... 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...

But:

[T]he 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.... [By] 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.... 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...

I blame Jeffrey Young: he should be writing not "Senate Democrats have identified a healthcare reform talking point they believe is a winner: No tax increases..." but instead "Senate Democrats have identified a fraudulent healthcare reform talking point they believe is a winner: No tax increases on individuals..."

But more I blame Ronald Reagan: he was the one who started American politics down the road of pretending that you could spend and not tax. But, as Milton Friedman always said, "TO SPEND IS TO TAX". You should arrange the taxes so that their distributional effect is what you wish and so that their net excess burden is as small as possible, but if you spend you are taxing someone, somewhere, sometime.

Comments

[It Figures:]

What a surprise - you blame Ronald Reagan!

Why not give some thought to blaming the actual people in Congress and the Administration today who are attempting to impose this monstrosity on us.

Most economists understand and agree taxes are ultimately paid by consumers regardless of where they are imposed. This is Econ. 101.

It would be very useful if a well known, respected, liberal leaning economist such as yourself would LOUDLY raise your voice against this charade. If the nation truly wants these programs, so be it. But don't let the politicians get away with trying to trick the unsuspecting into thinking we taxpayers are not picking up the check.

Aug 09 10:53 AM