Economics

Dear GOP: Tax Credits Are Not the Answer

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If you like social engineering done through the tax code, you'll love the House Republicans' health care plan. It takes the refundable tax credit that Obamacare provides to most people who get their coverage through a government-run insurance exchange and replaces it with a refundable tax credit available to anyone who buys a plan on the individual market. This would make our already nightmarish Internal Revenue Code even more complicated and tax season even more painful.

Regular tax credits allow an amount to be deducted directly from income taxes owed. Unfortunately, they're often poorly designed: They introduce unnecessary complexity and ambiguity to the tax code while usually failing to properly target the desired activity or population. In addition, while tax credits can seem lucrative to their recipients, they're often counterproductive for the economy as a whole.

Take, for example, the federal credit extended to U.S. companies for research and development. It is one of the largest corporate tax carve-outs in our tax code, amounting to about $9 billion a year. It's also an archetype for how these efforts can go wrong.

The benefits of the R&D credit are highly concentrated—the top 1 percent of American firms claim more than 82 percent of associated dollars. And because the design of the credit is so complex, companies must redirect scarce resources away from producing something of value to their customers and toward securing the handout. "Because the credit cannot be precisely defined, businesses are incentivized to spend large amounts of time and money lobbying Congress and tax regulators to ensure the credit is renewed and tailored to suit their specific interests," the Mercatus Center's Jason Fichtner and Adam Michel explained in a 2015 paper. "Significant resources are also wasted as parties attempt to interpret, litigate, and follow the law."

Despite the costs, there's no proof the R&D credit leads to significantly more or better innovations.

"Refundable" tax credits—the kind that become cash transfers from the government to people who don't owe any taxes—have all the same problems as regular tax credits, and on top of that require actual government outlays. According to a Congressional Budget Office report, the feds this year will receive $238 billion less than they otherwise would (in 2013 dollars) because of tax credits, including needing to make some $150 billion in direct expenditures.

The Earned Income Tax Credit (EITC), a darling of both parties, is even more lopsided. The program, which offers a wage subsidy to low-income workers, provides roughly $70 billion in annual benefits, $60 billion of which counts as government spending. Meanwhile, 94 percent of the current Obamacare tax credit takes the form of outlays, according to the Cato Institute's Michael Cannon, and the Republican substitute would likely be similarly expensive.

It is wrongheaded and paternalistic to use the tax code as a system of reward or penalty, as opposed to just being a means of raising revenue while introducing as few distortions as possible to the economy. The GOP's proposed health care tax credits are no better in this regard than the long-decried individual mandate, which punishes people for not buying a product Washington wants them to.

We already have a long list of tax credits meant to influence our behavior, nudging us to have more kids, save more money, drive electric vehicles, buy a house, go back to school, and more. Politicians justify the credits as either promoting good things (such as homeownership) or discouraging bad ones (such as pollution from fossil fuels). But as the economists Ed Lazear and Jim Poterba wrote back in 2005, "Such arguments are usually difficult to support with empirical evidence, and they lead to special privileges and a myriad of tax breaks that are likely, on balance, to reduce the efficiency of the tax system."

Republicans, who currently hold majorities in both the House and the Senate, regularly claim they want a fairer, simpler tax code. But the credits they seem to love are far more likely to be the product of special-interest lobbying than a careful study of social externalities.

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  1. It is wrongheaded and paternalistic to use the tax code as a system of reward or penalty, as opposed to just being a means of raising revenue while introducing as few distortions as possible to the economy.

    But this is what you get when you elect politicians whose main skill set is the ability to win elections. They always want to “do something” even if leaving bad enough alone is almost always the best course of action. Spontaneous order is the preferred outcome for most people – that’s how spontaneous order arises, it’s the amalgamation of what most people agree is the best course of action – but spontaneous order requires no shepherds to herd the sheep and what is the point of being elected to high office if you can’t use the power of the office to impose your will on everybody else?

