Wednesday, February 10, 2010

Article 1 of Title I: Health Care Reform

In my February 8th EconoBlast post, I copied Title I: Health Care Reform, taken from Paul Ryan’s Roadmap for America’s Future. Today’s EconoBlast offers a critical analysis of Ryan’s first article of Title I for reforming health care. Future posts will consider additional articles of Title I


Article 1: Ryan proposes a tax credit of $2,300 for individual tax filers and $5,700 for joint filers and families. No doubt, the intent is to make health care insurance appear cheaper to households via a refund of $2,300 per adult person of the premium paid for health care insurance. Everyone would like to pay less for their health care, right?

I oppose Ryan’s proposal for three main reasons: (1) health care insurance cannot be made cheaper with a tax refund; (2) using the federal tax code to influence choices people make is a bad idea; (3) the tax credit would simply transfer income from households who pay income taxes to households who do not, giving us yet another income transfer provision embedded in the tax code.

Health care insurance cannot be made cheaper with a tax refund, anymore than housing can be made cheaper with a tax deduction for interest paid on a mortgage. The tax credit proposed by Ryan would definitely make the “price” of health care insurance to the consumer lower, but the true cost of health care insurance would rise as a result. “Price” is not the same thing as “cost,” as all serious students of economics know.

The cost of health care insurance depends ultimately on the value of resources – land, labor, and capital – used to produce health care for the insured people who get sick. Increasing the quantity of health care demanded by artificially reducing the price paid by the consumer, other things unchanged, would increase the quantity of health care insurance policies purchased. More policies purchased means more resources used to produce health care services, other things unchanged, which would increase the cost of health care insurance policies. This result must be the case, unless producing more health care is costless. There ain’t no such thing as a free lunch (TANSTAAFL), just as Robert Heinlein reminded us in The Moon Is A Harsh Mistress.

Using the tax code to give people incentives to act in a particular way is a mistake. I will argue that the federal tax code should do one thing, and only one thing; it should raise revenue to finance the activities of the federal government. The tax code should do its job as efficiently as possible, with the least disturbance possible to the choices people make through voluntary exchange. Of course, lots of people will disagree with that proposition.

The federal tax code is already an abhorrent, grossly unfair, wildly inefficient disaster. The last thing we need to do is tack on yet another complication that deceives people into thinking their government is giving them something that it does not have to give. Government cannot give the people what it does not first take away from the people. What part of that observation is either unclear or untrue?

People do not need an incentive to purchase health care insurance. They already have one, if the insurance they choose to buy or not, is truly insurance. What we today call health care “insurance” is really not insurance at all; it is prepaid health care that broadly features healthy people subsidizing unhealthy people. Given the demographics of society, and the nature of human health, that means younger people broadly subsidizing older people.

What we call “health care insurance” today also features households consuming health care services with little or no regard whatsoever for the price that is actually paid to health care providers. Predictably enough, the result is households consuming vastly more health care services than they would voluntarily choose to consume, if they had to pay for what they consume directly. America’s health care system does need reform, but we don’t need even more consumption of health care without regard to what it costs to produce.

Those who criticize do not have to offer alternatives; pointing out the harm and unintended consequences of public policy is valuable in and of itself. Nonetheless, I will offer an alternative to Ryan’s proposed tax credit for health care insurance.

All households want health care that costs them as little as possible, offers the level of quality they want, is available on demand, and is provided by the docs of their own choosing. In other words, what households want is what we get when we solve the economic problem through voluntary exchange. History is full of evidence that voluntary exchange – and only voluntary exchange – gives us lower prices for higher quality, on demand, for the goods and services we want. What is true of cars, food, clothing, housing, and the full range of other goods and services is also true of health care.

My alternative to Ryan’s tax credit is simple; leave health care out of the tax code altogether. Do not subsidize health care through the tax code. Do not transfer income via the tax code. Allow households to choose the quantity and quality of health care they consume, in full view of the price they must pay to do so. It’s so simple that many people will disregard my proposal out of hand.

What about the households who “can’t afford” the health care they “need”? I will offer additional ideas that address that issue in future EconoBlast posts. But for now, I will simply say what is true.

First, there is no quantity or quality of health care that every or any household “needs.” Instead, there are infinitely variable quantities and qualities of health care that households “want.”

Second, strictly speaking, only a very small percentage of American households “can’t afford” health care. That is not to say that households like to pay as much as the health care they want costs. Most households "can't afford" a Mercedes Benz in just the same way they "can't afford" health care. In other words, a huge majority of American households do have the income or wealth it takes to buy a Mercedes and the health care they want, but they would rather not have to give up so much of other goods and services they also want to do so.

Couching the argument in terms of what households “can afford” and “need” is simply a red herring that leads to obfuscation and loss of meaning. Such language is rhetorical language that surely influences people, but does so without logical content.

Finally, to end this rather long post, I offer readers the following articles, one by Milton Friedman, the other by Greg Mankiw. Friedman’s article is foundational for anyone who wants to consider health care reform seriously. Mankiw’s article dispels a couple of myths that cavort as facts in the media about health care in America.

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