The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

August 30, 2005

More On The Labor Compensation Issue

In yesterday's Wall Street Journal (page A9 in the print edition), Stephen Moore made an observation similar to the one emphasized in my previous post: While wage and growth has been pretty anemic  over the past several years, it is difficult to make the same case with respect to total labor compensation, which adds benefit payments to wages.

In his brand spanking new blog, Daniel Gross takes exception to one of Moore's comments (duly noted by Brad DeLong):

Stephen Moore, a member of the Journal's editorial board, writes in today's paper:

The explosion of benefits paid to workers is in large part an artifact of the federal tax code, which allows employers to deduct from taxes pensions, health care, child care, and the like, but not wages.

Read it twice. Stephen Moore apparently thinks companies can't deduct wages paid to their workers from their taxable income the way they can deduct pension, health care, and child care costs. And apparently nobody at the Journal's op-ed page knew enough, or thought enough, to correct him.

Maybe Dan is mainly upset, one newspaper guy to another, about sloppiness of any kind.  But the economics of the central claim -- that the tax code favors payment in non-wage form -- does not seem wrong to me.  While it is true that employers can deduct wage expense just as they can other employee costs, it is not true that wage payments and benefits are the same when they get into the hands of employees.  Wage payments are taxed, benefits are not.  When the tax system is taken as a whole, a pre-tax dollar delivered to employees in the form of benefits yields a higher net payout to workers than a dollar delivered in the form of explicit wages.  To me, that sounds like the type of tax distortion Moore was trying to describe.

On a (sort of) related point, in the comment section of the previous post Angry Bear's pgl takes me to task (probably with some justification) for not addressing an argument that he has made before:

In my 1st RBC post, I noted Kash's argument that the rise in real compensation is substantially due to more costly health insurance. Not better, just more costly. Why did I mention it? It's a supply side. And yet you don't note that this is the reason for the divergence between real wage growth v. real compensation. Huh?

The reason that I did not take note of it is that I'm not convinced the observation is relevant.  Health insurance is the largest single component of employee benefit expenditures.  For a given total amount of compensation, increasing payments in the form of more insurance expenditure means less in other forms -- including wages.  Whether we get more or less for those higher insurance expenditures is an interesting and important question, as is the question of whether the tax code is introducing welfare-degrading means of compensating workers.  But I don't think it has much to do with the question I was trying to address, which was whether or not the return to working has been growing at an abnormally low rate.

UPDATE: Angry Bear (the orginal!) notes that the offending passage has been corrected:

THE AUG. 27 feature, "The Wages of Prosperity," by Stephen Moore mistakenly reported that wages are not tax deductible to employers. The relevant sentence should have said, "Fringe benefits have exploded in recent years because benefits are tax free to employees, but wages are taxed."

AB is still not happy.

The corrected wording doesn't pass muster as an explanation for flat wage growth, either. Benefits have been tax free to employees, and wages have not, for as long as I can remember. So the ongoing taxability (to the employee) of wages but not benefits simply cannot explain why wage growth has been flat in the last 4 years.

The best I can do here is to simply repeat that I think it can.


August 30, 2005 in Health Care, Labor Markets | Permalink


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I think pgl really makes a point that is also in your chart in the earlier post. Real compensation (he would argue), when properly deflated, has not been rising significantly, whereas overall domestic product (per worker) clearly has been rising, no matter how you deflate it. Something – presumably something about the labor market – is causing workers to get the short end of the stick when it comes to dividing the proceeds from recent economic growth. This same point is made by noting that the compensation line in your chart has been consistently (and increasingly) below the productivity line in recent years.

I believe, however, that we are barking up the wrong tree by talking about (ex post) real compensation. To my mind, the whole basis for talking about labor market slack originates from the finding of very strong empirical links between “slack variables” (most typically the unemployment rate) and changes in the inflation rate. I’ll leave you and pgl to argue about the implications of the division of output between labor and capital, and whether policymakers can or should do anything about that, but I think we can all agree that more employment is generally a good thing if it doesn’t put upward pressure on the overall inflation rate. Therefore, the sense in which I would mean the word “slack” is that there is room for more employment without exacerbating inflation.

