Thursday, July 30, 2009

Let’s tax destructive consumption not economic production

The current proposals to slap a surtax on the nations top earners to fund a massive increase in government health care spending leads to an interesting question. Why do we insist on penalising economic production, while destructive consumption remains relatively penalty-free?

Consider the following examples based on quick searches:

Cigarettes: Various sources note that 20-30 billion packs of cigarettes are sold each year in the United States.

Gasoline: Americans use approximately 140 billion gallons of gas each year.

Beer: Americans drink approximately 5 billion gallons of beer each year.

Wine: Americans drink approximately 750 million gallons of wine each year.

Fast Food Meals: Americans eat approximately 70 billion fast food meals each year.

Instead of placing a 5% tax surcharge on the most economically productive members of our society (i.e. those that create jobs, buy goods and services, while already paying the majority of taxes), why don’t we just tax counter-productive activities instead?

Admittedly, some of the items above are already some of the most heavily taxed items for sale at the moment, but there is no evidence this level of taxation has materially impacted consumption of these items.

If we slapped an additional $2/pack surcharge on cigarettes, a $1/gallon surcharge on gas, a $4/gallon surcharge on beer ($0.50/pint), a $2/meal surcharge on fast food meals, and a $10/gallon surcharge on wine ($2/bottle), using the conservative numbers above, this would generate approx. $250 billion in revenue, per year. This is 2.5x the White House estimates for the cost of the new health care proposals ($1 trillion over 10 years), so it should just about cover the actual costs.

Worst case from a revenue perspective, which is actually a best case from a cost perspective, is that sales of these items are reduced substantially due to the excess taxes imposed. The revenue would start to dry up, but this reduction in revenue is directly correlated to a reduction in risk and collateral costs. Would it be beneficial to reduce the number of smokers, reduce the number of drunk driving fatalities or incidences of alcohol abuse, reduce the amount of fast food meals consumed? I consider this a win/win situation. If consumption is not impacted by the higher price, at least the government has the appropriate level of funding to treat the after effects of such behaviour. If the consumption is impacted, the country will by definition get healthier, lowering the burden of costly heart attacks, lung cancer treatments, liver transplants, high blood pressure medicines, etc.

The analysis above is really just a starting point. You could significantly increase that number through various other measures (e.g. legalise and tax marijuana, additional fines on minor illegal activities such as speeding or parking tickets, taxes on sugary drinks/snacks or salty foods, etc., etc.). If we can’t morally persuade people to change (or at least reduce) their bad habits, let’s use economics to persuade this change. The key to this is that everyone still has a choice to do whatever they want, but that choice comes with economic consequences. You could even flip this approach around and reward productive behaviours by providing tax breaks (such as the ability to buy with pre-tax dollars) on things such as public transportation, gym memberships, basic annual check ups, fruits and vegetables, charitable donations, etc.

Ideally, the government would control spending by making substantial cuts to governmental programs, eliminating the need for additional tax revenues, however, I don't see that happening in Washington in the near future. Therefore, if they are going to raise taxes, I hope they do it a sensible manner.

Now, I’m no fan of taxes or government influence in my life, but if the alternative is a straight property grab (i.e. taking upwards of 45% of hard earned income, just because it is there for the taking), I could live with uncomfortable taxes on consumption if the unintended consequences of the tax policy result in positive, productive results. This is the win/win situation mentioned above – either tax revenues go up (win), or Americans are healthier (win - economically as well). Unfortunately, Washington is currently attached to it’s lose/lose/lose situation - higher taxes lead to less economic activity (lose) which leads to fewer jobs (lose) which leads to lower tax revenue (lose) - because it provides them with the best job security.

Will this ever work? Probably not. The reason? Populism. Why make the entire population upset with tax increases when you think you can get the same revenue from 5% (or less) of the voting public?

Unfortunately, our elected representatives are too worried about securing that extra campaign contribution or winning the next election to make the hard choices required to make this country better.

Sunday, July 19, 2009

Another Reason to Love the Australians

In a recent article in on ESPN, the US is looking to start a world class cricket league in hopes of raising the profile of the sport in the US. The traditional 5 day test matches would never fly with an American audience, but they are looking to adopt the Twenty20 version of the sport that lasts only three hours or so. After living in the UK and being exposed, and even playing some cricket, I wish them good luck, but I would urge investors to consider other options.

If this league comes to pass, it would be a great example of Americans adopting a version of a great Australian pastime.

On a much more relevant and important subject (sorry cricketers) - health care - American should also look to Australia for inspiration.

It looks as though the US will be passing a health care reform bill in the near future, and a public option is almost certainly going to be part of that reform. The primary concern about this type of reform is of course, cost, but another key consideration is the impact the private health insurance industry. There are hundreds of other issues with the current plan, but I’ll let the experts debate the finer points.