    1. Getting bills passed is like a market. You don’t dictate terms to the market. The market dictates terms to you.

      Of the twenty Republicans who voted against the bill in the House, almost all of them were from swing states: Pennsylvania, Ohio, Florida, etc.

      If the market won’t buy what you’re selling at the prices you need, then you can’t sell that.

      It’s up to Veronique de Rugy, Ken Shultz, and Jerryskids to make the American people want more free market healthcare. In the meantime, saying that we could have made a bigger profit if only we’d sold the same concepts at higher prices misses the point that the legislative market wouldn’t buy what we’re selling at higher prices.

      217-213 was the vote. Four votes less, and we’d still have the individual mandate and the Medicaid expansion. If this bill gets through the Senate, we’ll be getting rid of the individual mandate and the Medicaid expansion. When’s the last time Congress voted to kill entitlement spending like that? We should be celebrating.

      1. You don’t dictate terms to the market. The market dictates terms to you.

        And it would appear that the market – the people, constituents, voters, whatever euphemism you like – has given up the argument over whether govt should be involved in health care at all. The debate now seems centered on the extent of the involvement.

        The sad reality is that something as stupid simple as a lifting of the prohibition on interstate sales or ending mandates wherein group plans must cover things regardless of whether consumers want them has not only not occurred, there’s not even been a proposal put on paper for doing either.

        1. “The sad reality is that something as stupid simple as a lifting of the prohibition on interstate sales or ending mandates wherein group plans must cover things regardless of whether consumers want them has not only not occurred.”

          Without going into too much detail, the biggest reason why selling insurance across state lines can’t work right now is because of Medicaid, and the best thing we can do to get closer to the day when that’s possible is to cut Medicaid.

          The House bill kills the ObamaCare Medicaid expansion. That is a necessary step before we can move to cut Medicaid even further.

          Group plans will no longer be forced to cover certain things–that problem is addressed specifically in the House bill.

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          2. I’m making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life.

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        2. great points. I will not buy health insurance until I can buy what I want and exactly what I want. I pay as I go, cash. If we would all opt out, things would change.

      2. But the individual mandate was the only spider-silk thread tethering the whole thing to the concept of financial solvency. Without that Trumpcare is, instead of paying a nominal level of lip service to the idea of paying for what you spend, nakedly insolvent. Obamacare was a lot of bad things and I don’t think anyone here is willing to defend it as a good or right policy that was not enormously wasteful and financially untenable, but it’s hard to argue that it made an attempt (a bad one, but still) to pay for itself.

        There is nothing like that to the republican plan. It’s simply a bunch of handouts. We’ve gone from “tax and spend” democrats to “don’t tax but still spend” republicans. I don’t see how the lack of taxes is worthy of celebration.

        1. “But the individual mandate was the only spider-silk thread tethering the whole thing to the concept of financial solvency.

          The individual mandate was meant to compensate insurance companies for all the money they get gouged by providers to cover the losses providers suffer for treating Medicaid patients.

          Killing the ObamaCare Medicaid expansion obviates the need for the individual mandate.

          Please look at this graph and understand what it’s saying:

          http://www.aha.org/research/re…..art4-6.pdf

          . . . understand what it’s saying about the charges to various payers relative to costs.

          Medicaid and Medicare only reimburse providers for a fraction of the cost of treating patients. Providers are then expected to gouge private insurers for almost 50% above cost (on average) in order to make up for the losses they take treating Medicare and Medicaid patients.

          The purpose of the individual mandate was to force young people to buy insurance they wouldn’t use in order to insulate insurers from the shock of being gouged even further from the ObamaCare expansion of Medicaid. If we get rid of the ObamaCare Medicaid expansion, that individual mandate is no longer necessary.

          The House bill is one of the few times in my life I’ve seen Congress do something that actually addresses the ultimate cause of the problem.

          1. Are you seriously implying that rolling back the medicaid expansion will just magically pay for the death trap of guaranteed issue? Yes, states can opt out, but I don’t see many doing that because it’s politically toxic.