Thus, when I cite low help wanted advertising as evidence of slack, it is specifically with the knowledge that, historically, there is a strong correlation between help wanted advertising and changes in the inflation rate. (Indeed, the fact that help wanted advertising reached its all-time high in the late 1970s might suggest that oil prices are less important than one might think, both as a source of inflation and as a depressant to labor demand.) Of course, the correlation isn’t perfect, and it exhibits the same sort of instabilities as the inflation-unemployment correlation. However, when we take into account a variety of slack variables (e.g. average duration of unemployment, growth rate of payroll employment, etc.), all of which have strong empirical correlations with inflation changes, the picture that emerges (at least to me) is one of substantial slack.

Posted by: knzn | August 31, 2005 at 10:51 AM

I think at this point, we just agree to disagree. I interpret the instability in the inflation/slack relationships -- which I guess I think are more substantial than you do -- as a sign that the slack concept is on shaky ground. I understand that I am in the minority on this. I do indeed believe that employment could grow much faster without generating inflationary pressures. But I also beleive that this will happen when the real environment changes to make it so.

Posted by: Dave Altig | August 31, 2005 at 05:17 PM

I’m willing to acknowledge that the glass of Keynesian economics is only half full, but you and Bob Hall seem to be saying that, because it’s half empty, we need to go back to the refrigerator. Maybe it is a disagreement about the severity of the instability, as you suggest. But I could imagine a “composite slack indicator” that would have a much more stable relationship to inflation than its individual components.

I’m not sure what you mean when you say that “employment could grow much faster without generating inflationary pressures.” Almost anyone would have to agree there are some circumstances (e.g., a change in labor/leisure preferences) where that could happen. Are you making a substantive statement? What changes in the real environment do you think are necessary, and why?

Posted by: knzn | August 31, 2005 at 06:23 PM

knzn -- Productivity growth -- in the fundeamental, exogenous sense -- is the obvious example. I cannot answer definitively what the circumstances would be that would lead to a pickup in employment growth. That would suggest I know how to explain the pattern of labor market dynamics over the past five years, which I don't. I don't think anyone else does either. There is a pattern that represents a slowdown relative to the fire-breathing pace of the latter 1990s, for sure. I am not providing an answer, but rather objecting to the assumption that deficient demand, in the traditional Keynesian sense, is the explanation.

By the way, when it comes to an explanation of unemployment, I'm not saying the Keynesian glass is half empty. I'm saying that, for all practical purposes, it is completely empty. This should be read the way Hall offers it: Standard neoclassical synthesis models are just not suited to thinking about unemployment. That is not to say, however, that it is never the case that monetary policy mistakes create unemployment, or that policy is impotent to affect the unemployment rate more generally. I think there is a lot of confusion in all of this that comes from not separating the methodological case made by Hall with the interpretation of what types of shocks are actually driving outcomes today. I hope I have not contributed to that confusion.

Posted by: Dave Altig | September 01, 2005 at 01:17 PM

Health insurance is a great benefit and I think all employers should provide it.

Posted by: California Health Insurance | November 04, 2005 at 06:20 PM

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February 27, 2005

The NYT's Solution To Saving Medicare: A Highly Personal Reflection

Today's New York Times includes an article with the rather provocative title "How to Save Medicare: Die Sooner."   Flippancy of the headline aside, the article has a serious point.

...how can Medicare's ballooning costs be contained? One idea is to let people die earlier.

For the last few decades, the share of Medicare costs incurred by patients in their last year of life has stayed at about 28 percent, said Dr. Gail R. Wilensky, a senior fellow at Project HOPE who previously ran Medicare and Medicaid. Thus end-of-life care hasn't contributed unduly of late to Medicare's problems. But that doesn't mean it shouldn't be part of the solution. "If you take the assumption that you want to go where the money is, it's a reasonable place to look," Dr. Wilensky said.

