Taxes

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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.

Source:

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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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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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California raises state sales tax 1%

February 24, 2009 in Current Events, Taxes | No comments

Two weeks ago I did a piece looking at the cost of living in different states.  One major dimension of the cost of living is state sales and incomes taxes.  With the recent economic downturn, it looks like I’ll have to update my numbers.

California currently has the highest sales tax of any state (7.25%).  Due to the current budget crisis, it will increase the sales tax by 1 percentage point to 8.25%.  This means that in my current home of San Diego, the sales tax will rise to 8.75%.  In my future home of San Francisco the sales tax will be 9.5%.

Ouch!

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Cost of Living I: State Taxes

February 12, 2009 in Taxes | 11 comments

This June, I will finish my Ph.D. in Economics at the University of California, San Diego.  I am currently interviewing for a post-graduate employment and will likely move to another city.  Which city should I move to?  Of course, much of this has to do with personal preference.  Do you like warm weather or seasons?  City or rural?  Are there family considerations?  All these idiosyncratic issue certainly affect location choice.

However there is one issue that is important to all workers: taxes.  Most people prefer to live in a low tax state.  But what is a low tax state?  Texas has no income tax, but does has have a 6.25% sales tax.  Oregon has no sales tax, but does have an income tax of 8%-9%.  Although Maryland’s state income tax is low (around 4%), the local income taxes average about 3% of total income. Each state’s income tax rate depends on your tax bracket, plus there are state property taxes, estate taxes, etc.  This is getting complicated!

Fortunately, the Healthcare Economist has compiled a spreadsheet describing the tax rates of each state (see Table).  The data are from The Tax Foundation.  I have estimated the average tax rates in different states for individuals earning $60,000 and $100,000.  The aggregate tax rates include state and local income taxes as well as sales taxes.  The do not, however, include information on property taxes.

Which states have the highest tax burdens?  Take a look at my rankings:

I find that Alaska, South Dakota, Wyoming, New Hampshire, Delaware, and Montana have the lowest tax rates.  On the other hand, the states with the highest tax burdens are Maryland, California, Tennessee, Idaho, Minnesota, DC, and Kentucky.  

Different people are affected by different tax rates.  Retirees would prefer states with low sales tax and high income taxes.  Young workers saving in a for the future would prefer lowering income taxes rather than sales taxes.   Are taxes good or bad?  There is no shortage of opinion:

  • “There is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for you.”  – Robert A. Heinlein
  • “Taxes, are the dues that we pay for the privileges of membership in an organized society.”  – Franklin D. Roosevelt 

Data Sources:

  • Sales Tax Data: http://www.taxfoundation.org/taxdata/show/245.html
  • State Income Taxes: http://www.taxfoundation.org/publications/show/228.html
  • Local Income Taxes: http://www.taxfoundation.org/files/localincometaxes-20080711.pdf

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Cigarette taxes are bad for your health?

January 5, 2009 in Obesity, Taxes | No comments

Many economists and public plicy researchers have found that cigarette taxes reduce smoking.  This means that cigarette taxes must be good for your health…right?

A study by Baum (2009) claims that cigarette taxes may improve health, but not by as much as previously thought.  The paper finds that increasing the cigarette tax decreases smoking, but decreased smoking–an appetite suprressant–increases obesity.  Thus Baum finds that the health benefits of cigarette taxes may be overstated.

Disclaimer: Baum does state that “this research in no way concludes that [cigarette taxes] should be decreased to prompt weight loss.”

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Taxpayer money used to lobby politicians

October 17, 2008 in Current Events, Taxes | No comments

What is AIG doing with the bailout money it has received from the federal government?  The Wall Street Journal reports that AIG is “…using taxpayer money in its effort to soften new federal controls over the mortgage industry.”

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Junk food tax and Pringles

July 7, 2008 in Obesity, Taxes | 2 comments

Pierre Dubois of VoxEU has a suggestion to reduce obesity rates: a junk food tax. Dubois claims that a junk food tax of 5% would reduce junk food consumption by 15% and thus reduce obesity.

While junk food is not healthy, it offers the most calories per dollar. Thus, a junk food tax would fall disproportionally on the poor. Dubois states that “poor consumers [affected by the junk food tax] could then find cheap calories in less-dense food items, like starchy foods which are less apt to be overeaten.”

From a philosophical point of view, I generally do not like government officials making rules about what type of food you can eat. If you want to have a banana split every day that is your choice.

Some “experts” argue that in countries with public health care systems, however, the public does end up paying for the additional health costs of obesity. Yet it not been conclusively showed that obesity leads to higher health care costs. While obese individuals generally have higher health care costs each year, those who are extremely overweight also have lower life expectancy. According to a PLoS study, obese individuals actually cost the NHS less money due to their lower life expectancy.

Further, as a practical matter, it is difficult to determine which food are junk foods. Most people would claim that Pringles are junk food. In the UK, food is exempt from their 17.5% sales tax with the exception of potato chips. According to the L.A. Times, a British court has ruled that Pringles are not potato chips and thus are exempt from the tax.

If Pringles don’t count as junk food, then what does?

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