14 Mar 2017

More on the Tax on “Cadillac” Health Insurance Plans

Health Legislation 2 Comments

In response to my earlier post on Scott Sumner and Steve Landsburg, David R. Henderson sent me two of his own posts (I and II) on the 40% surtax on so-called Cadillac employer-provided health plans.

I think I’m generally in agreement with everything David wrote, but I suspect he is still more favorable to the tax than I am (…inasmuch as I am very much against the tax, and I don’t think David would be upset if it passed).

So in response to Scott and Steve for sure, and David not as much, let me offer the following points of pushback:

(1) The tax on Cadillac plans does not undo the “subsidy” in the existing tax code. As David himself conceded, it only kicks in at the margin.

(2) As John Goodman pointed out to David, this approach is all pain. (See Goodman’s own suggestion for using a tax credit approach to get the marginal incentives much better.)

(3) I don’t think it was an accident that the original ACA legislation only had the 40% surtax kick in at a high threshold. They weren’t trying to get rid of third-party payment for health expenses. No, in addition to the Cadillac tax the ACA also contained an employer mandate: a stiff penalty for large employers who didn’t provide adequate coverage to their employees. Thus employers were getting hit from both ends: up to a $3,000 per employee fine for not providing a decent plan, but then a 40% surtax on plans that were too good.

So I think Steve and Scott are being naive when they’re acting as if the Republicans have somehow foiled the architects of the ACA who were doing their best to contain health care costs. No, they weren’t. I think they were trying to ram a one-size-fits-all approach onto the employer plans to match the crappy plans people were getting on the exchanges. So (a) people paying out of pocket, (b) people buying plans through the exchanges, and (c) people getting plans from their employer, were all getting crappy coverage where they would still be devastated if they got hit with a really big medical event. Thus keeping health insurance bureaucratic and unsatisfactory, and giving rise to calls for single payer.

(4) In general, if the public is groaning under the burden of stuff costing too much, you don’t help them out by slapping a new tax on them. For an analogy, loose monetary policy led to rampant CPI inflation in the 1970s. I think some commentators actually suggested tax hikes as a way of “sopping up demand” and restraining annual price increases. No, that wouldn’t really help people pay for their groceries. Or for the analogy I used last time: We can point to all the ways the government itself is responsible for skyrocketing tuition costs. But if all the government did were to slap a 40% tax on colleges for every student they admitted, that would hardly help parents pay for college.

(5) I think the underlying assumption in these analyses is that the government holds other spending fixed, and so any new revenue from the Cadillac tax would simply reduce the deficit. But in practice I don’t think that is correct. So to the extent that it brought in receipts, I think we also have to factor in more IRS audits, more drone strikes, more DEA raids, and all the other stuff that the federal government spends money on. It’s because of this element that I am really surprised to see free-market economists lamenting the “missed opportunity” to tax the @)#($# out of employer-provided health plans. (I realize the main response would be for employers to not exceed the threshold.)

(6) As I argued in my Lara-Murphy post, I don’t think the IRS code by itself is what’s driving the absurdities in health care costs. I think the tax code provisions interact with all sorts of supply restrictions and mandates. For just one consideration: Before the ACA, if a person’s child had a medical condition, it might have been impossible for the person to buy individual health insurance. But if the person went and got a normal office job, then he could get himself and his dependents on the company plan without them even asking about his kid’s medical history.

So this is clearly an advantage to employer-provided coverage, and it explains why coverage isn’t portable. Yet this has nothing to do with tax deductibility. I don’t know if it’s because of a regulation saying health insurers have to provide group coverage to everybody, or if it’s a market outcome that insurers are OK with “community rating” because they figure it will all wash out. But for sure, this type of consideration shows that we’re not merely dealing with pre- and post-tax dollars for the same product.


==> In summary, although I understand and agree with the narrow technical analysis of the inefficiencies of the tax code, and how this contributes to an overallocation of resources into health care, nonetheless I was very much against the ACA’s surtax on (the top end of) employer-provided Cadillac plans. I think many free-market economists are fooling themselves if they (a) thought the architects of the ACA were really trying to improve efficiency and (b) predicted that such a new tax would rationalize health spending and reduce deadweight loss, all things considered.

13 Mar 2017

On Trade Deficits: Murphy vs. the World, Part 1 of 3

Trade 6 Comments

I disagree strongly with the rhetoric and substance of Donald Trump and his top advisors when it comes to trade deficits. For example, Peter Navarro’s recent WSJ op ed (which relied on the accounting tautology Y = C+I+G+Nx) could just as well “prove” that increased government expenditures are the way to boost real GDP and create American jobs.