Australia has a public health care option, but it also has a thriving and relevant private health care system to help defray the costs of a public option. In other words, the government provides for emergency care and subsidises other types of care, and private health insurance can be purchased to cover the balance. This approach appeals to both concerns highlighted above – the cost will be high but will not be astronomical, and the private insurance providers will still be relevant and in fact a key player in the health care industry.

Australias health care system (called Medicare – even the name would make sense here!) ensures free universal access to hospital treatment and subsidised out-of-hospital medical treatment. The Federal Government pays a large percentage of the cost of services in public hospitals. This percentage is calculated based on the treatment required. Typically, the Government is on the hook for 100% of in-hospital costs, and 75-85% of General Practitioner and specialist services. These figures can be increase for patients who cannot pay or are receving other benefits. Additionally, if a patient has crossed the threshold of total health expenditure for the year, the care may be further subsidised.

Where the Government pays the large subsidy, the patient pays the remainder out of pocket (co-payment), unless the provider of the service chooses to charge only the scheduled fee, leaving the patient with no extra costs.

Where a particular service is not covered, such as Dentistry, Optometry, and Ambulance transport, the Patient must pay the full amount (unless they hold a Low Income Earner card, which may entitle them to subsidised access).

However, to make up the difference in total costs and costs covered by the government, individuals can choose to take out Private Health Insurance to cover these costs, with plans that covers just selected services (cheaper), or plans with full coverage (more expensive). In practice, a person using private insurance may still be left with out of pocket payments, as services in private hospitals often cost more than the insurance payment.

The government actively promotes the purchase of private health insurance through the following programs:

  • Private Health Insurance Rebate: the government subsidises the premiums for all private health insurance cover, including hospital and ancillary (extras), by 30%, 35% or 40%. Recently the Australian Labour Government under Kevin Rudd announced that as of June 2010, the Rebate would become means-tested and offered on a sliding scale.
  • Lifetime Health Cover: If a person has not taken out private hospital cover by the 1st July after their 30th birthday, then when (and if) they do so after this time, their premiums must include a loading of 2% per annum. Thus, a person taking out private cover for the first time at age 40 will pay a 20 per cent loading. The loading continues for 10 years. The loading applies only to premiums for hospital cover, not to ancillary (extras) cover.
  • Medicare Levy Surcharge: People whose taxable income is greater than a specified amount (currently AU$70,000 for singles and AU$140,000 for couples) and who do not have an adequate level of private hospital cover must pay a 1% surcharge on top of the standard 1.5% Medicare Levy. The rationale is that if the people in this income group are forced to pay more money one way or another, most would choose to purchase hospital insurance with it, with the possibility of a benefit in the event that they need private hospital treatment - rather than pay it in the form of extra tax as well as having to meet their own private hospital costs.

How does the Australian government pay for all of this? Australian Medicare is funded partly by a 1.5% income tax levy on everyone except some low-income earners (i.e. less than approx. AU$17k), but mostly out of general revenue. After 5 minutes of research, it looks like Aussie income tax rates (not including the 1.5% levy for Medicare) are broadly in line with current US rates, except that everyone with incomes above AU$6,000 pays tax on a graduated basis starting at 15% and up to roughly 42% if you earn AU$1M.

In 2006, Australia spent 8.7% of GDP on health care (15.3% in US), or US$3,122 per capita (US$6,714 in US). Of that, approximately 67% was government expenditure (46% in US). Another interesting stat is that the US government spent US$3,074 per capita in health care while Australia only spent US$2,097 per capita. (Figures were obtained from the World Health Organisations Statistical Information System – which, by the way, is a remarkable resourse of information -

On paper at least (I haven’t spoken to any Aussies on this in years) it seems like a very sensible plan, both from a coverage point of view as well as a cost point of view.

The likely result from the current rushed proposals coming from Congress will effectively create a national health care service that will provide full coverage to everyone. All of the sound bites from everyone including the President say this is not the intention and they want private insurers to remain part of the game, but I think its like an unintentional-intentional walk in baseball. To the casual observer, the pitcher is still trying to get the batter out (i.e. politicians claiming they don't want to push private insurers out of the market), but in reality the pitcher has every intention of walking the batter (i.e. bypassing private insurers straight to a single payer system). To some this sounds great, but the costs will be astronomical (see previous post), and the current proposals to fund this partially with whopping tax rate increases on the higher tax payers won’t even come close to funding this program, leading to enormous defecits (or larger taxes on everyone else – VAT, etc.) down to road.

So let’s get Congress out on the Capital lawn for some cricket, throw a couple of shrimp on the barbi and start considering a reasonable approach to health care that will not further stifle our economy or burden our children with even larger mountains of debt. The Australian model would be a great place to start.

Note: Because I have a full time job, and cannot fully research the Australian health care system or tax code independantly, the information above is based on the Wikipedia entry for Health Care in Australia and their IRS equivalent website.