Adventures in Tax Incidence
One enduring feature of the American political landscape is that people seem to have very unsound intuitions about how tax incidence works. Thus, people hear about the idea of cutting the gas tax and they assume 100 percent of the benefit will go to consumers and none to oil companies. But when they hear about taxing “windfall profits” of oil companies, they assume all the burden will be borne by the companies and none by the consumers. That’s not how the world works. But it means you can often take a good idea, and turn it into a more politically palatable one, by messing around with the implementation details to make it seem like a tax on evil corporations rather than a tax on people who buy products from evil corporations.
Thus, via Jonathan Cohn, Barack Obama floats the potentially promising idea of “a variation that goes after the insurance companies, as opposed to directly taxing the benefits.” Given the progressive nature of the income tax, it would probably be difficult to formulate a version of this that’s exactly equivalent to proposals to curb the current tax exclusion of health benefits. Indeed, you’d probably wind up coming up with something that’s somewhat less progressive. But I’m glad to hear folks are poking around in this neighborhood and hopefully they’ll come up with something clever and workable.
18 Responses to “Adventures in Tax Incidence”
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July 23rd, 2009 at 3:34 pm
Shorter Matt: Let’s see if we can sucker the American people into paying higher taxes through clever tricks rather than being honest with them! They’ll be too stupid to notice!
July 23rd, 2009 at 3:37 pm
The exclusion would probably only kick end for opulent plans.
Plus, if insurance companies pass on the cost of taxes to consumers, that drives people to the public option.
July 23rd, 2009 at 3:44 pm
You could probably place a tax on health benefits above a certain cost. I think it would be better though to cap the exclusion even at some high nominal value so that eventually it will go away.
July 23rd, 2009 at 3:44 pm
@Brad
More broadly, there has to be a way to account for tax breaks/cut with taxes into one measurement to be used in debates on taxes. Then people like Brad could see how the rich are getting so insanely rich, and aren’t paying their fair share. Debating only who pays what in taxes is only half the story.
July 23rd, 2009 at 3:46 pm
Actually Brad Yglesias thinks voters are too stupid to even understand that if you go to war in Iraq and spend tons of money on Homeland Security and defense and you create a generous perscription drug benefit for seniors then eventually taxes will need to go up to pay for all that. I am sure Yglesias would prefer it if we could be honest about taxes but that is not how the world actually works.
July 23rd, 2009 at 3:52 pm
High cost of health care is a problem, so we’re going to tax health benefits?
July 23rd, 2009 at 3:54 pm
Unfortunately it isn’t clear that Obama understands Matt’s point. In fact, reading this it seems pretty clear he doesn’t. Maybe he should have sat in on a few discussions at lunch while he was at UofC–he might have learned something.
July 23rd, 2009 at 4:02 pm
I don’t know enough about the direct insurance taxation scheme to comment on it in detail. But in the linked piece, Obama first discusses a phased-in cap on the exclusion that would be consistent with his belief that we shouldn’t “add additional costs to families right now.” He then says, “You’re also seeing, I think, some interesting discussions in the Senate Finance Committee about a variation that goes after the insurance companies, as opposed to directly taxing the benefits.” If he meant a variation on the phased-in cap, then that would also be consistent with this belief. Again, though, I’m just speculating without an actual description at hand.
July 23rd, 2009 at 4:20 pm
I assume the idea is a surtax on insurance company receipts from sales of policies which are tax deductible for the purchasers as a business expense.
They eat some of the costs, recoup some money from stingier payments to hospitals, and get the rest from their customers. Not all of that will be from the customers who are buying these tax excluding policies. They will also squeeze their customers with the least bargaining power – individual policy holders.
If this is to be done, a public option with teeth is a necessity. It will probably have to be good enough to attract the entirety of the individual policy market.
This will eventually reduce the employer provided policies to only those employees who pay a higher marginal tax rate than the surtax rate the insurance companies pay. (with a little adjustment for corporate tax rates of the employer on the cut of the tax free pie they take for themselves)
July 23rd, 2009 at 4:54 pm
I think this is John Kerry’s idea. Here’s some more discussion of it:
http://www.nytimes.com/2009/07/22/us/politics/22health.html
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132×8540863
July 23rd, 2009 at 5:03 pm
It’s not a bad idea, and in the absence of capping the exclusion, I’d support it. But I suspect that it won’t be nearly as effective in reducing health care costs as capping the exclusion. The thing is, it’s not clear to me that the customers to whom the insurers will shift the costs will be the same customers who are purchasing the high-premium policies.
Moreover, it seems to me that the people who really object to the cap on the exclusion are the unions, since they often get their workers gold-plated health care policies. I suspect that the unions will be just as opposed to this proposal as to a cap of the exclusion.
July 23rd, 2009 at 5:25 pm
If health care is really a right (single payer) than taxing benefits is exactly the wrong thing to do!
But that means the base plan that everyone gets for free is not taxed (because it never shows up as income). If someone buys additional insurance I guess it gets taxed because it is like a regular purchase from income. Also, you could tax non-covered medical procedures at the local and state level.
July 23rd, 2009 at 5:39 pm
“But when they hear about taxing “windfall profits” of oil companies, they assume all the burden will be borne by the companies and none by the consumers.”
And they would be right. Maybe you should understand tax incidence before you spout off on it.
July 23rd, 2009 at 7:53 pm
Like most things, confusion on this tax incidence question is mainly due to conservatives lying about it.
July 23rd, 2009 at 10:39 pm
I’m going to avoid the health care funding issues to which I plead ignorance. But in the oil area, second order effects affecting either supply or demand are important -but absent from the political discussion. For instance a gasoline tax (or oil import fee) causes a nominal increase in consumer price, but if any conservation results, then the international price of oil will go down to balance out supply and demand. That means the end price goes up by less than the headline amount of the tax. The difference is made up by producers -including our favorite whipping boys OPEC. Alternatively, if we increase the tax on domestic oil companies, they will explore/produce less (because you’ve changed their computation of return on capital), so will lower the future supply. And the market clearing price of oil will rise, i.e. not all the hit will be born by the evil companies taxed, but some will go to consumers, and some benefits will accrue to foreign exporters etc. What we need are smart economists to estimate the strength of these second order effects, so we can choose policy based upon the best expert guess as to the overall effect.
Instead what we always get is emotional grandstanding.
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July 24th, 2009 at 11:26 am
And they would be right. Maybe you should understand tax incidence before you spout off on it.
Do you know anything about economics?
Lower profits means producers move to other industries. Fewer producers means higher prices. As much as the people here denigrate Econ 101, it would be nice if they had ever taken it.