However, most free-market economists are bashing Trump & Co. nonstop on this stuff. So where I would like to make some points is going the other way, namely, where I think pro-free trade economists are putting forth non sequiturs that will actually do little to help the cause. I hope it goes without saying that my point here is to clarify our communication with the public, especially with people who are sympathetic to Trump & Co’s arguments for trade barriers.

In this current post, I want to focus on a recent post from AEI’s Mark Perry. I am going to give a screenshot of the title and then quote the entire post, because I want you to be sure I’m correctly conveying his argument. Perry wrote:

Perry Title

Here’s one way to look at our America’s international trade situation:

1. The US receives more of foreigners’ production of goods and services than they get of ours, which results in a net inflow of foreign-produced goods and services every year.

2. The US also receives more of foreigners’ investment capital than they get of ours, which results in a net inflow of investment capital from abroad.

Protectionists, Peter Navarro and Trump then complain about America’s “trade deficit” for merchandise, but never mention the surplus for services, nor the surplus of foreign investment capital.

Consider a country like Japan’s international trade situation.

1. Japan exports more of its domestically-produced  goods and services to foreigners every year than it receives from abroad, which results in a net outflow of domestically-produced goods and services.

2. Japan also sends out more of its investment capital to other countries every year than it receives from abroad, which results in a net outflow of investment capital.

Protectionists, Peter Navarro and Trump then claim that they want the US to emulate Japan’s trade situation to “Make America Great Again.”

So that is the entirety of his post. I think it is entirely fair to summarize Perry’s argument as: “It is clearly advantageous to Americans that they are the recipients of both goods and capital. Only a fool would think it would help the country to transform that situation into one on which we are net exporters of both goods and capital. Yet that’s where Trump’s logic leads us, so he must be wrong.”

Now here’s my problem. Suppose a populist politician in Japan starts railing against the fact that they’re “getting killed by the Americans in our trade dealings.” He wants to pass a measure to “keep our savings here in Japan.”

In that case, surely Mark Perry and other economists would say that’s nonsense, that the voluntary transactions of Japanese manufacturers and investors only make the country richer. Nobody in Japan should look at their aggregate statistics about current account surpluses and capital account deficits and conclude that this is somehow dangerous for Japan.

But if that’s true–and it surely is–then Perry’s post above collapses. If a free trader would tell the people with a capital account deficit that they shouldn’t be worried about the situation, then free traders shouldn’t be telling Americans that having a capital account surplus is self-evidently a good thing.

12 Mar 2017

The Tabernacle of Exodus

Religious 6 Comments

In my Bible study we just got finished with the book of Exodus. I didn’t realize until reading the commentary on the last chapter that the book wraps up only one year after they left Egypt.

Another thing: When I was younger, I misunderstood all the references to “the tabernacle.” Being raised Catholic, I thought the tabernacle referred to a little cabinet.

However, in Exodus it refers to the tent which contained the Ark and other important items. (The word in both usages means “where God dwells” but they obviously refer to different physical structures.)

Here are two pictures (which I got from here and here) that helped me make sense of the long descriptions in Exodus of the tabernacle and courtyard:





For those unfamiliar with the text, at night God would hover as a pillar of fire above the tabernacle, while during the day as a column of smoke. Thus the children of Israel would know He was literally in their midst, leading them out of slavery and to the Promised Land.

10 Mar 2017

Free-Market Economists for Massive Tax Hikes

Health Legislation 17 Comments

You know how it’s impossible to buy an airplane ticket, unless your company pays for it? The reason is that businesses can deduct air travel as an expense.

You know how it’s impossible to go out to dinner, unless your company pays for it? The reason is that businesses can deduct meals as an expense.

You know how it’s impossible to afford printer paper and staplers unless your company pays for it? The reason is that–

“OK Bob, you’re making some kind of ‘analogy,’ we get it. What the hell’s your point?”

I’m glad you asked. Look at how Steve Landsburg and Scott Sumner are really mad at Paul Ryan–for refraining from imposing massive new taxes on health insurance. In my new Lara-Murphy.com blog post, I explain why I think their angst is misplaced.

Incidentally, to see just how mixed up Scott ended up getting on EconLog, look at this, when he responded to a critic (Glenn):

Glenn, You said:

“The bill eliminates most (all?) of the new taxes imposed on the sector by ACA. This should translate into lower costs.”

Which taxes are those? Removing the medical devices tax will increase health care costs.

No, taxing a supplier leads to higher prices.