End-of-life care may also be a useful focus because, in some cases, efforts to prolong life may end up only prolonging suffering. In such cases, reducing pain may be a better use of resources than heroic attempts to save lives.

This probably seems reasonable to all of us but, as the article notes, it is often easier said than done.

The question becomes, how can you identify end-of-life care, especially the kind that's likely to be of little value? "It's very difficult to predict exactly when a given individual is going to die, in most cases," said David O. Meltzer, an associate professor of medicine at the University of Chicago who also teaches economics...

... he recommended that doctors try to prepare patients and families for less resource-intensive care at the end of life. "There is no question, as a clinician, and as a patient and the family members of patients, there are things you can do to make sure that expenditures with little chance of being helpful won't be undertaken," he said. "You explain to people that the goal of medical care is not always to make people live longer."

... he recommended that doctors try to prepare patients and families for less resource-intensive care at the end of life. "There is no question, as a clinician, and as a patient and the family members of patients, there are things you can do to make sure that expenditures with little chance of being helpful won't be undertaken," he said. "You explain to people that the goal of medical care is not always to make people live longer."

I'm going to beg your indulgence, and take the highly unusual step (for this blog) of stepping out of my role of economist for a moment.  Two days after this past Thanksgiving , and less than a month after his 68th birthday, my father lost his battle with lung cancer.  Although his struggle was relatively brief in the larger scheme of things -- he had been diagnosed in the fall of 2003 with advanced-stage disease -- he followed the all-too-typical pattern of the many, many others similarly afflicted: Hopeful optimism as the first round of chemotherapy provided a brief respite, concern as the cancer came raging back, weariness as the much rougher second round of treatment took its toll, and despair as it became clear that the miracle we had all hoped for would not materialize. 

To an objective observer, it was obvious that the end was very near on Thanksgiving eve.  But despite the fact we had watched him virtually disintegrate in front of our eyes, the idea of my father's death was somehow still very abstract.  When you are living one day at a time, making it to the next sunrise becomes an obsession.

The cancer did not wait for us to come to grips with our emotions, and the moment came to make the terrible choice.  Seek (against my father's wishes) the extraordinary measure of medical care that might grant us one more desperate day -- or week? or month? or more? you never know, right? -- or resign ourselves to the dying of the light that had always, always burned so brightly in our lives.

We chose the latter.  A call was made to our local hospice organization.  On Thanksgiving morning we received the first of many visits from the remarkable human beings who would would help us usher my dad through his final days on earth.  He died -- I can think of it no other way -- as I hope I do.  In his own bed, in the home he loved, surrounded by children and grandchildren, in the arms of the woman that had shared his life's journey from childhood.   

The Times article ends with this observation.

AN alternative to saying no would be to encourage severely ill patients to choose hospice care, where the emphasis in treatment shifts from cure to quality of life. Patients are made to feel as comfortable as possible, and reducing pain takes precedence over radical procedures. At present, only about 1.6 percent of Medicare benefits pay for hospice care.

Despite the less-intensive brand of treatment, hospice care may not be cheaper than hospital care. "The assessment of hospice has not indicated that it's a clear money-saver," Dr. Wilensky said. "It can be, but we don't have very good examples."

Maybe so.  Compared to the alternative, I don't really know the ultimate price of the care my dad received in taking those last steps home.  But I do know its value.

You can find information about hospice care here.

February 27, 2005 in Health Care | Permalink


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From the New York Times "Economic View" column by Daniel Altman: [H]ow can Medicare's ballooning costs be contained? One idea is to let people die earlier. For the last few decades, the share of Medicare costs incurred by patients in their ... [Read More]

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Sorry to hear of your family's loss. Having been through it myself, I was totally unprepared.

Financially speaking, I think there are other areas in which savings are easier to come by. Prevention (both public health measures and preventive care by organized medicine) is often an excellent investment financially in addition to the obvious health benefits. In addition, the overuse phenomenon is really quite large and easier to identify in advance then is the end-of-life situation which is often known only in retrospect. Car wrecks, heart attacks etc are often sudden and fatal, andthe costs of their care are labelled end-of-life but nobody would seriously suggest less agressive treatment in most of these instances.

