Law Of Unintended Consequences
James Q Wilson makes many of the same points that have been made here over the last few months concerning the argument about income inequality that the left has been trying to use as a reason to tax the rich even more than they’re taxed now. In sum, most of the left’s arguments rest in the premise that the economy is a zero sum game and that the income the “rich” are taking had to come from someone else’s slice.
That argument, much like the climate change debate, depends on a measure of ignorance among those they’re trying to influence.
In reality, income inequality is nothing to be concerned about when it meets certain conditions. Or, in other words, it isn’t a zero sum game and everyone has an opportunity to do better.
The first measure as we’ve noted before, is income mobility. Wilson:
The “rich” in America are not a monolithic, unchanging class. A study by Thomas A. Garrett, economist at the Federal Reserve Bank of St. Louis, found that less than half of people in the top 1 percent in 1996 were still there in 2005. Such mobility is hardly surprising: A business school student, for instance, may have little money and high debts, but nine years later he or she could be earning a big Wall Street salary and bonus.
Mobility is not limited to the top-earning households. A study by economists at the Federal Reserve Bank of Minneapolis found that nearly half of the families in the lowest fifth of income earners in 2001 had moved up within six years. Over the same period, more than a third of those in the highest fifth of income-earners had moved down. Certainly, there are people such as Warren Buffett and Bill Gates who are ensconced in the top tier, but far more common are people who are rich for short periods.
In sum, you have both the top and bottom quintiles changing constantly as income earners move up or down fairly regularly. That means those moving up must be getting the opportunity to do so somewhere, and the fact that there is a change of about half in the period studied says many are succeeding.
Who are these people that get ahead? Well as Wilson mentions, a poor (I’m talking income here) student who graduates and gets a job in his or her field most likely won’t be poor in the sense of income very long. And that goes for most of the “rich”:
Affluent people, compared with poor ones, tend to have greater education and spouses who work full time. The past three decades have seen significant increases in real earnings for people with advanced degrees. The Bureau of Labor Statistics found that between 1979 and 2010, hourly wages for men and women with at least a college degree rose by 33 percent and 20 percent, respectively, while they fell for all people with less than a high school diploma — by 9 percent for women and 31 percent for men.
Also, households with two earners have seen their incomes rise. This trend is driven in part by women’s increasing workforce participation, which doubled from 1950 to 2005 and which began to place women in well-paid jobs by the early 1980s.
Preparation, delayed gratification and a work ethic. The old Puritan ideal. Amazing the staying power it has, no? That and adding a spouse with similar traits has a tendency to boost income to the household significantly. Yet for some reason, the left (who, btw, are all about workplace equality and equal pay) now want you be jealous of those accomplishments.
If, as the left would prefer, we should be concerned with income inequality and the mechanism that advances it, the solution is simple:
We could reduce income inequality by trying to curtail the financial returns of education and the number of women in the workforce — but who would want to do that?
Well certainly not the left, who doesn’t want the rich to go away. Instead it simply wants to make you hate them so they can justify taking more of their money. But Wilson’s point is spot on. This once was the key to the door of the American dream. Now it’s the key to a class of citizen who is vilified and called greedy and accused of not paying their “fair share”. If anyone is killing the American dream, it is the American left.
The tax on the rich is offered as a panacea to all that ails us. It will help pay down the debt and it will “level the playing” field. One assumes that means that it will somehow help the poor not be poor.
But Wilson points out, poverty in the US isn’t a function of the rich making a greater percentage of the national income. Poverty is a cultural problem that has nothing to do with the rich or taxing them:
The real income problem in this country is not a question of who is rich, but rather of who is poor. Among the bottom fifth of income earners, many people, especially men, stay there their whole lives. Low education and unwed motherhood only exacerbate poverty, which is particularly acute among racial minorities. Brookings Institution economist Scott Winship has argued that two-thirds of black children in America experience a level of poverty that only 6 percent of white children will ever see, calling it a “national tragedy.”
Making the poor more economically mobile has nothing to do with taxing the rich and everything to do with finding and implementing ways to encourage parental marriage, teach the poor marketable skills and induce them to join the legitimate workforce. It is easy to suppose that raising taxes on the rich would provide more money to help the poor. But the problem facing the poor is not too little money, but too few skills and opportunities to advance themselves.