It would be as if Scott were (correctly) arguing for taking away government support for colleges and universities, and then in the trenches ended up arguing, “In order to reduce education costs, the government should impose a tax on colleges for every student enrolled.”

Incidentally, David R. Henderson also had a (less cheeky) complaint against Scott’s post.

06 Mar 2017

Opting Out of Social Security

Social Security 5 Comments

My new EconLib article. An excerpt:

My suggestion is that the government, before making any major changes to the Social Security formulas, first allow Americans to opt out of the system, thereby avoiding any future payroll taxes but also forfeiting any accrued benefits. However, if the person represents a net asset to the Social Security program from the government’s perspective, then he or she must contribute this amount before being allowed to opt out.5

An opt-out option would improve upon the status quo from the government’s perspective, because Americans can opt out only if they represent a neutral or net liability to Social Security. On the other hand, since it’s voluntary, it would seem that my proposal cannot hurt the Americans who opt out; anyone worried about being hurt by this procedure can choose to remain in Social Security.

The thing that I didn’t fully realize until writing this piece:

The Current System Relies on Forced Loans to the Government

How can allowing an opt out represent a win-win scenario? Why would some Americans—I suspect millions—remove themselves from Social Security if they currently represent a net financial liability to the federal government? The answer depends crucially on the fact that private households have a higher discount rate than the U.S. Treasury.

Currently the U.S. Treasury can borrow money (by issuing Treasury Inflation Protected Securities or TIPS) from bond buyers for very low interest rates, such as 0.9 percent on 30-year loans and 0.4 percent on 10-year loans.7 These are “real” rates of return, meaning that the Treasury adjusts for price inflation when paying back the lenders.

On the other hand, many households currently hold a substantial portion of their wealth in assets that they expect to earn a higher real return than inflation-protected bonds issued by the U.S. Treasury….

The large scope for win-win reform occurs because many participants in Social Security are implicitly being promised a real rate of return on their payroll taxes in between these extremes. For example, Leimer (1994) estimated that people born in 1975 will “earn” an average of 1.9 percent from Social Security, while those born in 2000 will earn 1.7 percent.9

So to me, that’s a critical factor. Rather than viewing Social Security as merely a tax and spend program, it is actually more of a mandatory participation in a pay-go retirement system. Or to put it in other words: By letting today’s workers opt out, the government doesn’t simply lose current tax revenue, but it also reduces its future obligations. This gives rise to “win-win” outcomes that I didn’t fully grasp before starting this project.

NOTE: If you are really a policy nerd, go see if my criticisms of George W. Bush’s Social Security privatization plan are consistent with my present piece. (I think they are, but I understand the issue better now than I did back then.)

06 Mar 2017

Contra Krugman Ep. 76: With Special Guest Oren Cass

Contra Krugman 2 Comments

This is a special episode in two ways. First, we cover not one, but two, Krugman columns.

But wait, there’s more. We also have special guest Oren Cass, of the Manhattan Institute, join in the fun.

A breakdown of the highlights:

2:15 I shower Oren with love.

6:05 I start with my petty pushbacks against Krugman’s throwaway lines. I point out that Krugman inserted an “all” into the CNN coverage that he copied and pasted in a way that made Spicer look worse, and also that Krugman has repeatedly blamed “paid trolls” for leaving comments on his blog.

8:35 I ask Oren about the claim that ObamaCare gave 20 million Americans health insurance.

9:35 Tom asks Oren about the claim that tens of thousands will die annually if ObamaCare is repealed. [Note the crucial part of his response–the estimates of ObamaCare lives saved are actually based on earlier studies about private health insurance, which is *not* what increased under ObamaCare. He also pointed out that mortality went up last year–the first time that has happened in decades.]

12:15 I rephrase Oren’s point about Massachusetts vs. ObamaCare to make sure people get it.

12:35 I make a point about the mortality calculations; Oren points out that my data ended too early–it’s even worse for ObamaCare than I thought. Also he reminded us that insurance expansion didn’t really happen until 2014, so that’s the right time to start looking for the impact of ObamaCare on (age-adjusted) mortality.

16:25 Oren makes the GREAT point about using the states that did, and did not, do Medicaid expansion to set up a decent control group. It comes out bad for ObamaCare and the claims that it is saving lives.

16:40 Oren agrees with Tom that there is an internal consistency to ObamaCare.

19:05 Oren argues that if we want to help a small group of people who have serious pre-existing conditions, then let’s just deal with that separately. I go into my grocery store analogy.

21:50 Tom transitions to a summary of “The Uses of Outrage” column.

