Here is another example of an accounting trick whereby:
1) Corporations get taxpayer money for no good reason
2) It turns out that health care was already paid for by the government but just funneled through corporations.
Here’s the main point…
To encourage corporations to continue the provision of prescription drugs to retirees under their retiree health plans, rather than dumping the outlay into the lap of the new Part D Medicare program, the [Medicare Modernization Act of 2003] granted corporations a federal subsidy equal to 28 percent of their outlays on prescription drugs for retirees….
Suppose a firm in, say, 2009 spent $1 billion on prescription drugs for retirees and received from the government a $280 million subsidy toward that outlay.
Should the firm be allowed to deduct from its taxable income only its net outlay of $720 million on prescription drugs for retirees (Option A), or should it be allowed to deduct the full $1 billion (Option B)?
The Bush administration and the lawmakers in 2003 chose Option B ($1 billion in our illustration), in effect allowing corporations to deduct from their taxable income an expenditure actually made by the general taxpayer.
Evidently the Obama administration and its allies in Congress disagree with that decision, for included in the recently passed health-reform bill is a provision allowing business firms to deduct only their net outlay on prescription drugs for retirees (Option A above — $720 million in our illustration).
In other words, the taxpayer subsidizes these health care expenditures by more than 28% of the cost. If the top corporate tax rate is 35%, a company with $1 billion in prescription drug outlays would pay $350 million less in taxes. If it were only able to deduct $720 milion, its taxes would be $252 million. So this provision is worth $98 million or 9.8 % (35% of 28%). In other words, the subsidy is not 28% but in fact 37.8%.
Thus, taxpayers are already paying 38% of prescription drug benefits for retirees with corporate pensions.
It might be argued that the fact that this subsidy is executed via this apparent loophole is inconsequential. The real question, it might be argued, is whether 28% or 38% is the right level of subsidy. That is, what matters is the effective degree of subsidy, the net dollars, rather than the means.
This position is wrong for two reasons. First, this particular means is not neutral in its impact. In particular, it favors corporations that pay higher tax rates. If, for example, a corporation only pays a 15% tax rate, the extra subsidy is worth only 4.2% rather than 9.8%. And how is the tax rate assigned? Based on the total size of a company’s profits. Company’s with bigger profits pay a higher rate. In other words, this subsidy favors large companies over small companies. While it is true that, in this case, larger companies are more likely to have qualifying pension plans, the point is still that the means of the subsidy has an impact over and above its level. If we accept the “only effective rates” matter logic, then we should assume it is used in many other circumstances in which the effects are more significant.
More broadly, this means is problematic because it is overly complex. As the complaints over the reversal of this policy under the new health care bill show, every time you effect a policy through an extra step or trick, you make the impact of additional changes more far-reaching and thus more objectionable. More things have to change to get things working the way you intend, which means change is more difficult, which means it is less likely, which means your system is on the path to being outdated and under-performing. If you want to subsidize 38% of retiree prescription drug benefits, write a check for 38% of the cost. Don’t mix and match a thousand rules that each contribute .038%.
But of course, finding, mixing and matching thousands of .038% rules is exactly what politicians tend to do. It’s easier for them because it’s harder for people to figure out that this is what’s really happening.
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