Taxes

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Estimating the elasticity of health insurance offering for firms: Part II

May 25, 2010 in Health Insurance, Taxes | 1 comment

How does the price of health insurance affect the probability that a firm will offer health insurance to their workers?  A previous post provides a variety of estimates of the elasticity of firm health insurance offering with respect to premiums.  A more recent article by Gruber and Lettau (2004) needs to be added to this mix.

This paper uses data from the 1983-1995 National Compensation Surveys to determine that “there is a moderately sized elasticity of insurance offering with respect to after-tax prices (-0.25), and a larger elasticity of insurance spending (-0.7). We also find that the elasticities are driven primarily by small firms, for whom the elasticity is larger.” Additionally, the authors claim that if the tax subsidy to employer-provided health insurance were eliminated, 15 million fewer workers would be offered health insurance.

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Health Insurance Subsidies (a.k.a Higher Marginal Tax Rates)

March 3, 2010 in Public Policy, Taxes | No comments

The health reform bills currently propose introduce health insurance subsidies for individuals who do not qualify for health insurance provided by the government.  The goal of these subsidies is to make health insurance more affordable for the lower and middle class. The subsidies gradually decrease for higher income levels.

In “Obama’s Prescription for Low-Wage Workers,” Michael Cannon notes that one also can see these subsidies as increasing the marginal tax rate.  For instance, let us John makes $16,000 and has a 25% income tax rate.  Under the new health reform bill, John would also receive a subsidy to purchase health insurance.  Let us assume the subsidy is $5000.  Thus, his after tax income is $17,000 [(1-.25)*16,000+5000].

What happens if John has the option to work at a new job that pays him $20,000?  Of course, he will earn more income but his health insurance subsidy will also decrease.  If the health insurance subsidy decreases to $3,500, then his after tax income in your new job is now $18,500 [(1-.25)*20,000+4000].  Although John’s gross income increased by $4000 when taking the new job, his after tax income only increased by $1500.  This is in a marginal tax rate of 62.5%.  In fact, Mr. Cannon’s research finds that mandates and subsidies impose effective marginal tax rates on low-wage workers “averaging between 53 and 74 percent.”  When marginal tax rates are high, extra hours worked lead to a smaller increase in after-tax income.  Thus, the labor supply decreases.

One thing Mr. Cannon ignores, however, is the current Medicaid poverty trap.  Poor individuals are eligible for Medicaid.  However, if they get a better job paying them more money, they may lose their Medicaid eligibility.  Poor individuals may refuse to take better paying jobs to keep their Medicaid coverage.

Once the subsidies are implemented, however, poor individuals will be more likely to take a better-paying job since they can receive subsidies to buy private health insurance even if they lose their Medicaid coverage.  The high marginal tax rates are more likely to affect the labor supply of the lower-middle class and middle class individuals.  These individuals are in the same scenarios as John is above.  Higher pre-tax earnings will not necessarily translate into significantly larger after-tax earnings.  I predict that the higher marginal tax rates Mr. Cannon mentions will decrease the labor supply most for individuals in the middle class.

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Is licensing tax preparers a good idea?

January 7, 2010 in Regulation, Taxes | 3 comments

The USA Today writes that “the IRS has proposed a broad initiative that would require hundreds of thousands of tax preparers to register with the government, pass a competency exam and adhere to ethical standards.”  This sounds like a good idea as it will safeguard individuals from unscrupulous tax preparers.  But who will this truly benefit?

If you want a high quality tax preparer, there are many reputable companies that can prepare your taxes.  These tax preparers will be well trained and you’ll pay more for them.  Firms have an incentive to maintain this quality so their customers continue to require their services.  If quality is above average over the long run, they can build a reputation and charge higher prices.  Thus, for individuals who already have high quality tax preparation, there is no benefit.  In fact, there could be an increase in cost to these individuals if the government standards require additional training that does little to improve quality.

This idea will most certainly hurt poor immigrants.  When I was in college, I spent my Saturdays in the spring doing tax preparation for immigrant farm workers in Kennett Square, PA.  I worked for a non-profit legal firm.  I receive training on the basics of tax preparation.  Because most of these migrant workers had little assets and no mortgage, doing their taxes was simple.  If an individual had a more complex tax return (e.g., if they had a mortgage), I would refer them to the supervising lawyer.  The migrant workers received their tax preparation for free since we were volunteers.  However, this practice may not continue into the future.