            1. I’m saying that other “solutions” will never be effective so long as providers are gouging insurers by some 50% above cost in order to make up for the losses they suffer because of Medicare and Medicaid.

              You cannot give away more than half the country’s medical resources at a discount–and expect there not be huge market distortions. The exorbitant cost of insurance is one of those distortions. There are others.

              Once again please look at the link above. Understand what that graph means.

              What reform is going to make it so that private insurers are no longer competing with each other to offer you an insurance policy that covers 150% of the cost of care? There is only one solution that addresses that problem, and that solution is to cut Medicare and/or Medicaid.

              This bill rolls back the ObamaCare Medicaid expansion. Look at the chart. Tell me why that WOULDN’T address the problem. Did you know that 16 hospitals in New York’s high Medicaid concentration areas have closed over the last 15 years because 1) Medicaid only pays for a fraction of the cost of care and 2) in poor neighborhoods, there aren’t enough privately insured patients to make up for the difference?

              http://citylimits.org/2017/01/…..cs-health/

            2. How ’bout this stat?

              “Mayo told STAT that it lost $546 million in indigent care and in unpaid Medicaid portions in 2016 and $1.8 billion in unpaid Medicare portions.”

              http://tinyurl.com/lq7vf4n

              They made up for those losses by overcharging private pay patients.

              How else could they?

              What is another way to address that problem besides cutting Medicaid and Medicare?

              Obama tried forcing young people to buy insurance that wouldn’t use it to try to bolster the insurers. Not only did it not work–it’s morally reprehensible for the government to force people to buy things specifically because they don’t need them.

      3. Four votes less, and we’d still have the individual mandate and the Medicaid expansion. If this bill gets through the Senate, we’ll be getting rid of the individual mandate and the Medicaid expansion.

        I don’t understand why libertarians and conservatives care about repealing the individual mandate if they’re just gonna put some dressing and reimpose it. I mean, I’m no fan of Obamacare, but the GOP (or conservatives in general) doesn’t have much of a plan other than Obamacare-lite. Mandating catastrophic coverage is basically the individual mandate sans the community ratings provision, and high-risk pools are just a giant money pit. I just don’t see it being that much better.

        1. What are you talking about mandating catastrophic coverage?

          Who’s doing that?

          Do you have a link?

          Or are you saying this is something that will happen in the future as a result of . . . getting rid of the individual mandate?

          Please note that the individual mandate is morally unconscionable from a libertarian perspective. Using the coercive power of government to force people to eat broccoli is morally indefensible from a libertarian perspective.

          There are lots of things like that. Execution is less expensive than life imprisonment. So what? Who said protecting people’s rights was going to be inexpensive? Providing defense attorneys at public expense is expensive–so what? Justice requires that expense. The Fourth Amendment is a pain in the ass. So is the First Amendment for that matter. Respecting people’s rights is a pain in the ass.

          So freedom and justice and respecting people’s right to make choices for themselves is an expensive pain in the ass . . . so what?

  2. If for no other reason, from this libertarian’s perspective, the GOP plan is superior to ObamaCare because it eliminates the imposition of an 800,000% marginal income tax rate at 400% of poverty line.

    I do not benefit from the GOP plan. The sum of my income taxes plus my premium costs will go up under the GOP plan, so I would be paying more under the GOP plan were it to be enacted. However, I obtain the favorable outcome under ACA is accomplished only because I really don’t need the money I earn from self-employment for current living expenses and can turn down work at year-end if AGI approaches 400% of poverty line. For somebody in a less financially facile situation, i.e. about 90% of the population, such a situation does not exist.

    The structuring of premium subsidies under ACA is simply obscene, and it’s hard to imagine anything that would not be an improvement. ACA was designed to fail forward into single payer. As bad as single payer is, it would not be as anti-libertarian as ACA is at 400% of poverty line (as long as it isn’t Canadian-style single payer where private-pay options are forbidden by law.)

