Remarks to the 3 rd Year Medical Students on April 29, 2010 Let me help you understand who I am, so you can understand any biases that might surround my comments. I am a business professor, who believes the practice of business is good for society and people in the practice of business have a responsibility to society. We should ALL be both economic and ethical members in society. I teach a course entitled Public-Private Partnerships: Fighting HIV/AIDS in the U.S. as well as tax policy courses. I am the audit chairperson of the Female Health Company. The company produces the female condom, which is a product that empowers women to protect themselves against sexually transmitted diseases. I am the wife of a doctor. He is a member of a small mental health practice in the community. I believe the denial of insurance coverage for pre-existing conditions is a reason we need some kind of reform. I believe the goal of better health care for society is an area on which society can find common ground. However, society struggles to find common ground when we ask HOW will we achieve our goal? HOW do we provide better health care? AND HOW do we pay for better health care? Now let me turn to why you asked me here - the effect of tax policy on behavior... In a broad sense, I study how we govern society through regulation. That is, how governing bodies try to influence the behavior of the community. There are several ways we govern societal behavior. 1. Mandate make it illegal to happen or not happen 2. Grants pay for it Both of these require revenue to pay for it or monitor it. How might we do that? Taxes. Governing bodies also use taxes as another way to influence societal behavior. When lawmakers use tax policy to influence behavior, its success will depend on 1. the accuracy of assumptions about the resources needed to monitor the tax policy and 2. the responsiveness of the community to the tax policy.
Success being defined here as how big of a nudge in behavior did society get for the cost of the policy? I d like to take five of the many tax provisions from the health care reform act, which is estimated to raise $437 billion in revenue over 10 years, and push you to think deeper about the possible impact of these provisions. 1. 10% excise tax on indoor tanning. Starting July 1, 2010, there is a 10% tax on indoor tanning. This provision will influence behavior for those who care about having darker skin AND can t or won t pay the extra $1.50 $2.00 in taxes. This provision will be an immaterial revenue raiser, especially if it is an effective policy. 1 2. Tax credits for small firms to provide coverage. In 2010, employers that have 10 or fewer employees AND pay an average annual wage of less than $25,000 can receive a tax credit equal to 35% of the healthcare premiums paid by the employer. 2 To provide perspective on the $25,000 wage requirement, the poverty rate for a family of four is $22,000. A question we should ask is how many firms actually pay an average annual wage to their employees, including management, close to poverty level? Will these small firms, which pay an average annual wage that is close to the poverty level, be profitable so they can actually use the credit and have the resources to know how to take advantage of this credit? 3. 2.3% excise tax on manufacturers of medical devices. In 2013, manufacturers of medical devices will pay a 2.3% tax on medical devices unless the law specifically excludes them. A question we should ask is who will really pay this tax? Business owners through lower corporate profits? Consumers through higher prices? Labor through lower wages or cutbacks? If the producers markets are competitive, the tax will fall to consumers. 3 4. Tax on individuals who don t obtain health care coverage. In 2014 individuals, who don t buy health insurance, will be taxed. A family of four making $88,000 could be subject to the following taxes. 4 2014 $285 2015 $975 2016 $2085 However, if the premiums of the cheapest health insurance available in the state are more than $7,040 (8% of income) then the family will not owe a penalty if they don t pay for coverage. 5 1 The average visit to a tanning salon is estimated to be $15-20. The Obama administration estimates that it will raise $2.7 billion from this provision. It is unclear from my sources whether this estimate includes the effect of the loss of jobs in the industry or the changes in behavior. 2 After $25,000 and 10 employees, the credit is reduced until companies with more than 25 employees and an average annual wages of $50,000 receive no credit. 3 Tax Options for Financing Health Care Reform (March 23, 2010) by Jane Gravelle at the Congressional Research Service. 4 I am not 100% confident about this calculation given its complexity. Different sources only discuss parts of the overall tax. A calculation is provided in the appendix, so I gave it my best shot.