Posted by: quietstorm | February 27, 2005 at 02:50 PM

Sorry about your Dad. It has been years since my Dad died of lung cancer. He too died at home, never spending a day in the hospital. My best friends dad was diagnosed with cancer about the same time. His family opted for agressive care. He lived about six months longe than my Dad, had multiple rounds of chemo, and died in the hospital with a pain drip going. He may have lived longer, but the quality of his life was awful. (Not to mention what was spent.)

I believe there is a considerable amount of money to be saved in end of life care. Having worked in a hospital for years, I saw many patients come in for extraordinary care, even with a diagnosis of terminal cancer. Many died in the hospitl or the skilled unit.

A difficult issue to deal with.

Posted by: JWC | February 27, 2005 at 06:15 PM

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February 14, 2005

Becker and Posner on Medicare

This week's discussion at the Becker-Posner blog -- which I should be linking to far more often -- concerns prescription drugs and medicare.  (Econlog notices as well.)  Posner leads off with an observation that I have long thought unjustifiably ignored by conservative critics of the administration's prescription-drug benefit plan.

Given Medicare, I do not think that there is a principled objection to including a prescription-drug benefit in it. Suppose Medicare were limited to hospital treatment. Then critics would say, that’s absurd—it will only impel people to get hospital treatment that would cost society (though not the patient) less in a non-hospital setting. It is similarly questionable to exclude prescription drugs from Medicare coverage. Drugs are substitutes for other forms of medical treatment in many situations; therefore excluding them from coverage will induce people to seek other forms of treatment that may cost society more to provide... This means, by the way, that in calculating the net social cost of the prescription-drug benefit, the cost of other treatments for which drugs, with their cost to the patient reduced by the Medicare subsidy, will substitute should be subtracted.

And Becker agrees.

Given that the U.S. is unlikely to be able to prevent excessive use of expensive options, we should try to find more approaches that are relatively cheap to use to treat additional patients, even when those patients are better treated in other ways. New drugs and improved understanding of the medical value of proper nutrition may both have high development costs, but they are cheap to extend to additional users, especially after patents expire and cheap generics enter. By contrast, hospitals have relatively constant costs of adding additional patients.

So I agree with Posner for this reason mainly, but also for the reasons he gives, that medicare and other medical systems should include drug coverage.

He does, however, note a well-known peculiarity in the current program.

For persons who elect this coverage, it pays fully up to the first $250 per year of drug expenses, then has no coverage-the famous “donut”- for additional drug expenses in the middle range, and finally it has insufficient coverage at the very high end. The total cost of this program could be significantly cut while eliminating the “donut” and raising high-end coverage by adding a sizeable deductible, perhaps as large as $1000.

The "Given Medicare" proviso in Posner's comment is the tip off that he is not so thrilled with the program in the first place.

As a matter of economic principle (and I think social justice as well), Medicare should be abolished. Then the principal government medical-payment program would be Medicaid, a means-based system of social insurance that is part of the safety net for the indigent. Were Medicare abolished, the nonpoor would finance health care in their old age by buying health insurance when they were young. Insurance companies would sell policies with generous deductible and copayment provisions in order to discourage frivolous expenditures on health care and induce careful shopping among health-care providers.

But then again:

I do not think, however, that total expenditures on medical care would decline markedly if Medicare were abolished. The reason is the enormous value that the vast majority of people place on longevity, good health, and freedom from pain and other physical discomfort.

(Not only that, but the amount we spend -- relative to spending on everything else -- is likely to expand -- by choice -- the richer we become.  If that doesn't strike you as stating the obvious, and you like mathematical models, check out this paper by Stanford's Bob Hall and Berkeley's Charles Jones.)

Becker essentially votes for reforms -- close, I think to those that the administration has in mind -- that look very much like the analog to social security privatization.  In addition to the changes in the drug benefit plan described above, Becker thinks

...everyone should be required to buy at young ages private catastrophic medical insurance that can be automatically extended. Medicaid would cover the poor who cannot afford to pay for this insurance...

