Imagine if the government gave people a subsidy of $5000 each time they bought a new car. That would be inefficient, encouraging the excessive purchase of new cars. Now imagine that the subsidy was 40% of the price of the car, up to a price of $25000. That would be even more inefficient, encouraging the excessive purchase of cars, and also encouraging the purchase of cars of excessively high quality. Now imagine a 40% car subsidy that had no upper limit. That would be extremely inefficient.
That last option, a “Cadillac subsidy”, is a good description of our health care system. The government effectively pays roughly 40% of the cost of private health insurance, via tax subsidies. That means if you buy a health care plan that costs $20,000/year, it actually only sets you back roughly $12,000/year. This subsidy encourages people to consume too much healthcare.
By far the best aspect of the Obama healthcare bill was the “Cadillac tax” on expensive health care plans. The best way to think about this “tax” is that it essentially removed the 40% subsidy on health insurance premiums, above a certain level. It’s analogous to going from a 40% subsidy on all new cars, to a 40% subsidy on only the first $25,000 spent on a new car.
In my previous post I discussed the awesome power of the health care industry. According to this article, tomorrow we may see an example of that power in Congress:
Congress will be voting Wednesday on a repeal of what is known as the “Cadillac Tax”—a provision of the Affordable Care Act which would place a 40% tax on employer-sponsored health care plans which provide excess benefits.
Think tanks and industry advocates have been fighting the implementation of the tax for years, and successfully delayed it until 2023.
The tax was supposed to be a funding source and would include 40% on anything greater than the value of health insurance benefits surpassing approximately $11,200 for individuals and $30,150 for families in 2022, according to the Tax Foundation. . .
And now it seems like it’s headed for the chopping block.
Needless to say, any repeal is unlikely to be offset by tax increases or spending cuts in other areas. We’ll just add the bill to the tab that we are already leaving to the next generation. The deficit will continue to reach unprecedented levels for a period of peace and prosperity.
Is there any constituency for sensible economic reforms, in either party?
READER COMMENTS
Lorenzo from Oz
Jul 16 2019 at 10:08pm
No, because Culture Wars R Us (on both sides). And because the US has done a not very good job of sharing the benefits of economic reform. In part because migration allows the urban/costal elites to let the provinces rot (a dynamic that also applies in the UK, but not in Australia).
This Niskanen Centre report by Will Wilkinson provides an excellent example, it’s argument being “sure the Heartland is economically and socially stagnant with lots of deaths of despair, but the important thing is not to let them block their own continuing marginalisation and particularly not by getting a say over migration”.
BTW, it does not apply in Australia because we were already much more urbanised, and we have preferential and compulsory voting. Parties of government have to aim for 50% +1 of the vote and cannot prosper by driving people away from the ballot box. Hence, our migration policy maintains the balance between capital and labour, unlike what has happened in the US and UK, where it has increased the scarcity premium on capital and reduced it on labour. And yes, I am aware of the economic literature but as it almost entirely ignores a major cost of migration (increased shelter costs due to non-citizen entrants in labour markets making it easier to regulate to restrict the supply of land for housing), I stand by the scarcity premium effect.
robc
Jul 17 2019 at 10:00am
While preferential balloting is good, compulsory voting is horribly immoral.
I remember in the late 90s, Liberty Magazine did a reader survey and 1/3 or their subscribers (who responded) did not vote because it voting violated their morality.
Banning something because you think it is immoral is bad. Mandated something that others think is immoral is far, far worse.
Lorenzo from Oz
Jul 19 2019 at 7:28pm
On that argument, is compulsory wearing of seat belts “horribly immoral”? Compulsory voting is really compulsory attendance–you can always vote informal and thus for nobody. It is a ritual of democracy, a ritual of common participation. But it has the great effect that the policies based on compulsory taxation and compulsory adherence to the law cannot be decided by driving people away from the polls.
Scott Sumner
Jul 17 2019 at 11:07pm
The Wilkinson piece is excellent.
Plato’s Revenge
Jul 18 2019 at 11:15am
The Wilkinson piece paints a completely black & white picture of diverse, productive, cosmopolitan coastal areas vs. narrow-minded, hostile, unproductive ‘failed states’ in flyover country. And as far as his field of analysis is concerned, he’s right.
Now for the corresponding analysis of how the shining beacons of development produce politics that aren’t all that much behind on the stupidity scale.
Like, let me think, axing the Cadillac tax…
Mark Z
Jul 18 2019 at 5:57pm
I think Wilkinson pays selective attention to the data and insufficient interest in causality and tells a story that coheres with his cultural prejudices.
He ignores, for example, that net internal migration in the US is away from the elite, socially progressive metropolises he favors and largely into the parts of the country he seems to characterize as backwards, especially among the poor. Many of the supposedly backwards regions are actually poor in large part because they are actually accessible to poor people; and the rich regions so rich because only rich people can afford to live there. In other words, compositional shifts are largely driving the statistics.
I imagine Wilkinson has the south squarely in mind when he thinks of backwards regions, but south and southwestern states are mostly among the faster growing ones (again largely because they’re receiving poor people fleeing the bad economic policies of the parts of the country he admires). While one may insist that the key phenomenon is not about regions, but rural vs, urban, it seems precarious for his narrative that migration is mostly away from the cities that most embody the characteristics he adulates toward those that least embody them.