Therefore, this family faces the following trade-offs if insurance is available for $7,040. Year Pay the penalty and get no insurance Pay and get insurance for your family 6 2014 $285 $7,040 2015 $975 $7,040 2016 $2,085 $7,040 A question we should ask is will these families value health care enough and pay the thousands of dollars more for health insurance? My hope is yes. My head says not so sure. Another issue to consider is that the cost of health premiums for a family of four is currently $13,375. 7 The government estimates that at some point health care premiums due to reforms could be lower by 14% - 20%. 8 Therefore, under the best circumstances where a 20% decrease in premiums happens by 2014, our family of four earning $88,000 can expect premiums of $10,700 = $13,375 (1-20%) and will not have to pay the penalty because the $10,700 is greater than the $7,040 threshold discussed above. So this families trade-off would be... Pay the penalty and get no insurance Pay and get insurance for your family $0 $10,700 A question we should ask is what happens if premiums don t drop enough to require a penalty and people opt out of the individual mandate? The economics of the reform are based on diversifying risk by insuring everyone by bringing everyone into the insurance system through the individual mandate. What if no one joins the party? 5. Medicare taxes on high income individuals. In 2013, the Medicare tax rate for single individuals making $200,000 or married couples filing a joint return making $250,000 will increase in two ways. 9 The Medicare tax rate on earned income (i.e. wages) will increase by 0.9% A new 3.8% Medicare tax rate will be charged on unearned income (dividends, interest, capital gains, royalties, etc.) 10 5 http://www.opencongress.org/articles/view/1789-health-care-affordability-and-the-individual-mandate- 6 Because this family of four earns more than 400% of the federal poverty level, it will not qualify for federal subsidies to help pay for health care premiums. 7 http://www.businessweek.com/investor/content/mar2010/pi20100322_662113.htm 8 For certain individuals that qualify for tax credits that reduce their premiums, the White House estimates premiums could drop 59%. See http://www.whitehouse.gov/health-care-meeting/questions/buy-own-insurance. To qualify for the full credit, the individual must meet certain income restrictions. The credit is reduced to zero when as the individual earns income over 400% of the federal poverty level. For a family of four in 2008, this would be about $88,000 (4*$22,000) 9 The income thresholds of 200,000 and 250,000 are also not adjusted for inflation. Therefore, the same issues that arise with AMT today will likely occur for this provision in the future. That is, more people than intended will be deemed high income as wages rise with inflation.
Income earned in retirement accounts and on tax-exempt income (i.e. interest from municipal bonds) is excluded from unearned income. The new Medicare taxes are estimated to raise $210.2 billion of the $437 billion (48%). Before we count that money as a given, a question we should ask is how will high income individuals respond? Will municipal bonds become more popular? Will new opportunities for savings for retirement be taken? Will married couples rethink dual careers because the threshold for married couples is only $50,000 more than singles? If so, will this provision affect working women or men more? I am not saying health reform won t work. I am not saying the tax provisions won t raise $437 billion. I d have to do far more research to step out on that limb. I am saying we don t know. $437 billion is simply an estimate based on a lot of assumptions about behavior. What is interesting about tax policy is that many times when we want to change behavior we assume that individuals respond to tax increases or decreases, and when we want to raise revenue we assume that individuals do not respond to tax increases. 10 The taxed income is actually the lesser of unearned income or income over the $200,000 or $250,000 thresholds.
Appendix Background on the computation of the tax for not purchasing health insurance Year The tax on an adult (children pay ½) is the greater of 2014 $95 or 1% of income $880 2015 $325 or 2% of income $1760 2016 $695 or 2.5% of income $2200 Therefore, at first glance a family of 2 adults and 2 children would pay 2014 $95 or 1% of income $2640 2015 $325 or 2% of income $5280 2016 $695 or 2.5% of income $6600 However, there is a cap for families equal to 300% of the adult tax so the final tax is 2014 $285 2015 $975 2016 $2085