  3. The GOP plan is unlibertarian because it continues to insert the state into problems that are better solved, and can only be equitably solved, by free markets. If it wasn’t obvious already, the behavior of the GOP since January reveals that there is very little that is libertarian about the GOP and that their agitation against statist intervention in health care was for show.

    1. According to Americans for Tax Reform:

      -Abolishes the Obamacare Individual Mandate Tax which hits 8 million Americans each year.
      -Abolishes the Obamacare Employer Mandate Tax. Together with repeal of the Individual Mandate Tax repeal this is a $270 billion tax cut.
      -Abolishes Obamacare’s Medicine Cabinet Tax which hits 20 million Americans with Health Savings Accounts and 30 million Americans with Flexible Spending Accounts. This is a $6 billion tax cut.
      -Abolishes Obamacare’s Flexible Spending Account tax on 30 million Americans. This is a $20 billion tax cut.
      -Abolishes Obamacare’s Chronic Care Tax on 10 million Americans with high out of pocket medical expenses. This is a $126 billion tax cut.
      -Abolishes Obamacare’s HSA withdrawal tax. This is a $100 million tax cut.
      -Abolishes Obamacare’s 10% excise tax on small businesses with indoor tanning services. This is a $600 million tax cut.
      -Abolishes the Obamacare health insurance tax. This is a $145 billion tax cut.
      -Abolishes the Obamacare 3.8% surtax on investment income. This is a $172 billion tax cut.
      -Abolishes the Obamacare medical device tax. This is a $20 billion tax cut.
      -Abolishes the Obamacare tax on prescription medicine. This is a $28 billion tax cut.
      -Abolishes the Obamacare tax on retiree prescription drug coverage. This is a $2 billion tax cut.
      Read more: http://www.atr.org/list-obamac…..z4gJNGCQY3

    2. The GOP plan is unlibertarian because it continues to insert the state into problems that are better solved, and can only be equitably solved, by free markets.

      Sadly, that part of the argument has been lost; it was never embraced by the left and now it has been ceded by the right. We’re now left debating the extent of involvement, meaning the libertarian argument has lost in the marketplace of ideas. I have no issue with the argument, largely because govt’s past track record hints that it will fuck this up as well, but Ken above makes a reasonable point in saying you have to grab incremental gains when it is possible.

      1. do not buy health insurance. opt out. everyone. pay as you go. Make payments to doc or hospital if necessary.
        instead of payments to ins co, make payment to hospital or doc. Then things will change.

        1. Yes and no.

          For some of us we at least have the option for direct primary care. Hospitals though…

  4. The GOP plan is unlibertarian because it still inserts the state into a problem that can be better solved, and can only be equitably solved, by free markets. If it wasn’t obvious already, the behavior of the GOP since January reveals that there is very little that is libertarian about the GOP and that their agitation against statist intervention in health care was for show.

    Still, the GOP plan does amount to a huge reduction in taxes.

    1. According to Americans for Tax Reform:

      -Abolishes the Obamacare Individual Mandate Tax which hits 8 million Americans each year.
      -Abolishes the Obamacare Employer Mandate Tax. Together with repeal of the Individual Mandate Tax repeal this is a $270 billion tax cut.
      -Abolishes Obamacare’s Medicine Cabinet Tax which hits 20 million Americans with Health Savings Accounts and 30 million Americans with Flexible Spending Accounts. This is a $6 billion tax cut.
      -Abolishes Obamacare’s Flexible Spending Account tax on 30 million Americans. This is a $20 billion tax cut.
      -Abolishes Obamacare’s Chronic Care Tax on 10 million Americans with high out of pocket medical expenses. This is a $126 billion tax cut.
      -Abolishes Obamacare’s HSA withdrawal tax. This is a $100 million tax cut.
      -Abolishes Obamacare’s 10% excise tax on small businesses with indoor tanning services. This is a $600 million tax cut.
      -Abolishes the Obamacare health insurance tax. This is a $145 billion tax cut.
      -Abolishes the Obamacare 3.8% surtax on investment income. This is a $172 billion tax cut.
      -Abolishes the Obamacare medical device tax. This is a $20 billion tax cut.
      -Abolishes the Obamacare tax on prescription medicine. This is a $28 billion tax cut.
      -Abolishes the Obamacare tax on retiree prescription drug coverage. This is a $2 billion tax cut.
      Read more: http://www.atr.org/list-obamac…..z4gJNGCQY3