If any region (other than West Virginia of course) really deserves the characterization as economically stagnant, backwards, etc. it’s the northern Midwest, but that doesn’t cohere with Wilkinson’s narrative. Are the Chicago, Cleveland, Buffalo, and Detroit areas bastions of socially backward, white resentment of elites and minorities? And how much more can the major coastal metropolises that are still thriving grow while making it ever more expensive to live there? Some of these paragons of productivity are already flirting with a general flight of citizens further out into the suburbs because of their policies.
Wilkinson would do well to remember that Detroit, Cleveland, and Pittsburgh were once the most productive, fastest growing cities in the country. These sorts of grand political narratives often prove to be short lived.
Lorenzo from Oz
Jul 19 2019 at 7:35pm
There is, as I say in my post, some good bits in Wilkinson. But the underlying mentality is a powerful part of why the US is getting so polarised. Not as bad as Dan Savage’s essay on “the Urban Archipelago” but not so far away either.
And if folk are going to write large sections of their own country off, they are in a poor position to complain if those folks notice and arc up.
nobody.really
Jul 18 2019 at 11:48am
Wilkinson describes a sorting process wherein most of the motion is unidirectional: Upwardly mobile people leaving rural America for urban America.
Compare this to the dynamics as legal and social prohibition on integrated housing declined: The most upwardly mobile blacks moved out of the ghettos. Those left behind were disproportionately likely to be poor, and were perceived as such. And they resented what they perceived to be the larger society’s indifference to their plight.
It’s ironic (and unhelpful) that white rural America has spent so much time looking down on black urban America, but increasingly finds itself in a similar position.
Mark Z
Jul 18 2019 at 5:26pm
I may agree or disagree with you (or both) in the sense that consistency is warranted. Though imo, as the poor urban black community needs Thomas Sowells, not Al Sharptons, likewise the poor rural white community needs Kevin Williamsons, not Sean Hannitys.
A focus on the internal causes of privation rather than looking for external ones. I’m less interested in seeing a victimhood mentality for Appalachia and more interested in seeing introspection (especially regarding things like drug use, social acceptance of criminality, teenage motherhood, dependency, etc.) applies to these communities as well.
nobody.really
Jul 19 2019 at 11:29am
Why not both? I pose that as an earnest question.
And I suspect the earnest answer depends upon a person’s objectives.
Yes, Horatio Alger stories about “pulling yourself up by your bootstraps” are adaptive: They instruct people to keep hope, and to continue to work on the levers that are within reach.
But once we move beyond the level of fairytales for motivating children, we can review all the variables and conclude that there are systemic reasons for some people’s plights, driven by social dynamics beyond their control. Elderly black people did NOT create the nation’s obsession with race, did NOT create the neighborhoods in which they lived, and did NOT create the dynamics that would eventually drain those neighborhoods of their most upwardly mobile members–yet they were left to bear the brunt. Pointing out how a few of them were able to escape their circumstances by “pulling themselves up by their bootstraps” might be the best we can do–after all, a placebo is better than no remedy at all–but that’s not clear to me.
Likewise, economic circumstances have changed to make urban living more remunerative for most people, and rural people did NOT create those changes. (Ok, they provided cheap food, which is not quite nothing.) Not surprisingly, they’d rather vote for Trump’s false hopes than listen to more lectures about pulling themselves up by their bootstraps.
Lorenzo from Oz
Jul 16 2019 at 10:22pm
I have a post discussing the above points in greater length here.
Lorenzo from Oz
Jul 16 2019 at 11:36pm
On the scarcity premium point, Australia’s migrants tend to raise the average level of human capital, not something true of other OECD countries.
Frederick Davies
Jul 17 2019 at 3:50am
You guys in America had a Republic once, but corrupted it into a Democracy, and then…
“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy…”
―Alexander Fraser Tytler
FD
robc
Jul 17 2019 at 10:01am
“A republic, if you can keep it.” — Ben Franklin, maybe.
nobody.really
Jul 17 2019 at 1:12pm
For what it’s worth, Wikipedia could find no support for the idea that Alexander Fraser Tytler ever said this quote.
Phil H
Jul 17 2019 at 11:28am
So here’s what puzzles me, a bit. Markets are meant to be incredibly powerful things. They overcome barriers of distance and class. The other day David Henderson argued here that they overcome prejudice and discrimination. And Washington is sclerotic and gridlocked. Yet somehow, these powerful markets just don’t have the power to outmanouevre Congress.
I actually agree with Sumner on this, and it illustrates that markets are not free, they are fragile creations that need to be nurtured with lots of (the right) rules, so that they can work their magic.
IVV
Jul 17 2019 at 11:54am
Isn’t the other side effect of a subsidy an increase in the price of the good on the supply side? So getting rid of the “Cadillac Tax” will, in effect, also increase health care costs with no growth in quality or outcome?
Scott Sumner
Jul 17 2019 at 11:04pm
IVV, Just the opposite, as this is a subsidy paid to demanders. You are right that the subsidy raises prices, so reducing it will lower prices.
nobody.really
Jul 17 2019 at 1:00pm
Glad to hear Sumner finally come out against Trump’s tax cut.
Walter Boggs
Jul 17 2019 at 2:53pm
I think what he’s coming out against is spending money we haven’t collected, regardless of whose tax cut happens to be involved.
Scott Sumner
Jul 17 2019 at 11:05pm
Nobody, My position on the tax cut has not changed.
TMC
Jul 17 2019 at 2:39pm
Likely the tax rate you should be using is closer to 20%. The discount you get from the write-off doesn’t apply to many/most taxes. So one question, does this same tax exemption make the food industry wildly inefficient?
Comments are closed.