Most of the lack of economic opportunity and dearth of skills comes not from the rich making too much, but those in that condition making poor choices early in their lives. Combine that with some of the less desirable cultural aspects of poverty and you end up with a fairly permanent underclass with little hope of advancing.
But that has nothing to do with the rich or how much they make. Problem? Yes. A product of income inequality. No.
And even then, poverty in this country is a relative thing:
Between 1970 and 2010, the net worth of American households more than doubled, as did the number of television sets and air-conditioning units per home. In his book “The Poverty of the Poverty Rate,” Nicholas Eberstadt shows that over the past 30 or so years, the percentage of low-income children in the United States who are underweight has gone down, the share of low-income households lacking complete plumbing facilities has declined, and the area of their homes adequately heated has gone up. The fraction of poor households with a telephone, a television set and a clothes dryer has risen sharply.
In other words, the country has become more prosperous, as measured not by income but by consumption: In constant dollars, consumption by people in the lowest quintile rose by more than 40 percent over the past four decades.
Income as measured by the federal government is not a reliable indicator of well-being, but consumption is. Though poverty is a problem, it has become less of one.
I always think of my mother when I read things like this. She was defined as “poor” after retirement and my father’s death. House paid for, cars paid for, and had more money in retirement (very large savings account) than she could spend, but when measured against the arbitrary income line, you’d have thought she was eating cat food and living in a cardboard box. She lived very well, but her “income” – all she received a year from Social Security – put her under the poverty line.
So Wilson’s point is correct – measuring consumption paints a completely different picture, and that picture says things are getting relatively better for the “poor” in this country even while the rich seem to be getting richer. Something about “lifting all boats” in there.
All of this is, simply, class war populism. President Obama said in his State of the Union address, “call it class warfare if you want.” Okay, I will. That’s precisely what it is. It is the demonization of a class designed to shift blame from one entity (in this case the Obama administration) to another (the rich) and blame them for all the problems now extant.
The fact remains that income inequality isn’t a problem. It is certainly not even a major problem. And for the most part, American’s reject the argument:
American views about inequality have not changed much in the past quarter-century. In their 2009 book “Class War? What Americans Really Think About Economic Inequality,” political scientists Benjamin Page and Lawrence Jacobs report that big majorities, including poor people, agree that “it is ‘still possible’ to start out poor in this country, work hard, and become rich,” and reject the view that it is the government’s job to narrow the income gap. More recently, a December Gallup poll showed that 52 percent of Americans say inequality is “an acceptable part” of the nation’s economic system, compared with 45 percent who deemed it a “problem that needs to be fixed.” Similarly, 82 percent said economic growth is “extremely important” or “very important,” compared with 46 percent saying that reducing the gap between rich and poor is extremely or very important.
So why does the left continue to pursue it? Well, one of the reasons is, as mentioned, a need to blame someone else for the perceived failings of this administration. “It’s not our fault. If only the rich would pay their fair share. But the Republicans won’t allow it”.
The second, of course, is that left – champions of progressive taxation – see this as an opportunity to advance that ideal again. Wilson asks the pregnant question which you’ll never get the left to agree too:
But what is the morally fair way to determine tax rates — other than taxing everyone at the same rate?
The case for progressive tax rates is far from settled; just read Kip Hagopian’s recent essay in Policy Review, which makes a powerful argument against progressive taxation because it fails to take into account aptitude and work effort.
Those are traits that can never be made “equal”. Those are what propel some out of the lowest quintile and keep others in the highest quintile. Since you can’t make people work harder or increase their natural aptitude for work, the only way to make things “equal” is to do what?
Penalize those who excel.
That’s precisely what the progressive tax system does. In the case of this country, it then subsidizes those who don’t excel, thereby getting exactly what those subsides pay for – a permanent underclass, or at least the basis for one.
So, income inequality isn’t our problem. Poverty is. Or at least the American version of poverty. And taxing the rich won’t do a thing to solve that problem. Nope, the answer is much more complex and involved than that. That’s what the left doesn’t want to face. Because if it does, it is likely to find the root of the current problem of poverty in this country directly in programs leftists have touted for decades.
And we can’t have that, can we?
I’ve been meaning to write about this for some time, but events overcame the ability to do so until now (Okay, I forgot about it).