  5. It’s important not to miss the forest for the trees.

    The important aspect of this is the way the House healthcare plan moves people from Medicaid to the private insurance markets. That isn’t just about getting rid of the ObamaCare Medicaid expansion; that’s also showing us the way forward to getting rid of Medicaid entirely.

    Giving people subsidies to buy healthcare from a private insurer instead of Medicaid is exactly like giving people vouchers to go to a private school instead of public schools. It’s a good things for all the same reasons school vouchers are a good thing–only more so because public schools don’t distort the market for private schools as badly as Medicaid distorts the private health insurance market.

    I’d rather the government got out of education entirely, but if they aren’t going to do that, then Milton Friedman had a suggestion. I’d rather the government got out of healthcare entirely, but if they aren’t going to do that, effective vouchers is probably the next best thing.

    1. I’d suggest the forest in this case is that the GOP is just as statist and collectivist and paternalistic in their love for Big Government as the Dems. We’re all socialists now, Bernie is not some outlier in the scheme of American governance. It’s just a difference of degree, not of kind.

      1. “I’d suggest the forest in this case is that the GOP is just as statist and collectivist and paternalistic in their love for Big Government as the Dems.”

        That observation is completely divorced from reality if it’s based on this bill.

        The bill sunsets the ObamaCare Medicaid expansion and kills the individual mandate. The Democrats are univsally opposing the bill for that reason.

        If anything, you’re just as collectivist and paternalistic in your love for Big Government as the Democrats–if you oppose this bill. I guess there might be a difference between you and them if you’re completely out of it because of your misconceptions.

        How can killing the individual mandate be as statist and collectivist as opposing getting rid of it?

        How can killing the ObamaCare Medicaid expansion be as statist and collectivst as opposing getting rid of it?

        You’re delusional at best.

        1. I may very well be delusional but it doesn’t change the fact that the heart of this whole issue is “How should the government fix the problems with healthcare delivery?” and that’s what we’re arguing about. Never mind the fact that many of the problems with healthcare delivery are caused or exacerbated by government intervention and the GOP has long claimed to be aware of the fact that government intervention frequently causes more problems than it solves. The GOP campaigned for 6 damn years on repealing Obamacare and now that they have everything they claimed they needed to get the repeal done they’re admitting that “If you don’t like your universal healthcare, you don’t have to keep your universal healthcare” was as big a lie about Obamacare as any other.

  6. It’s also important to remember that this bill passed the House by four votes. If anything had been changed, it probably wouldn’t have passed. It’s the way it is–because that’s the only way it would pass.

    The question isn’t whether the bill could be better–a better bill wouldn’t have passed. The question is whether we want to get rid of the individual mandate and the Medicaid expansion–and this bill deserves the support of libertarians for doing that.

  7. The Republicans and Democrats were the same party until 1824. Then they split. They write the rules for Presidential elections so no other party gets a fair shake. They always vote in unison when it comes to striping you of your liberty, pay raises, pensions and more Government. They will never vote for term limits, smaller government or less war. Socialize medicine only benefits insurance companies and hospitals. War only benefits multi national corporatons and banks. You John Doe citizen get the honor of paying for it with your tax dollars and/ or your life or limbs while the Trumps, Bush’s, Clintons and their crony capitalist get all the rewards.

  8. the feds this year will receive $238 billion less than they otherwise would (in 2013 dollars) because of tax credits, including needing to make some $150 billion in direct expenditures.

    Does “including needing” mean “and need”? Or does it mean the net difference is $238B, of which $150B is in expenditure, $88B in revenue?

    Could this have been written any more confusingly?

