Wednesday, March 21, 2018

The Republican Tax Reform: Part 14 — Removal of the Obamacare Tax

Yeah … we made it to the last post on this subject!

For the last 8 years, the Republicans have been talking about undoing Obamacare. With more power in D.C. after the 2016 elections they took on that problem. And they failed twice.

Unfortunately, Democrats and Republicans both admit that there’s some parts of Obamacare that aren’t working and are badly in need of reform or removal. So the need is still there. But, given the political climate in D.C. this isn’t going to happen anytime soon.

After failing twice at healthcare reform, the Republicans in Congress moved on to tax reform. This they were able to pass. And they snuck in a dig at Obamacare along the way.

The American healthcare system has good and bad aspects to it. First, it is definitely unlike the healthcare system of any other country. Most of this is due to historical accidents. Second, Americans are typically in worse shape when they seek healthcare, but the prognoses once care is obtained are typically better. So it’s a high quality system. Unfortunately, third, it’s the most expensive healthcare system in the world. You get what you pay for. Fourth, and you probably have not heard this one before, the claims that American healthcare spending is too big a share of the economy are so groundless they probably qualify as fake news (I hate to use that term, and I’ll deny any Trumpiness, but there it is). The place to go for information on this is Random Critical Analysis. Basically, Americans are a lot richer than the easily available data shows, and healthcare demand is more income elastic than people recognize. Fifth, American healthcare is not distributed evenly and is probably not distributed equitably. Sixth, the financing of American healthcare is both complex and insufficient. There are other subproblems to these, and some other items I might add to the list.

Obamacare proponents pay lip service to all of these, but the actual act as written focuses mainly on the last two.


I can’t make you believe that your professor is not a nut. But let me toss out some economics and finance for you to mull over. You don’t have to believe me, but facts have a way of coming back to bite us.

Private health insurers are a lousy investment if you have some money stashed away. They simply do not make profits with the ease that anyone thinks they do. They need help, not abuse.

Pharmaceutical companies are very dicey investment propositions too. They are playing Russian Roulette: if their next drug is a hit, they make money and get to try again, but if it’s a flop they typically lose their independence in a merger with a company that did get a hit. We can debate this, but there are solid arguments that all healthcare improvements for the last few generations are due to pharmaceuticals. Read that again: all. It’s debatable, but the data says it’s not out of the question that everything other than new pharmaceuticals has been a waste of time, money, and effort. So why are we making them play Russian Roulette?

Third, healthcare is not (for the most part) run by the federal government. They collect the money, but they farm it out to states, counties, and cities through programs like Medicaid. Those lower level governments are exceptionally cash-strapped due to underfunding. This is a huge problem, especially in the northeast and midwest: these governments are incapable of doing much else because they’re mandated to provide healthcare but not compensated enough to actually do so very well.

Fourth, it may be dumb that the U.S. doesn’t have one national single-payer system (I don’t agree, but that’s why I said “may”). But do not have any illusions: we have a few nationwide single-payer systems. The most prominent is the VA. This is also the system with the biggest scandal in our lifetimes for not actually providing the healthcare that they were paid to provide.


OK. I’m done.

My point is that our healthcare problems have a lot to do with money, and not so much with access.

But Obamacare was painted as a policy to improve access.

I’m sorry (if you like Obamacare) but better access was the hook to reel you in. It was mostly about getting more money flowing through the parts of the healthcare system that are already run by the government. It’s a fever-dream to think it was about doing more of what they already can’t do. It was about fixing that stuff first. And this meant more money coming in, to help out health insurers (who were going broke), and pharmaceutical companies (who are at risk of going broke), and state governments that are paralyzed because there’s no money left over, and federal bureaucrats in the VA who claim underfunding as well.

Obamacare did 2 things to alleviate this. One was push for alternatives that would get uninsured people into the system. The other was the Obamacare penalty/tax for people who didn’t get into the system.

The thing is, most people who are uninsured choose to be that way. Yes, healthcare is often prohibitively expensive. But this doesn’t change the face that it’s a bad deal for most people who are adults, healthy, and young. A huge chunk of Obamacare is about getting those people to pay upfront for services they’re unlikely to collect upon. Yes, that gets them in the system, and provides security, and is arguably more equitable … but the big thing is that it gets extra cash into the system to fund the existing underfunded items.

This is where the tax comes in. This is sold as take the carrot (better plans under Obamacare) or get the stick (a tax penalty). No doubt there is some element of that. But look carefully at the economics: the choice is to either pay one way or pay the other way. In both situations, the government gets money out of the public. If you don’t think this is the primary goal of Obamacare, you haven’t been paying attention. (A big clue in favor of this is all the focus on the newly insured … note that there’s little talk about whether or not they’re actually healthier).

And along come the Republicans in 2017, and they can’t touch Obamacare, but they still want to fiddle with it, and they like cutting taxes, so they cut the Obamacare penalty/tax.

Again … choose the metaphor that works for you … keep your eye on the ball … don’t let the magician misdirect your attention … see through the smoke and mirrors.

The liberals/progressives/Democrats have tried to paint this as a reduction in healthcare. It isn’t. The people who were choosing to pay the penalty/tax were already committed to paying for their own healthcare (admittedly, they may not have been planning on paying very much for it, or as much as others might like). But consider this: is it conceivable that they’d pay less if they have more money? Probably not, particularly given the mountain of evidence on the income elasticity of healthcare demand. As much as some may hate to admit, any reasonable estimate a few years down the road is going to find that the Republicans tax reform increased spending on healthcare for many people in the economy.

But, this tax reform definitely funnels money in a direction that Obamacare did not intend. So it’s going to reduce healthcare spending for those segments of the economy whose bills are mostly paid for by deep pockets: private insurers, pharmaceutical companies, and the federal government. In a real sense, this is a “starve the beast” policy choice from Republicans.

From a Keynesian perspective, this tax reform is probably slightly expansionary since it will cut tax revenues. From a supply-side perspective, it is probably slightly expansionary since it reduces the incentives for tax avoidance.

Is it a smart move? Probably not. Obamacare was an attempt to improve the flow of funds, with a ridiculous amount of window-dressing about equitability. (Get this picture: no one wanted a tax increase, especially from Democrats, especially right after a huge recession … so it absolutely had to be covered up with warm fuzzy feelings). The flow of funds problem is still there, and the Republicans probably made it worse, and don’t seem to have the willpower to make another run at improving it. Unfortunately, the progressives/liberals/Democrats have spent so much time focused on the window-dressing that they’re not thinking clearly about the primary goal any more.

I’m not sure what the right metaphor for all this is. Maybe the Democrats brought home a stray dog and a stray cat, and the Republican ran the dog off so they don’t have to feed it, and the Democrats are claiming that this hurt the cat. On purpose! Except the Republicans didn’t hurt the cat, because they barely noticed it at all. But the dog is stray again and neither party is paying it much attention. It’s not a great metaphor, but it gets at the idea that neither party is acting well, or being honest about the realities.

P.S. And one last personal note on this. I don’t think the Democrats were very open and honest about the penalty back when this was passed, and they got help from conservatives on the Supreme Court to keep it in place. It’s hard not to say they all probably had this coming. It was kludgy from day one.

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