Oct 16

What happens to healthcare reform if the people invited to pay for the party don’t show up?   Honest historians already know:  It won’t be pretty.

Even voters of the most liberal persuasion have a hard time arguing against the economic truism, “tax something and you’ll get less of it”.   So check out this bag of goods:  Among the key funding mechanisms for the healthcare bills being promoted are a 40% excise tax on so-called “gold-plated” or “Cadillac” plans, and a windfall profit tax on insurance companies themselves.    When even the unions are raising an eyebrow to taxing high-cost plans, you know something’s up.

Senator Max Baucus and others have run their numbers and see a moneypot in these high-cost plans.   Their spreadsheets look really simple and have formulas in them like “Tax Revenue = MoneyPot * 40%”.      What is being attempted here is something akin to studying physics without calculus, calculus being the “language” of dynamic processes.  The planners and masterminds in control insist on using static analysis, a simplification that results in financial recklessness.

History shows conclusively that people don’t sit back and accept 40% tax rates with glee.   In an instinctive pain-avoidance maneuver, they change their behavior in an attempt to minimize the tax.    Some percentage, likely bigger than Sen. Baucus will ever admit, will reduce their high-cost plans one way or another.    The unions certainly realize this — they’re likely to see the value of their plans cut closer to, or under, the tax-trigger threshold, all via reduced benefits.   In any case, the total taxable dollars to drive the Senator’s moneypot is going to go down.     Witness, the birthplace of government program cost overruns.   Calls for further tax increases and/or limitation of services (also called rationing) will be soon to follow.

In another form, this dynamic is happening today in the form of shrinking state tax revenues.   In New York, thanks to the  ongoing economic illiteracy of the state legislature, the Working Families Party was able to convince them that their budgetary woes could be solved by raising the taxes on the “rich”.     Things haven’t gone according to plan, and they’re about $500 million short (note that a sad side-effect of the staggering numbers being bandied around the health care, stimulus, cap & trade and other policy debates is that $500 million now seems like chump change).    Steve Malanga’s excellent article goes on to describe similar stories in New Jersey, Maryland and elsewhere as high-wage earners pack up and leave.

But for striking parallel to the tax on luxury insurance plans, we can visit the boatyards up and down the Eastern Seaboard in the early 1990’s.   In an attempt to get the “rich” to pay their “fair share” of taxes, liberal Democrats in Congress enacted a family of taxes on “luxury” goods, as defined by them, including boats costing more than $100,000.    Ironically, Ben Bernanke, along with Robert Frank, wrote about the backfiring of this legislative mess in their 2003 book “Principles of Microeconomics“, quoted here:

pg 96:

“Before these taxes were imposed, the Joint Committee of Taxation estimated that they would yield more than $31 million in revenue in 1991.   But in fact their yield was little more than half that amount, $16.6 million.   Several years later, the Joint Economic Committee estimated that the tax on yachts had led to a loss of 7,600 jobs in the U.S. boating industry.  Taking account of lost income taxes and increased unemployment benefits, the U.S. government actually came out $7.6 million behind in fiscal 1991 as a result of its luxury taxes — almost $39 million worse than the initial projection.    What went wrong?

The 1990 law imposed no luxury taxes on yachts built and purchased outside the United States.   What Congress failed to consider was that such yachts are almost perfect substitutes for yachts built and purchased in the United States.   And, no surprise, when prices on domestic yachts went up because of the tax, yacht buyers switched in droves to foreign models.   A tax imposed on a good with high elasticity of demand stimulates large rearrangements of consumption build yields little revenue.   Had Congress done the economic analysis properly, it would have predicted that this particular tax would be a big loser.   Facing angry protests from unemployed New England shipbuilders, Congress repealed the luxury tax on yachts in 1993.”

Other accounts of the yacht tax put the job losses at upwards of 25,000, or as high as 45,000, with sales revenues plunging as much as 71%.    But if you think the lesson here is that Congress should have only taxed imported yachts, or all yachts, you’ve sadly missed the point.

Finally, there is the self-defeating notion of taxing “windfall profits”.   Simply put, if one of the stated goals of the left is to reduce the profits of the insurance companies, is funding health care legislation with a “windfall profits tax” nothing more than a parasite killing its host?

Just like the yacht buyers who changed their behavior, or the people voting with their feet and moving out of high-tax states, the “dynamic” will with certainty trump the “static” when it comes to trying to raise big dollars to pay for big health care.    When it does, and the budget hole is measured in 12 or 13 digit numbers, to what peg will Congress turn?   Once again, it won’t be pretty.

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What do you think?

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