Tax Analysts Blog

Cluster Bomb of a Tax

Posted on Apr 2, 2010

A few years ago Congress gave a subsidy and a tax break for companies that provide prescription drug benefits to retirees. To help reduce the costs of health care reform Congress repealed the tax break. The estimated impact of this provision is about $500 million a year once it takes effect in 2013. In this day and age, that's small potatoes. But the way businesses are howling--Boeing, for example--you would think it was the end of the world. Companies are booking the present discounted value of all the lost tax benefits all at once--so it is making a noticeable dent in reported profits (even though there is no imminent cash impact). The dust up seems to be part of larger campaign to demonstrate how health care reform is screwing business.

Of course, a spirited attack on the provision is to be expected. But we had to laugh at some of industry's claims. In the space of a few paragraph you can read in Bloomberg how the tax will hurt profits, jobs, retirees, and customers.

Who bears the economic burden of a tax is one of the most difficult questions for economists to answer. Apparently lobbyists are taking advantage of economists' fuzziness to claim everybody is screwed by this new tax. But they should be careful. There are limits to what they can claim and still stay in bounds of rational economics. If, for example, all the burden falls on customers, none of the burden can fall on workers, retirees, and profits. Similarly, if all of the burden is on profits (as they are reporting on their financial statements), there is no burden on workers and customers. And so on. Yes, taxes impose a burden. But claims about who bears the burden are usually 95 percent rhetoric composed by non-economists who really have no basis in fact for their claims. Saying don't make it so.

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