26:20 I accuse the “anti-fascists” of projection. It’s Krugman who is politicizing life–he criticizes a guy for golfing with Trump.

28:20 Oren pushes back on Krugman’s claim that Trump is self-evidently a would-be autocrat. Oren speculates that the anti-Trump people have waited their whole lives for the chance to fight against autocracy, and now they’ve convinced themselves that this is it.

29:30 I point out that Krugman says we’ve had a “white nationalist takeover” of our government, and yet the hot topic now is Kellyanne Conway kneeling on the couch during a photo op with black college presidents. Sort of a weird PR move for white nationalists.

34:15 Oren closes on a nice note: Krugman illustrates that the Left is trying to say that being anti-Trump is the only acceptable position, and that in order to be anti-Trump you need to sign up for all of the Left’s policies. E.g. the women against Trump march didn’t want pro-life women. It makes us doubt that they actually believe Trump is an autocrat who threatens democracy itself.

05 Mar 2017

God’s Defining Attribute

Religious 4 Comments

…is His goodness.

In Exodus 33, Moses famously asks God to show him His glory. Notice how God responds:

17And the Lord said to Moses, “I will do the very thing you have asked, because I am pleased with you and I know you by name.”

18Then Moses said, “Now show me your glory.”

19And the Lord said, “I will cause all my goodness to pass in front of you, and I will proclaim my name, the Lord, in your presence. I will have mercy on whom I will have mercy, and I will have compassion on whom I will have compassion. 20But,” he said, “you cannot see my face, for no one may see me and live.”

21Then the Lord said, “There is a place near me where you may stand on a rock. 22When my glory passes by, I will put you in a cleft in the rock and cover you with my hand until I have passed by. 23Then I will remove my hand and you will see my back; but my face must not be seen.”

So it is interesting that Moses asked to see God’s “glory” but God responded by saying that all of His “goodness” would pass in front of him. And it is this goodness that would be so overpowering that it would kill Moses if he experienced it full-on.

We noticed these things ourselves in our Bible study, but Guzik also picks it up in his commentary: “God didn’t reveal His justice to Moses, not His power, and not His wrath against sin. All those are truly aspects of God’s nature, but when He showed Himself to Moses He displayed His goodness.”

Now in the Bible study itself we were a bit puzzled by the sudden jump from God talking about His goodness to then saying, “I will have mercy on whom I will have mercy…” It seemed like a bit of a non sequitur.

But then later, when I was talking about the passages with my son, it made more sense. My son had said something like, “It is that God is so good compared to Moses that Moses brain would shut down?” and then that made me remember how I had once tried to explain what heaven and hell might be like. (I think I have touched on this here at the blog.) Suppose that in the afterlife, you are made acutely aware of just how much pain and suffering your actions caused others throughout your life. Faced with the full recognition of how bad you were, it is unspeakable agony, and you live with that for eternity; that’s what Hell is. If you stroll through life thinking you’re a pretty good person–not like one of those bad people–then you are in for a serious shock.

But instead, if you’ve been priming yourself your whole life with the notion that you deserve hell, but are granted access to God through the vicarious redemptive work of Jesus, and spend most of your free time singing praises about God, then when you see Him in the afterlife you don’t dwell on your sins–you bask in His presence. You have already moved beyond your own ego and know that He’s more important a thing to focus on than yourself. So that’s what Heaven is.

So back to my son’s comment on Exodus 33: 19-20: If the specific reason Moses would die in the full juxtaposition of God’s goodness is that Moses (by contrast) is so sinful, then it makes sense that God would immediately mention that He would pick some people to allow in His presence after suitably shielding them.

Let me try to restate the possible interpretation in other words: In this passage, Moses asks to see God. God points out that Moses is not good enough to do that, but God desires to make it possible, so He comes up with a way that God Himself covers up Moses’ shortcomings to allow it.

Likewise, for those of us who seek God, God points out that we are not good enough to do so on our own merits. But He desires to make it possible, so He comes up with a way that God Himself covers up our sins to allow it.

03 Mar 2017


Potpourri 112 Comments

==> I am not a fan of using political courts to punish liars, but it’s pretty amazing what Greenpeace was forced to admit in court as a result of a lawsuit.

==> My latest IER post highlights a new Fraser Institute study (not by me) that shows the British Columbia carbon tax hasn’t been revenue neutral for at least two years, even though the BC government has claimed that it was.

==> Josh Hendrickson tries to defend the Austrian theory of the business cycle from the rational expectations objection.

==> A pretty clever ploy by Uber to evade the h8ers.