  9. As someone who actually participated in the obamacare exchange I see this legislation as a huge improvement. The exchanges are exactly the kind of inefficient, customer hostile enterprises that government always produces. Imagine buying insurance at the DMV. The “tax credit” described above is actually a straight forward payment to a third party, the insurance company. It does not lower your tax burden and if you’re above poverty level, it will not cover the inflated premiums and out of pocket costs dictated by Obamacare compliant coverage. The individual mandate forces anyone without health insurance (not to be confused with health care) to become an actor in this theater of the absurd, or cough up significant dollars to the U.S. Treasury.
    At the very least, individuals will be able to decide if the cost of benefits is worth it to them. That’s how a market works. If I decide to buy, I can sit down with an agent and find a plan that makes sense for me. That’s how a market works. If I qualify for a tax credit I will absolutely, and without any guilt, put that number on my 1040. That’s how economic incentives work. If I have an HSA I can shop for a better deal. Well no, I can’t do that because healthcare providers can’t or won’t quote a price.
    In any case, I fully expect the healthcare monstrosity to collapse under it’s own weight within a decade but the shitty Republican plan is a little less shitty than Obamacare.

  10. How can it be so impossible to realize you are elected to REPEAL?

    One simple statement. “Obamacare (use actual legal definition), and all regulations created in it’s implementation, are null and void effective 12/31/2018.

    Now the stupid republicans own the entire Obamacare fiasco, state control, deficits, and all.
    And after all that angst, the senate is going to modify it, and it will (probably) fail in the resolution committee.

    1. Because they actually weren’t. Trump promised that people could keep all the good parts of Obamacare (people actually being able to get health insurance) while eliminating all the parts people didn’t like (which is what paid for everyone getting health insurance)

  11. Ok, wait a minute. As long as we’re handing out refundable tax credits isn’t it better to make them apply to *everyone* who buys a health insurance plan, not just one through the ACA?
    It seems to me that only making it available through exchange does MORE social engineering, since those plans are highly socially engineered to have what progressive believe are desirable features. So that making it available for ANY plan removes the incentive to buy the socially engineered ACA plan.

    Yes, it would be better to repeal the tax credits entirely – but that option seems politically infeasible. We can’t really pull the rug out from under people on ACA plans. We can however do something to neutralize the incentive to buy via the exchange.

  12. Ok, wait a minute. As long as we’re handing out refundable tax credits isn’t it better to make them apply to *everyone* who buys a health insurance plan, not just one through the ACA?
    It seems to me that only making it available through exchange does MORE social engineering, since those plans are highly socially engineered to have what progressive believe are desirable features. So that making it available for ANY plan removes the incentive to buy the socially engineered ACA plan.

    Yes, it would be better to repeal the tax credits entirely – but that option seems politically infeasible. We can’t really pull the rug out from under people on ACA plans. We can however do something to neutralize the incentive to buy via the exchange.

    1. Employer-provided coverage is already tax-favored. I haven’t read any good analyses of exactly how the AHCA credits compare to the exclusion of employer-provided from income, but I think the general idea was that giving everyone the credit would double-reward those who get their insurance from their workplace.

  13. RE: Dear GOP: Tax Credits Are Not the Answer

    Correct.
    Eliminating the onerous IRS and replacing it with something like a national sales tax is the answer.
    Too bad the republicans are too stupid to figure this one out…again.

  14. Dear Reason: Government Is Not the Answer

    Government is not reason, it is fire. Government creates nothing rather it consumes at the expense of the governed.

  15. “”Refundable” tax credits?the kind that become cash transfers from the government to people who don’t owe any taxes?have all the same problems as regular tax credits, and ”

    This doesn’t read well. I think I understand what you mean: owe being that the taxpayer literally did not have any tax burden to the federal government as per IRS code that year – their total tax was $0. The correct term for that is “no tax liability” not “don’t owe”. Most people permit over-withholding and don’t owe anything at the end of the year, because for some reason it is fun to provide the State an interest free loan and then get excited about a “refund” of their own money that could have been used to pay down debts during the year.

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