What you’ll see with this particular provision is just stupid law. Granted, the entire law in which this provision is found is, in my opinion, stupid, but this takes the cake. But it also appears to be a politically motivated provision designed to make Health Savings Accounts (HSA) unattractive. I can’t see any other reason for it. George Scoville has written extensively on it. Here’s what he’s found:
Starting Jan. 1, 2011, you will no longer be able to use your Health Savings Account (HSA) to pay for over the counter (OTC) medications at a pharmacy, supermarket or other retail store without a prescription.
Examples of OTC items that will require a prescription for HSA debit card purchases as of Jan. 1, 2011:
- Acid controllers
- Acne medicine
- Aids for indigestion
- Allergy and sinus medicine
- Anti-diarrhea medicine
- Baby rash ointment
- Cold and flu medicine
- Eye drops
- Feminine anti-fungal or anti-itch products
- Hemorrhoid treatment
- Laxatives or stool softeners
- Lice treatments
- Motion sickness medicines
- Nasal sprays or drops
- Ointments for cuts, burns or rashes
- Pain relievers, such as aspirin or ibuprofen
- Sleep aids
- Stomach remedies
Yes, that’s right, suddenly many things that Americans buy without thinking twice about are made prescription items if you want to use your HSA to pay for them. And those would all be legitimate items for purchase with an HSA account. So ObamaCare introduces a hassle factor. What a great way to get people to drop their HSA for something easier and more hassle free – like mandated insurance, no?
But as usual, the law of unintended consequences drops by to say “hello” (the hassle factor is intended, this, probably not although you’d be hard pressed to figure out why they didn’t think of it):
Doctors at East Louisville Pediatrics PSC in Kentucky say they’re writing as many as 50 prescriptions a day for drugs such as Bayer AG’s aspirin and Pfizer Inc.’s Advil that don’t need a physician’s nod to be purchased off pharmacy shelves.
The trend, triggered by the 2010 health-care law, affects more than 20 million Americans with flexible spending or health savings accounts that let them use pretax dollars for medical needs. A U.S. rule that took effect Jan. 1 taxes purchases of over-the-counter drugs except for insulin unless the patient has a prescription, generating $5 billion through 2019, according to the congressional Joint Committee on Taxation.
Doctors, pharmacists, insurers and drug companies say while it may generate money to help expand coverage for the uninsured, the measure is driving up medical costs and creating unnecessary work. They want it repealed, expecting demand to surge at year’s end, when people have to use up balances in the accounts.
“It’s a complete waste of time,” said Conrad Flick, one of five physicians at Family Medical Associates of Raleigh in North Carolina, in a telephone interview. In many cases, he said, he’ll talk with patients by phone to determine why they want the drug before he feels comfortable writing the prescription. “So I’m spending an extra half-hour or hour of my day doing things that I don’t get paid for,” he said.
Administrative costs from the new provision are growing, said Diane Myers, administrator for the East Louisville practice that has eight doctors and two nurse practitioners who write prescriptions. “I bet we’re spending a minimum of 10 hours a week on these things,”she said.
10 hours a week that could be spent doing important things or, in this case, having a life. 10 hours a week lost writing prescriptions for aspirin, for heaven sake.
This is an “improvement”? This saves money? This is a provision that helps bend the cost curve down?
In an alternate universe maybe.
Your government at work.
Sheriff Joe Arpaio and Steven Segal have apparently teamed up to give Segal’s reality show about law enforcement some umph. It has led to a pretty bizarre and dangerous bust. But not “dangerous” in the way you might think.
Apparently Arpaio called out just about everything with a badge to bust a, wait for it, suspected cockfighting entrepreneur.
Of course Crooks and Liars, where the vid comes from had to sensationalize even further an already outrageous story by saying a “tank” was used.
It wasn’t a tank. It was an armored car (and an ancient one at that).
But to take down a suspected cock fighter, it took Arpaio, tens of deputies, a SWAT team, bomb robot and armored car? Oh, and a film crew — don’t forget the film crew.
This is the point Radley Balko makes constantly about the militarization of the police in this country. If they have it, they want to use it. And when you use things like armored cars and SWAT teams, bad things can happen.
One of the things police don’t seem to do very well is due diligence intelligence work. Had they spent any time whatsoever watching the place they felt compelled to use the armored car and SWAT team on, they’d have discovered that the owner was there alone, unarmed and … asleep.