If the government requires everyone who prepares taxes to pass through an onerous training program, fewer volunteers will decide to participate in free tax clinics.  Many non-English speaking Americans may not fill out their taxes themselves.  Further, the non-profit’s scope of their program will likely decrease if they have to pay for additional training for all their staff. 

Also, how will the government guarantee people will act ethically?  Will they give them a test of what is ethical?  Will they ask nicely ask people not to do a bad job?  

In short, licensing tax preparers is a bad idea.

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Can the government create jobs?

December 10, 2009 in Economics - General, Public Policy, Taxes | 2 comments

On Tuesday, President Obama unveiled a plan to use repaid TARP monies to fund a job creation program.  The question is, can the government actually create jobs?

Initially, one would say yes.  If the government hires more workers, this is job creation.  If the government hires more contractors, this is job creation.  If the government gives subsidies to businesses to increase employment, this is job creation.  Isn’t it?

One must first wonder where the government is getting the money to pay for the job creation programs.  Let us assume that it is from taxpayers.  In this case, the government is taking money from individuals to ‘create jobs.’  However, by increasing taxes, consumers have less money to spend on goods and services.  When consumers buy less stuff, firms will cut jobs.  The net effect likely will be a wash.  The government ‘creates’ jobs by paying money itself and destroys jobs by raising taxes.

What if the government funds the job creation with debt?  If the debt is only purchased by Americans, we have the same problem.  Consumers purchase government debt rather than buying products.  Again the net effect is likely a wash.

Now let us think expand our thinking.  Assume we live in a global economy where foreigners buy our bonds.  In this case, the government may be able to create jobs somewhat in the short run .  Foreigners will have less money to buy American exports if they buy our bonds, but likely only a fraction of foreigners income is spent on American goods.  Thus, the extra money the government receives from foreigners can create American jobs in the short run.  Subsequent generations, however, will have to pay back the loans from foreigners in the form of higher taxes.  Thus, increased job creation now comes at the expense of decreased job creation in the future.

Let us also think about business cycles in the creation of jobs.  The U.S. just went through a bad economic downturn.  Individuals and firms were saving more and buying/investing less.  Thus, firms had a smaller market to which they could sell goods.  If the government taxes (or borrows) from individuals and firms, and decides to spend all this money on ‘job creation,’ employment could actually increase.  Currently, the marginal propensity to spend will likely be higher for the government than for consumers or firms.  However, increased marginal propensity to consume implies a decreased marginal propensity to save.  With lower savings rates, there are fewer funds available to investors to invent new ideas, invest in new technologies and provide the foundation for long-run technical growth.  Interest rates will rise.  Currently, the Federal Reserve has held down interest rates by printing more money, but this will likely cause inflation in the near- to medium-term.

As any economist knows, there is no free lunch.  The government may be able to create jobs in the short run to counteract dips in the business cycle, but these debts must be repaid in the long-run.  Thus, in the long-run the government does not create jobs.  Innovative individuals and firms create jobs.  Further, this post has not even discussed the problem that the government will likely misallocate funds and may hire the wrong type of workers for long term economic growth.

If the government really could create jobs in the long-run, then the government might be able to maximize job growth by spending ad infinitum.

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Medicare Cost Projections

November 10, 2009 in Medicaid/Medicare, Taxes | 2 comments

The Social Security Administration’s Office of the Actuary projects Medicare costs up to 75 years in the future. How much of your taxable income will be going to pay for Medicare in the next 10, 25, or 75 years? Take a look at this chart.

By 2085, 12.24% of your taxable income will need to go to pay for Medicare. Not shown on this chart, is that 17.78% of your taxable income will also be needed to pay for Social Security. Thus, by 2085, 30% of worker income will go to fund these two entitlement programs.

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Federal Health Care Regulation: Taxation

November 4, 2009 in HSA, Public Policy, Taxes | 1 comment

Today we will discuss how the tax code affects health care.