A third important change would be to encourage tax-free medical savings accounts that allow unused medical balances to be carried over from year to year...

Once these three reforms are in place, we can then start to “privatize” the medicare system for the elderly, except for those elderly who are poor enough to qualify for a government program like Medicaid that pays for their medical needs. The privatization of medical coverage of the elderly would be the dual to my proposal last week to privatize retirement incomes.

Professor Becker's "proposal... to privatize retirement incomes," incidentally, can be found here.  (And I couldn't agree more.)

UPDATE: Don Boudreaux comments on Becker's social security post.
UPDATE UPDATE: Boudreaux was actually pointing to an editorial in today's Wall Street Journal based on last week's Becker-Posner blog entry.
ANOTHER UPDATE: Tyler Cowen comments too.

February 14, 2005 in Health Care | Permalink


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Question: Unemployment????? Who pays?

Posted by: dilbert dogbert | February 15, 2005 at 12:50 PM

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February 13, 2005

Is Health-Care Compensation "Stickier" Than Wages?

In an earlier post, I asked whether there is something about compensating workers with in-kind benefits -- health-care insurance, in particular -- that makes that form of payment qualitatively different from explicit wage payments, from an employer's point of view. My musings were prompted by this passage from SmartMoney.com:

Many economists attribute the slow pace of hiring during recovery from the last recession in part to the rapid growth of benefits, especially health insurance.

My response at the time:

I'm not convinced that last sentence should be taken at face value. After all, from an employer's point of view all that should matter is the total cost of labor, not the form in which payment is made.  The difference, of course, might be that payments in the form of health care benefits are more open-ended and "sticky" than payments in wages. If that's so, perhaps its a wrinkle in this debate (with follow-ups here and here)  that deserves some consideration.   

So this, from an article in this morning's New York Times, caught my eye.

It's no secret that surging health costs have become a C.E.O.-level issue. When a company like  General Motors looks more each year like a giant health plan that operates a nice little nonprofit car business on the side, who wouldn't sound the alarm?

But to many business leaders, their union counterparts' view of soaring health costs remains a mystery. Given union readiness to strike in the face of even modest efforts to slim generous health plans, these costs almost certainly doom unionized workers to few if any real wage increases for years to come. Do union leaders get this trade-off? Are they hamstrung by political dynamics that make it hard to approve even sensible health plan changes that can be cast as "givebacks"? And what is their answer?

Recent conversations with Morton Bahr of the Communications Workers of America and Andrew Stern of the Service Employees International Union suggest that at least some union leaders think about the health system in ways more sophisticated and businesslike than many chief executives do - and that they are eager to be partners in a national reform dialogue that's overdue.

"There's really one economic pot, and you argue essentially over the size of that economic pot and how it gets distributed," Mr. Bahr said of the growing trade-off between health care and wages. "What it leads to is more strife at the bargaining table because workers are not going to be ready to say, 'Well, the health care costs are going up, so we're willing to take a zero wage increase.' They expect the union to find a way to do it, and that's going to lead to more strikes."

Any thoughts?

UPDATE: John Irons and Russ Roberts discuss the issue of employer-provided insurance (among other things) in the latest issue of the Wall Street Journal's Econoblog.

February 13, 2005 in Health Care | Permalink


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Part of the problem in the debate about health care is most of the people debating it do not realize the key difference between the US and other countries system.

In the US we have somehting like a cost plus health care system and the total cost of the system has risen so sharply that we need to do something to limit its costs. In Europe and Canada they impose a limit on the costs of healthcare and ration care.
That is the reason they have waiting list and other similiar features that people refer to when claiming that the US system is better.

But in the US few are willing to look at what the true basic case is -- healtcare has gotten to be too expensive. Until that problem is addressed we will continue to argue pass each other and do nothing to really solve the problem.