Guys like Arpaio scare the living crap out me. Good police work doesn’t require “overwhelming force” the vast majority of the time. And this was obviously one of them. It makes sense in military doctrine when you attack an enemy. Police, on the other hand, enforce the law. They should be trained and required to use only the force necessary to do that. The opportunity for something to go horribly wrong are increased every time an operation like this is mounted.
It obviously wasn’t necessary to destroy property like Arpaio did here to arrest this man. But then, it wouldn’t be much of a show for Segal if all that happened was a couple of deputies knocking on the door and arresting a sleepy man for suspected cock fighting would it?
The tail, in this case, is wagging a very dangerous dog.
Holy moly, perhaps the oceans will rise and hell will freeze over – but it won’t be because of “climate change” or whatever the warmists are calling it this week. Nope, Al Gore has found a government program he doesn’t like. Yup, that’s right. And not only that – and this is the hell freezing over part of it – it’s a “green” government program.
Yes, friends, Al Gore says that the US government’s subsidies for corn ethanol is “not good policy”.
"It is not a good policy to have these massive subsidies for (U.S.) first generation ethanol," said Gore, speaking at a green energy business conference in Athens sponsored by Marfin Popular Bank.
"First generation ethanol I think was a mistake. The energy conversion ratios are at best very small.
"It’s hard once such a programme is put in place to deal with the lobbies that keep it going."
Gadzooks. A flip-flop. He supported the program previously. Oh, wait – he was just making a political statement then:
He explained his own support for the original programme on his presidential ambitions.
"One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president."
Dear farmers – vote for me and I’ll pay you outrageous subsidies to grow corn for ethanol. "Certain fondness” my rear end. Nothing has changed about Gore in the “I’ll say anything to get what I want” department, has it? Flippin’ piece of crap – buying votes with your tax dollars. Not that he’s the only one that does it, but for heaven sake, given the financial situation we’re in does he have to be so freakin’ glib about it?
Of course the reason corn-ethanol is a crappy idea is the subsidies are high and thus 40% of the corn grown is grown for ethanol. That puts it in competition with corn for food. Any guess what corn based food products have done since this nifty little program has been in place?
Yes, they’ve gone up quite a bit. In this case, we call that the “law of unintended consequences” only as a rhetorical device. The consequences may have been unintended but there were any number of economists saying “if you do that you’re going to drive up food prices”. And, of course, the answer from our government experts was the “you don’t know what you’re talking about”.
You know, the same experts that have told us that more of us can have more health care and it will cost less.
Anyway I thought you’d enjoy Gore’s little walk-back. Don’t forget the same experts who brought you corn-based ethanol and higher food prices will be “debating” an energy bill at some point in the future. I’d hide my wallet before then if I was you.
Even more irony – the groups lining up against the EU’s energy targets mandating the use of biofuels are not who you would expect:
Energy targets for 23 of the EU’s 27 members suggest 9.5 percent of the bloc’s transportation energy will come from biofuels by 2020, said the groups, which include Friends of the Earth, Greenpeace and ActionAid. The crops may need an area twice the size of Belgium, and clearing the necessary land could make the fuels 167 percent more polluting for the climate than sticking with gasoline and diesel, they said.
The proponents naturally say that’s all nonsense:
The EU aims to get 10 percent of its energy for transportation from biofuels, hydrogen and renewable power by 2020. The target is meant to reduce greenhouse gas emissions by 20 percent by 2020.
EU energy spokeswoman Marlene Holzner said the targets require less land than the study suggests and that EU guidelines prevent the use of deforested land.
“The Renewable Directive says very clearly that it is not allowed to chop down forests to produce biofuels,” Holzner said in an e-mail. “The same goes for drained peatland, wetland or highly biodiverse areas.”
Well of course it says that’s not allowed. Whether or not that’s actually followed is another matter entirely. But here’s the point – the directive’s implementation means that existing land that can be used to reach the targets must be converted from growing whatever it is growing now (food?) to being dedicated to biofuel production. Either way a large area (twice the size of Belgium?) is going to have to be dedicated to such production to make the 10 percent target viable. So where does "food production" go? Looking for new land, that’s where. Or, the EU learns to live with the reduction in agricultural products and the resultant increase in prices required to turn the existing land into biofuel production.
