Health Reform’s $550B Hidden Costs to Taxpayers

 

Pop Quiz: if McDonald’s offered a 30 percent discount on hamburgers, would consumption increase, decrease or remain unchanged?

If you said “increase,” you understand a basic principle of economics that most Americans with common sense realize even without completing Econ 101. The idea that “if you tax something, you get less of it” is the same principle in reverse. Yet Congress completely ignored this truism in passing the health bill last March.

Notwithstanding President Obama’s firm pledge to the contrary, “Obamacare” included a plethora of new taxes that will impact Americans at all income levels. Indeed, less than half the revenue raised by Obamacare comes from taxes explicitly limited to high income households ($200,000 for individuals/$250,000 for families).

The remaining new taxes affect all consumers and include levies on prescription drugs, medical devices, health insurance providers and even tanning parlors. These and related revenue increases amount over 10 years to more about $225 billion (over $700 per U.S. resident), an enormous burden on the economy.

It is bad enough that the President would violate so flagrantly his own repeatedly-stated tax pledge. Even worse, Congress completely ignored hundreds of billions of dollars in hidden costs related to these taxes. Recall that virtually any increase in taxes results in lost production. So if we tax prescription drugs and medical devices, fewer people will buy them. The net dollar value of this lost production is called “deadweight losses” by economists, but it’s simpler to call it a social welfare loss.

This may seem trivial. However, economists have figured out that for every additional dollar imposed in new federal taxes, social welfare losses amount to 42 cents per dollar of new tax revenue collected.

Thus, every dollar of tax-financed spending really costs society $1.42 — one dollar in visible transfers from taxpayers to the government and another 42 cents in hidden losses related to unseen goods and services that would have been produced but for these added taxes.
You would think that Congress would take into account such massive hidden losses when debating proposals as expensive as health reform. Yet it does not. By ignoring these costs, the true costs of health reform — even if accepting the unrealistic way in which the bill was scored –were probably $157 billion higher than advertised.

But the bill also included Medicare and Medicaid savings that even the Medicare actuary has said “may be unrealistic,” along with an assumed 21 percent reduction in physician payments that no one expects to happen. Including the added taxes needed to cover $550 billion in savings never realized or to pay the roughly $300 billion needed over 10 years for a “doc fix” to avert deep cuts in physician pay, the overall hidden social welfare costs of taxes needed for health reform would rise to $550 billion.

Imagine you were a member of Congress who reluctantly cast a vote for health reform because Presidential arm-twisting persuaded you that the benefits exceeded costs. Had you been aware that the true cost of the bill was at least half a trillion dollars more expensive, might that have changed your vote?

It is distressing to think that such a massive cost would have made no difference in how some members of Congress evaluated this plan. Health reform barely passed the House. Yet a mere four more “no” House votes would have defeated it.

It is plausible to believe the outcome would have been different had Congress been made aware of the enormous, hidden costs embedded in this bill. Like the consumer who jumped at McDonald’s 30 percent off sale, Congress passed a plan that appeared to be about 30 percent cheaper than it actually will be after purchase. And now, we all are beginning to pay the price for this hasty and ill-informed decision.

Conover is a research scholar at the Center for Health Policy and Inequalities Research at Duke University.

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