  • Tax exemption of employer-provided health insurance. “In 1943, the Internal Revenue Service (ruled) that employees could exclude the value of employer-paid health insurance premiums from their taxable income. In 1954, Congress excluded by statute the value of employer-purchase health insurance from gross income.” To this day, employees essentially receive a subsidy to buy health insurance from their employers; this is because they can use pre-tax dollars to purchase employer-provided health insurance benefits.
  • Tax-deductibility of individually purchased health insurance. Individual health insurance benefits are tax deductible only if the individual itemizes deductions on their tax return. Since it is more likely wealthier individuals itemize, the benefits of this rule are more likely to accrue to the rich.
  • Deductibility of medical expenses. The IRS tax code states that individuals can deduct medcial expenses that exceed more than 7.5% of their gross income.
  • Health Savings Accounts (HSA). An HSA is a trust similar to a 401(k) where individuals can use pre-tax money to pay for medical expenses. HSAs must be linked to an high deductible health plan (HDHP) which was defined in 2006 as a plan that had a deductible not less than $1050 for the individual or $2100 for a family. Money left in an HSA account at the end of the year can be carried over to future years.
  • Flexible Spending Accounts (FSA). Individuals can deposit pre-tax dollars into a fund to pay for health care expenses. Unlike HSAs, FSAs need not be tied to a HDHP. Also, unlike HSAs, money deposited in an FSA that is not spent by years end is lost. This is why FSAs are considered “use it or lose it” accounts.

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How to pay for health reform: Taxes

July 10, 2009 in Taxes | 1 comment

The New York Times is reporting that “to pay for a sweeping overhaul of the health care system, House Democrats will propose a surtax on individuals earning $280,000 and up and couples earning more than $350,000.”  Now, taxes in and of themselves need not be distortionary.  Let us assume that your employer takes $10,000 from your paycheck currently to pay for your health insurance.  If the government would no provide you with health insurance, you would receive $10,000 in extra wages from your employer and you pay a tax of $10,000 to the government for health insurance.  In this cases, taxes are not distortionary.

This scenario of course assumes that government and private health insurance are of equal value.  If private health insurance is of higher quality, this could result in a decrease in efficiency; if government health insurance is of higher quality, this could be an efficiency improvement.

However, taxes are charged according to health insurance demand or even in a lump sum fashion.  Instead, the rich will pay more in taxes than they will receive from government health insurance benefits and the poor will pay less in taxes than they will receive in health insurance benefits.  Further, since the proposed tax is only on those individuals earning $280,000 or more, the tax will almost certainly be distortionary in some manner.  Although this progressive tax will create some distortions, it could cure others.  For instance, government health insurance could help to reduce labor market inefficiencies caused by Job Lock and Job Stretch.

I wonder how many doctors will support health reform now?   A public plan will increase their revenues as more of their patients receive insurance, but a higher percentage of their profits will be taken by the government due to the proposed surtax.  As any economist knows, life is full of tradeoffs.

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Medicare trust fund to be tapped out by 2017

May 12, 2009 in Medicaid/Medicare, Social Security, Taxes | 1 comment

Bond Markets seem to be concerned over the escalating level of U.S. Government debt.  Yields rose during the latest $14 billion auction of U.S. 30-year Treasury Bonds.  This graph shows an ominous budget deficit trend as well.  There seems to be good reason for this.  

American’s stimulus plan and entitlement programs are putting an increasing burden on American tax payers.  With the recession taking a toll on tax revenues, Social Security and Medicare funding is increasing jeopardy.  CNN reports that the “Social Security trust fund will be exhausted by 2037 — four years earlier than estimated last year… The recession also hit Medicare. The Medicare trust fund is forecast to be tapped out by 2017, or 2 years earlier than the trustees’ estimate last year.”

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How did the national debt get so big?

May 8, 2009 in Public Policy, Taxes | 3 comments

The book Cadillac Desert discusses the development of dams, aquaducts, and irrigation canals to slake the thirst of cities and farmers in the Western U.S..  While these projects did eventually deliver the water they promised, they did so at huge costs to taxpayers.  In the words of former congressmen Robert W. Edgar:

“The old-boy network comes to you,” says Edgar, who was elected to the House of Representatives in 1974, at the age of thirty-one.  ”They say, ‘You’ve got a water project in your district?  You want one? Let us take care of it for you.’  Then they come around a few months later and get their pound of flesh.  You actually risk very little by going along.  You get a lot of money thrown into your district for a project that few of your constituents oppose.  In return, you vote for a lot of projects your constituents don’t know or care about.  Not many of my constituents are going to base their vote for or against me on whether or not I supported Stonewall Jackson Dam in West Virginia.  Then everyone wonders why we’re running such big federal deficits, and they cut the social programs, which must be the culprit.”

  • Robert W. Edgar, U.S. Congressman from 1975 to 1987.

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How much is a $100m Cut from the Budget?

May 1, 2009 in Taxes | No comments

Obama Budget Cut Visualization.

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