The bureaucrats wave away the concern:
The 10 percent target would require 2 million to 5 million hectares of land, and there is enough unused terrain in the EU that was previously used for crop production to cover its needs, Holzner said.
This is classic government intrusion into markets and the beginning of the inevitable market distortions that brings along with the law of unintended consequences. Biofuels have to be grown somewhere. Government is going to subsidize that at a rate higher than growing food. That means, at some point, food growth is going to be displaced. Holzner, with an airy wave of the hand says “hey, the land is available – problem solved”.
Of such are man-made disasters cluelessly formulated and executed.
Your “Econ 101” lesson for the day is a lesson politicians never seem to grasp, although they do love to harp on is “greedy corporations” outsourcing “American jobs”. In effect, they play off of free market decisions necessary to maintain competitiveness in order to characterize corporations as the bad guys (and, naturally, they and government as the white knights).
Of course the market decision I’m speaking of concerns doing what is necessary to remain competitive in highly competitive markets. And, one of the highest costs of production is headcount or the workers. So in a free market, competitive industries are going to seek the lowest cost possible for labor to remain competitive.
That may mean moving to a new country for labor intensive industries where labor costs are lower.
But sometimes it isn’t “greedy corporations” that drive American jobs offshore. Sometimes it is the US Government. Take light bulbs for instance:
The last major GE factory making ordinary incandescent light bulbs in the United States is closing this month, marking a small, sad exit for a product and company that can trace their roots to Thomas Alva Edison’s innovations in the 1870s.
Wait, you say, there’s still a demand for light bulbs! Of course there is – but thanks to government intrusion, that demand, by law, is only for a particular kind – not the incandescent types that we actually manufactured here. Instead of letting the market decide which type of light bulb it wanted, the government decided to mandate it. And what you are now allowed to “demand” is a compact fluorescent, or CFL.
What made the plant here vulnerable is, in part, a 2007 energy conservation measure passed by Congress that set standards essentially banning ordinary incandescents by 2014. The law will force millions of American households to switch to more efficient bulbs.
The resulting savings in energy and greenhouse-gas emissions are expected to be immense. But the move also had unintended consequences.
Rather than setting off a boom in the U.S. manufacture of replacement lights, the leading replacement lights are compact fluorescents, or CFLs, which are made almost entirely overseas, mostly in China.
Consisting of glass tubes twisted into a spiral, they require more hand labor, which is cheaper there. So though they were first developed by American engineers in the 1970s, none of the major brands make CFLs in the United States.
CFLs, as noted, are more labor intensive to manufacture than are incandescent bulbs.
China’s labor costs are far less than the US’s. Therefore, the US government’s mandate ending the use of incandesents by 2014 and mandating CFLs be purchased in their place drove the domestic lighting industry – and the jobs it produced – off shore. And all based on dubious science and the apparent belief that energy production is finite and waning.
Oh, and “how about those green jobs?” Another promise shipped off to China.
When you screw that CFL in some family in China will thank you. And when you pay your taxes some of which go toward unemployment benefits for former light bulb manufacturers here – make sure you thank the politicians for the job well done. I’m sure those former GE workers will.
Did you know there’s a home in Mississippi that has flooded 34 times in 32 years? And each time it has flooded, the federal government, through FEMA’s Federal Flood Insurance Program, has paid the owner’s claim. The house, worth $69,900, has cost the government $663,000 in flood damage claims. That’s almost ten times the home’s worth and averages over $20,000 a year.
If insanity is doing the same thing over and over again and expecting different results, that aptly describes this federal program. It essentially incentivizes home owners to remain in flood prone areas by bailing them out each time they are flooded. And, as you might imagine, that’s finally caught up with the program, as USA Today reports:
FEMA’s National Flood Insurance Program is the nation’s main flood insurer, created by law in 1968 as private companies stopped covering flood damage. The program insures 5.6 million properties nationwide and aims to be self-sustaining by paying claims from premiums it collects.
Instead it’s running deeply in the red. A major reason, a USA TODAY review finds, is that the program has paid people to rebuild over and over in the nation’s worst flood zones while also discounting insurance rates by up to $1 billion a year for flood-prone properties.
Along with the huge losses from Hurricane Katrina, the generous benefits have forced the program to seek an unprecedented $19 billion taxpayer bailout.