Posted by: spencer | February 13, 2005 at 10:11 AM

The key to health insurance is that companies get a tax break for health insurance dollars that the employees don't get if they took that money as wages and paid for their own. Therefore, it's not true that from an employer's point of view that helath insurance is the same as wages. They far prefer health insurance! Now the problem is that for the employees, health insurance is now "other people's money". So, the marginal cost to an employee of additional medical services is[*] (close to) 0, so naturally they start using more. Now, finally we see that costs are spiralling out of control, and nobody wants to pay for it.

[*] Technically, a pure economist would say that the charge additional medical services goes to the employer and therefore to reduced (other) wages for the employee, but this is so slow and indirect that it *appears* to be zero in the short term. In the long term, what you would expect is the sort of political fuss that we are seeing right now as the costs of the system slowly bubble their way through to the real consumers.

Posted by: Jordan | February 13, 2005 at 01:37 PM

To your prior post on this, I gave the Wessell market clearing view. But your title here is interesting as I am a Keynesian who has been arguing we are still below full employment. Add to the discussion, the intriguing grocery worker strike that shut down Von's et al. in Southern Cal for almost half a year. The complaint of the unions? That Von's et al. wanted to reduce health care benefits.

Posted by: pgl | February 13, 2005 at 03:03 PM

I worked for a British firm in the 1970s when personal tax rates were extremely high. The British offset part of the system by providing a very large menu of fringe benefits ranging from free meals to cars for all managers.

If you average tax rate is 20% a firm can provide $100 of income for $80 by paying directly for insurance and other fringe benefits.

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February 09, 2005

The Big Miss On The Medicare Drug Plan: Tell Me Something New

The new estimates for the ten-year cost of the Medicare prescription drug plan are out and, as you probably know by now, it's pretty ugly.  The short story, from the Washington Post (via Hugh Hewitt):

The White House released budget figures yesterday indicating that the new Medicare prescription drug benefit will cost more than $1.2 trillion in the coming decade, a much higher price tag than President Bush suggested when he narrowly won passage of the law in late 2003.

The piling on has, of course, begun -- Max here, and Angry Bear here, for example.  But before we get too carried away, this picture documenting the historical misses in budget targets is worth keeping in mind.


The source is Appendix C of The Budget and Economic Outlook: Fiscal Years 2006 to 2015.

Note the magnitude of these annual projection errors.  In the much heralded surplus years of the late 1990s, the misses were hugely favorable -- well over $100 billion each year.  And the discrepancy was not due to policy changes, but unforeseeable economic developments and "technical factors,"  or errors in estimating the budgetary consequences of particular policies. (It's also interesting to note that the misses were almost all positive in the Clinton years -- the poor Republicans seem to get the other end of the stick.  As I said in this article some years ago, maybe it's better to be lucky...)

The lesson, to me, is that all the harping about this budget projection or that economic assumption is, well, ridiculous.  The confidence intervals on these things are so large that no one -- and I mean absolutely no one -- has any solid grounds to complain about the baseline assumptions of others.  You're all going to be wrong.

I'm not being nihilistic about this.   The point is the conversation should be how much of our incomes we want allocated by the government on average, who we want to tax to pay for it, and how we want to tax them.  The great benefit of the rules implemented in the administration of Bush the elder (with the Omnibus Reconciliation Act of 1990) and the Clinton administration (with the Omnibus Reconciliation Act of 1993) is that they framed the projections in the context of those fundamental decisions. 

Nouriel Roubini suggests returning to that world in this post.  I think he wrongly suggests that this implies the current administration would have to reverse its tax policies -- it only means that they would have to pay for them with reduced spending, which I gather they are more than willing to try.  But on the basic suggestion that we get back to rules that force those types of decisions, we are agreed.

