David R. Henderson  

Are Taxes "Passed On"?

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Suits vs. Geeks Watch... Conservative != Libertarian...

In arguing with the recent study done by Price Waterhouse Coopers for the American Health Insurance Plans (AHIP), the White House bloggers say the following:

AHIP CLAIM: Fees on health insurance providers, pharmaceutical manufactures and device makers will be passed through to individuals and families.
REALITY: This claim does not withstand scrutiny for at least three reasons:
First, the idea that every dollar of assessment will be passed on to consumers is not credible - especially given the policy design. The policy assesses a flat amount per year, paid by companies based on their market share, beginning in 2010. The AHIP assumption that they will accumulate the amount of these fees and pass them along in a lump sum to enrollees later simply does not make sense.

Unfortunately, we can't say whether the bloggers have stated AHIP's claim accurately because the only thing we have access to is not the Price Waterhouse study but, rather, a 26-page report that gives their conclusions with no actual analysis. I doubt that AHIP claimed that "every dollar of assessment will be passed on to consumers." If AHIP did say that, it would mean that Price Waterhouse assumed that insurance companies' marginal cost curves were horizontal (actually, that's somewhat plausible) and that the insurance companies have zero market power (that's less plausible). But whatever is true about costs and market power, any per unit tax is passed on at least somewhat to consumers unless the supply curve is vertical or the demand curve is horizontal. Who believes either of those?

Also, I doubt that AHIP said, as the White House bloggers said, that "they will accumulate the amount of these fees and pass them along in a lump sum to enrollees later." I don't even know what passing "them along in a lump sum" means. A lump-sum tax will not be passed on if it does not force out any marginal firms. But the White House's own statement above says that it would be an incremental tax, not a lump-sum tax. In the White House's own words, "The policy assesses a flat amount per year, paid by companies based on their market share, beginning in 2010." If the tax is based on market share, the way to reduce the tax is to shrink. That makes it an incremental tax.

H/T for White House blog to Charley Hooper.


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COMMENTS (7 to date)
MBP writes:

White House bloggers make even less sense then you give them credit for. Read point number 2:

"Second, these fees are intended to recapture part of the benefits these businesses will get from reform. No one disputes that newly insuring nearly 30 million more Americans will increase their access to needed services – translating into new business for insurers, drug companies and device makers and other providers. This new revenue would far exceed the amount of the new fees – so if you believe that they will pass along the new assessment, they will also pass along their new windfall to consumers."

The "fees" are not tax deductible and will be paid out of after tax net income. Yet the WH bloggers compare fees to new revenue. The appropriate question is not whether fees will be offset by revenue but whether fees will be offset by incremental profit. Since the fees apply to all members of insurers, not just new members, the WH claim is dubious. Insurers' after tax margin is about 4-5%, so i'm skeptical the fees will be offset by incremental profit. The right question is whether (4-5%) * new revenue > fees.

Further, why wouldn't insurers at least attmept to pass on most or all of the fee to customers? It's similar to a new mandate. When state gov'ts require insurers to provide mental health care or in vitro fertilization, insurers simply pass it on in the form of higher premiums accross their entire membership base. Since the new fees will apply to all firms, i imagine they would all raise their rates accordingly. If anything, the fees will further concentrate market share among larger companies that have better cost structures

MBP writes:

Even more amusing - the first paragraph of the WH blog post quotes Linda Douglas of teh WH Health Reform Office saying the AHIP report, "comes on the eve of a vote that will reduce the industry's profits"....so at the beginning of the blog reform will reduce insurer profits, but further down it will increase them. Can't do both.

David R. Henderson writes:

Well done, MBP. You're an MVP. :-)
David

CJ Smith writes:

Have we forgotten the term "doublespeak" from Orwell's Big Brother? Couldn't happen in our society, right? Excerpts from recent press releases on taxes:

"Reducing fraud, waste and corruption will generate $X in additonal revenues..."

"Tax collections remainded flat, but we cut budgets X%, generating $X% in revenue..."

and my favorite -
"We made across the board increases in fees, assessments, and charges, amended the rates upward on existing code provisions, and allowed existing exemptions and exclusions to sunset - but no new taxes!"

MBP, great observations that I'll have to add to this collection.

Steve Verdon writes:
First, the idea that every dollar of assessment will be passed on to consumers is not credible - especially given the policy design. The policy assesses a flat amount per year, paid by companies based on their market share, beginning in 2010. The AHIP assumption that they will accumulate the amount of these fees and pass them along in a lump sum to enrollees later simply does not make sense.

This is circular reasoning, or to restate the above in more simplified form:

Frist the idea that ever dollar of the assessment will be passed on to consumers is not credible. [Deleting irrelevant description] The idea does not make sense.

Doc Merlin writes:

Of course taxes are passed on. Any cost that is evenly distributed through a highly competitive industry will just get passed on. Highly competitive industries often run with very slim profit margins, anyway.

The case isn't the same for monopolies however, I suspect that for them less of the cost will get passed on to the consumer, and more of it will be felt by the stockholders. The actual distribution of who would bear what percent of the pain, would depend on the demand curve for whatever it is they are selling, however.

Doc Merlin writes:

Oh forgot to mention, health insurance usually runs on very small profit margins, iirc around 3%. So, yes, its likely the pain would be passed on to the consumer. Also, if the mandates pass, you can guarantee they will, because of the distortions in the demand curve.

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