As one critic succinctly points out, “if this were a private insurer, it would be bankrupt”. In fact, it with those business practices, it would have been bankrupt years, if not decades ago. And now, hat in hand, it goes to the taxpayer for a bailout. $19 billion dollars worth of bailout.
As a government program, federal flood insurance covers anyone. It’s similar to state-run programs that insure homeowners and drivers who cannot get private coverage. Policies cannot be canceled, and individual premiums cannot be raised based on claims payments.
"It is not run as a business," [FEMA Administrator Craig ]Fugate said.
Congress’ Government Accountability Office said in April that the program is "by design, not actuarially sound" because it has no cash reserves to pay for catastrophes such as Katrina and sets rates that "do not reflect actual flood risk."
Raising insurance rates or limiting coverage is hard. "The board of directors of this program is Congress," Fugate said. "They are very responsive to individuals who are being adversely affected."
Or said another way, Congress has been “captured” by influential constituents who see no problem using their influence to burden taxpayers to subsidize the way of life they prefer – no risk building in areas prone to natural disasters. It isn’t “regulatory capture” per se, but it could certainly be called “constituent capture”. It is certainly rent seeking. Whatever the name preferred, it is an abuse of the taxpayer’s money.
It appears the plan is to continue doing business as usual – providing cheap insurance to builders and homeowners who continue to build or rebuild in flood prone areas. No fault risk taking subsidized by the federal government via taxes. So when you see stories like this, you know who to blame:
In Fairhope, Ala., the owner of a $153,000 house has received $2.3 million in claims. A $116,000 Houston home has received $1.6 million. The payments are for damage to homes and what’s inside.
After all, the view’s beautiful, coverage cheap and can’t be canceled and the risk minimal in terms of dollar loss, so what incentive is there to relocate to an area less prone to flooding as long as the taxpayer is on the hook to subsidize that lifestyle and they keep paying?
You could also entitle it "meet the new boss, same as the old boss". What I’m talking about is a recent meeting between UAW bosses and GM workers. To say it didn’t go well would be a vast understatement)(via Sweetness and Light):
Workers at a General Motors stamping plant in Indianapolis, Indiana chased United Auto Workers executives out of a union meeting Sunday, after the UAW demanded workers accept a contract that would cut their wages in half.
As soon as three UAW International representatives took the podium, they were met with boos and shouts of opposition from many of the 631 workers currently employed at the plant. The officials, attempting to speak at the only informational meeting on the proposed contract changes, were forced out within minutes of taking the floor.
The incident once again exposes the immense class divide between workers and union officials, who are working actively with the auto companies to drive down wages and eliminate benefits.
Actively working with the auto companies? They are part owners now of the auto companies – they’re "management" for heaven sake.
Interesting how it suddenly looks when you’re on the "other side", huh? And in the face of vociferous opposition, the UAW officials abandoned the podium.
All of this was written up at the World Socialist website. There’s also a video which gives real credence to the story. In the beginning someone from the local is speaking. He or she (I really couldn’t tell which) then introduces the UAW international drones at about 2:48. As you watch it, it will remind you of some of the townhall meetings of last summer:
The article goes on to say:
Workers at Local 23 voted 384-22 in May to reject reopening a previous contract, which had guaranteed that wages would remain intact in the event of a sale. GM first announced its intention to sell the plant in 2007, threatening to close it if it did not find a buyer.
Despite overwhelming opposition by the rank-and-file, UAW executives secretly continued negotiations with JD Norman, which they outlined in a document sent to workers last week.
Pretty bad when your union which is now management sells you out, isn’t it? To paraphrase one worker, “they’ll still have their jobs while they sell ours out”. Wow – wasn’t that the argument against the hated “management?” Heh …
Irony – it’s really something to be appreciated sometimes, isn’t it? The UAW always wanted control of the auto companies didn’t it? Now it has it – sweet, huh? And private sector unions wonder why their membership is dropping like a rock.
Or at least they won’t be given much of an incentive to do so if they provide health care:
A study by the National Center for Policy Analysis shows that tax credits in the new healthcare law could negatively impact small-business hiring decisions.
The new law provides a 50 percent tax credit to companies offering health coverage that have fewer than 10 workers who, on average, earn $25,000 a year. The tax credit is reduced as more employees are added to the payroll.
The NCPA study finds the reduction in tax relief to be a cost concern for companies looking to hire additional workers, but operate on slim profit margin yet still provide employee health coverage.