February 9, 2005 in Data Releases, Health Care | Permalink


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December 09, 2004

The Health-Care Deduction Debate Heats Up Update

"Adam O'Neill" at The Lowest Deep -- now enthusiastically included on the econ blog roll to the left -- is not so enthralled with the Cogan-Hubbard-Kessler proposal noted in my previous post.  He has some qualms about how the numbers work out -- essentially a disagreement about how strong the cost-saving incentives are from an individual taxpayer/consumer's perspective.  But, in addition, he has a major problem with the regressivity implied by the payroll tax implications of shifting from employer-financed expenditures to employee-financed expenditures.  From his post:

...hidden in their plan is a 15 percent tax hike on health benefits for low income workers. Their plan makes insurance tax deductible (deductible from income taxes) rather than an exclusion from income (which makes it deductible from income taxes AND payroll taxes). 1) This would significantly reduce insurance offering at firms (firms would no longer have any direct reason to offer insurance) and 2) This makes the tax system more regressive because only individuals earning under $87,000 pay the social security payroll tax. They themselves peg this implicit low-income tax increase at a minimum of $8 billion a year ($8 billion from switching eliminating the payroll tax exclusion plus some fraction of the $11 billion of increased revenue from increases in take-home pay).

And he objects to Cogan ET Al's claim that "percentage tax reductions from detectability for low-income households are three to five times the size of reductions for high-income households."  Says O'Neill:

The key is the phrase "percentage tax reductions." Of course a $1 tax break to someone making $10,000 a year is greater in percentage terms than a $10 tax break to someone making $200,000. One would like to think that health care spending would be measured in more absolute and egalitarian terms.

I have to give that one the Subjective Judgment Alert. Whether policy ought to be more "egalitarian" is not the sort of thing that economists can speak to with any degree of authority -- our training gives us absolutely no special status for making value judgments.  Our training is, however, pretty useful for pointing out the trade-offs implied by any particular policy choice.  On those grounds, i recommend this post as a useful addition to the conversation.

UPDATE: Yet more from Andrew, who lays out his case for eliminating the excludability of health insurance purchases from income and using the higher tax revenues to provide refundable tax credits to lower income households who purchase insurance.

UPDATE UPDATE: "Brilliant Deduction Revisited" and "Tax Policy for Health Insurance," follow-ups at the The Lowest Deep.  And this, via Vox Baby, at Marginal Revolution.

December 9, 2004 in Health Care | Permalink


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Posted by: insurance | June 07, 2005 at 06:24 AM

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The Health-Care Deduction Debate Heats Up

Writing in yesterday's Wall Street Journal (in an editorial titled "Brilliant Deduction"), John Cogan, R. Glenn Hubbard, and Daniel Kessler wax enthusiastic about a proposal to make all medical-care expenditures tax-deductible.

We propose... For anyone with at least catastrophic insurance coverage, all health-care expenses -- employee contributions  to employer provided insurance, individually purchased insurance, and out-of-pocket expenses -- would be tax-deductible.  The deduction would be available to those who claim the standard deduction and to those itemize.

The most important effect of tax deductibility would be to reduce unproductive health spending.  Under current law, medical care purchased through an employers insurance plan is tax-free, while direct medical care purchased by patients must be made with after-tax income.  As we and many others  have observed, this tax preference has given patients the incentive to purchase care through low-deductible, low co-payment insurance instead of out-of-pocket, which in turn leads to cost unconsciousness and wasteful medical practices...

According to our calculations, based on research from the RAND Health Insurance Experiment and others, we estimate that tax deductibility would reduce spending by approximately $40 billion in 2004 dollars, or 6% of total private health spending.

But can we afford a revenue-loser like this at a time when federal deficits are a major concern?  The authors argue that to do otherwise would be penny-wise and pound-foolish.

... full deductibility would lead to approximately $5 less spending on relatively unproductive care for each dollar of foregone tax revenue.  That's right -- a progressive tax cut would lead to an efficiency gain in the larger economy about five times as great.

Andrew Samwick, commenting on an earlier post by Brad DeLong, weighs in as well.

December 9, 2004 in Health Care | Permalink


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» A Not So "Brilliant Deduction" from The Lowest Deep
Cogan, Hubbard and Kessler propose to "fix" the tax-related issues surrounding health care by expanding tax subsidies for medical expenses. There are so many problems with their opinion piece that I hardly know where to start. First, hidden in their ... [Read More]

Tracked on Dec 9, 2004 9:58:04 AM


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