Tag Archives: taxes

Can’t repeal economics — health insurance

1 Mar

How does health insurance work? Individuals (or an organization on behalf of the individual) pay a premium to a company. If the individual falls sick the insurance company pays for health care. Sounds simple, but what is the insurance company’s business model here?

Healthy people pay premiums. That is the insurance companies revenue stream. When they fall sick the insurance company pays for healthcare — that is (along with administrative expenses) the insurance companies costs. Profits = Revenues – costs. The insurance company has an incentive to keep costs low and revenues high.

Notice that for the insurance business model to work healthy people are necessary as a revenue source. But what sort of person would prefer not to buy insurance? Well healthy people of course because they don’t think they need it. By the same token sick people would want insurance. This dynamic is not good for the insurance companies bottom line. That is why insurance companies would like to charge more for older people or sicker people (for example those with preexisting conditions) though ideally it would be best to not have these high risk categories on their rolls at all.

Older Americans are covered under government run Medicare since they add to insurance companies costs. Before ACA insurance companies could refuse coverage to people with preexisting conditions. Now they cant. Healthy people therefore cross subsidize people with preexisting conditions and as a result high risk people have a lower premium than they would otherwise have while healthy people have a higher premium. This is a risk pool and left alone it is not stable. Healthy people are paying more than they want to so they quit buying insurance. This reduces revenues and profits for insurance companies. So they raise premiums. This makes more healthy people leave. And the insurance company goes out of business. Healthy people are needed to cover expenses for sick people and a little bit more. But for everyone — both sick and healthy — to be covered healthy people have to be “incentivized” to buy insurance. In any case, any policy to add more people to insurance rolls implies that sicker people are more likely to apply while healthy people will not. This unraveling of the risk pool destroys the insurance business model. The only way to get around that is to “incentivize” healthy people to join the insured ranks.

The ACA does that by penalizing people who do not have health insurance. The various replacement plans floating around seem to want to give tax credits for those who join. They are essentially the same thing. Consider someone who has to pay a $1 penalty if she does not buy insurance. That $1 of her money she does not have — a penalty she can avoid by buying health care. Now consider the $1 tax credit. If she does not buy the insurance she loses $1 of her own money as taxes — a penalty she can avoid by buying insurance!

Can’t repeal economics. Sigh!


“Border Adjustments” Tariffs Whatever

19 Feb

I do not understand why Mr. Trump and his GOP want to raise taxes on the American people.

Mr. Trump wants to hike import tariffs. His congressional Republican lackeys call it a “border adjustment.” Either way this tax will make goods and services more expensive for American consumers while their touted “benefits” are murky.

For example, a fall in the trade deficit is touted as one such “benefit”. However, this fall will ALWAYS be balanced by a fall in foreign capital investment in the US. Thats just how national income accounting works. Well that’s also fewer American jobs.

Another effect might be a devaluation of the US dollar because of a fall in demand for US assets. That makes our exports more competitive while making imports more expensive. Since many of the goods we make in the US have foreign inputs the net effect of all of this on American jobs and wages is murky.  Moreover, a fall in demand for US assets like T bills puts upward pressure on interest rates. Higher interest rates translate into less US capital investment and fewer American jobs. These higher interest rates could be neutralized by asset purchases by the Fed. But that could end up being inflationary.

Supporters of the “Border adjustment” claim that any inequity in the border adjustment will be negated by a rise in the value of the dollar. Well thats not so certain given the possibility I raise above. In fact anyone who claims they know exactly what will happen to exchange rates is at best wildly optimistic!

Advocates also keep talking about the border adjustment as “trade neutral”. Thats a lie. The whole argument for the border adjustment is that it helps import substitute and export industries while penalizing American businesses which use imported inputs. In fact even advocates say that prices of all goods will rise (see https://taxfoundation.org/understanding-house-gop-border-adjustment/). Which of course it would! In other words it is a tax on the American people.

Of course, US tariff increases will be matched by other countries. This trade war will impoverish everyone.

Not so long ago Republicans understood that government intervention in business decisions was a bad idea because the economy is complicated. As a result, policies have complex and often unintended effects. This was one argument for small government that did not promote grandiose policies with ever cascading unintended consequences. Republicans need to remember that idea. Executive orders or even legislation cannot repeal economics.

How about a flat destination based corporate income tax without any border adjustment? That would encourage American businesses to relocate to the US. It would increase demand for American goods and American workers. And all without the inevitable price hikes from so called “border adjustments.”

Taxes and…..

28 May

Alan Simpson told Fareed Zakaria that any one who thinks that the current deficit problem can be solved without raising taxes (in some form — either directly or indirectly through inflation and/or high interest rates) has rocks instead of brains. I like the salty rhetoric. But is it true? I suppose it depends on beliefs about the short and long run.

By and large most economists would believe that economies where the government has a light touch — creating and protecting basic institutions that promote economic freedom — are more likely to generate prosperity. Low taxes are part of this mix since taxes are how governments extract rents from creative individuals. Of course there is an optimum amount of taxation necessary to protect the aforesaid institutions. But this is a long term view. As of now we have increasingly an extractive political economy. Rising inequality in the US does not help. Some inequality is of course good since it provides an incentive to work (as a recent book by a Bain Capital colleague of Mitt Romney’s rightly claims). But as inequality increases it enables a class of wealthy individuals to capture the legislative process to their favor. This is a fundamentally anti capitalist process which starts a vicious cycle that reinforces both extractive political and extractive economic institutions (Acemoglu and Robinson make this case in their recent book “Why Nations Fail”). At any rate, the rising deficit also extracts wealth from the economy and the ROI on this deficit spending is at best unclear. But taxation is an extractive process as well. One obvious solution is to get rid of all transfers (social security, medicare, etc.) and gut military spending. But this appears to be politically unfeasible. Another solution is to raise tax REVENUES by simplifying the tax code and cut spending at the same time. This would reduce the power of extractive economic institutions. This is effectively the Bowles Simpson approach and the approach that President Obama claims as his own. Then there is the Mitt Romney approach — cut taxes on his first day in office and do very little for spending. Cutting taxes may appear to be a blow against extractive economic institutions. But runaway spending will continue. Remember that even Paul Ryan’s so called revolutionary plan merely limits the GROWTH of spending! Thus the deficit may be expected to rise. In other words the rise of extractive institutions will in fact be abetted by tax cuts! Current, stated, Republican policy may appear to disfavor extractive political institutions (the tax cuts) but in reality will increase their power (by doing very little for the deficit). Why?

One answer may be that the Republican party has been captured by wealthy interests who wish to capture the legislative process and jumpstart a system of extractive political and economic institutions. In other words, its not a question of rocks instead of brains. This is very intelligent rent seeking at work. I think I disagree with Mr. Simpson. Republicans are not stupid.

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