A couple of points – A) the tax credit is temporary (until 2016), and, only covers a small part of the cost of hiring an employee. However, B) it is a available to all small companies with 25 employees or less already offering health insurance. The stated purpose of the tax credit is to encourage those small businesses who fit the template (10 or fewer workers averaging about $25k a year, up to 25) to continue to provide health care and encourage those who aren’t to do so. But it provides the tax credit on a sliding scale, and that scale discourages hiring at the scale breaks:
Using insurance premium cost projections supplied by the nonpartisan Congressional Budget Office (CBO), the study states that the credit reaches its optimal point at 13 workers, with relief peaking at $36,400 for qualifying business.
After the 13th worker the economics surrounding the credit change, the study says.
For employers with 15 workers, taking on an additional hire will reduce the credit by $1,400. For a company looking to expand from 20 to 21 workers, the credit will shrink by $3,733. And businesses will take a $5,600 reduction on the credit when hiring the 25th worker.
The credit phases out for companies with at least 26 employees.
If the company is already at 13, it most likely won’t hire 14, or 15. If it is at 20, it’s most likely not going to hire 21. And 26 is most likely out of the question.
Bill Rys, tax counsel at the National Federation of Independent Businesses, told The Hill that while demand is the primary driver for hiring decisions, costs related to new hires is a key factor.
“To the extent that a tax credit is related to the benefits that you’re paying your employees, it is going to be a factor in determining what is the cost of the employee,” he said. “The fact that you’re losing a portion of the credit because you brought in a new employee is going to have to factor into the cost of who you’re hiring.”
So there is a negative incentive – at least as long as the tax credit exists – to hire people if it will lessen the tax credit. Instead:
“If a business can make a decision to substitute capital for labor – say, contract the procedure out or automate it – I believe [losing the tax credit] will play an important part in the reluctance to hire,” Villarreal said, adding, “It’s puzzling that we have this perverse incentive not to have businesses grow by not encouraging them to hire additional workers.”
UPDATE: Even more good news as companies read through the legislation and discover little hidden nuggets of penalty and cost. For instance:
About one-third of employers subject to major requirements of the new health care law may face tax penalties because they offer health insurance that could be considered unaffordable to some employees, a new study says.
It seems the law deems insurance that is unaffordable by a family to be an insurance cost that is more than 9.5% of their household income. Of course, few if any companies know the “household income” of their employees. That’s because, mostly, it’s none of their business. But also because it may be comprised of a second or third income, dividend, disability or even retirement income.
But, if it is over 9.5% of that household income, companies can be fined up to $3,000 per employee. Of course they won’t know that until and unless the employee files for a federal tax credit because he or she has determined their insurance cost is over 9.5% of their household income (is that gross or AGI?):
If an employer’s health plan is deemed unaffordable, the worker may qualify for a federal tax credit, or subsidy, to buy coverage in a new state-based marketplace known as an insurance exchange. A person claiming a credit must disclose income information to the exchange. The exchange will then notify employers if any of their workers qualify for subsidies.
Along with notifying the employer of this info, I suppose the “exchange” will also notify the appropriate government agency that is responsible for levying the fine.
Wow – no incentive there to just drop coverage for everyone, is there?
What a monstrosity the Democrats have brought upon us.
I mentioned, a week or so ago, that it appeared the developing strategy the White House was going to use in the 2010 midterm elections was to again try running against Bush. The brain-trust behind this idea seems to think it will give President Obama the ability to “ride the wave of anti-incumbency by taking on an unpopular politician steeped in the partisan ways of Washington”. Except the most obvious partisan these last 16 months is Obama and he, in case he hasn’t noticed, is the “incumbent”.
I think Politico and Merle Black pretty much have it figured out when it comes to this sort of a strategy:
It’s a lot to ask an angry, finicky electorate to sort out. And even if Obama can rightfully make the case that the economy took a turn for the worse under Bush’s watch, he’s already made it – in 2008 and repeatedly in 2009.
It’s not clear that voters still want to hear it.
“If you’re the leader of a large corporation and you’re in power for a year and a half and you start off a meeting with your shareholders by blaming your predecessor, that wouldn’t go over very well,” said Merle Black, a political science professor at Emory University. “This is a very weak approach. … And I can’t imagine it having an impact on these very swing voters.”