April 19, 2017    6 minute read

Taxes, Healthcare and the Mother of All Bombs

Where Does It All Go?    April 19, 2017    6 minute read

Taxes, Healthcare and the Mother of All Bombs

People care deeply about healthcare and taxes. Taxes, as an earlier article by this author discussed, pay for a lot of different things. The Defense Department budget comprises 15.8% of the overall budget. Of that budget, $17.2bn involves missiles and munitions, including hardware such as the Mother of All Bombs (MOAB). As people finished up their 2016 tax returns, some may have reflected on the cost of the United States’s overseas engagements in the Middle East and wondered if they could direct their tax dollars specifically to particular parts of the budget – much like restricted gifts to not-for-profit institutions. This author personally directs tax dollars to National Parks – or would, if there were such an option!

$16m for a bomb – the MOAB, or GBU-43B – seems a lot, even if it does explode with the power of a nuclear bomb. As it happens, neither of those facts – both reported in the immediate aftermath of the MOAB being dropped – are true. The MOAB explodes with the force of around 11 tons of TNT, one thousandth the power of a nuclear bomb, and its cost is in the vicinity of $170,000, according to the US Air Force – which is responsible for producing the bomb, as opposed to third parties such as Lockheed or Boeing. The development costs have not been disclosed.

It is interesting to reflect on why the costs were so widely and quickly misreported. Perhaps it is not surprising in an era where the concept of ‘fake news’ has entered our everyday discussions.

The effect of misreporting the costs of the MOAB is to undermine trust in reports on the activities of the Federal Government and to facilitate whatever political position the reader wishes to take, based on whichever information source happens to fit most closely the reader’s own biases. This is dangerous and certainly deserves discussion in another article. It is not, however, the subject of this article. Rather, the introduction is intended to provide some context to the primary subject matter: healthcare and taxes.

Very Real Costs

The cost of healthcare and the cost of taxes paid through quarterly estimates or deducted from each pay packet are very real to every taxpayer in the United States. The first ever pay packet is an immediate reality check on entering the workforce. The surprise on the face of one’s child when that child opens the envelope and discovers the difference between gross and net pay is interesting to behold, and has probably triggered many discussions on the role of government and why exactly there is such a significant difference between gross and net.

There is nowhere in the US Tax Code that stipulates that cash payments are ‘free’ of tax, but the question has often been asked. Estimates of unreported income are difficult because they attempt to get at information that is intended to remain hidden. Studies have been periodically been conducted on this. One, by Vito Tanzi (Estimates of the Size of the Underground Economy), suggests an amount in excess of $600m. This study, however, is over thirty years old. Another, from 2000, instead measuring a period from 1962 to 1980, estimates the underground economy to be around 5 % of GDP. Based on today’s GDP, this would suggest a figure of $1trn.

Academic studies have tracked a close correlation between the marginal tax rate and tax compliance, suggesting that there is a level of taxes that the United States, as a nation, is comfortable with. In 1952, Federal Receipts as a percentage of GDP were just under 18%; in 2016, they were around 17.6%. When this rate moves above the average, tax compliance declines.

Another way to understand compliance is the way in which taxpayers evaluate their charitable giving. A common measure of the efficiency of charitable organisations is the percentage of contributions that make it through the bureaucracy to their intended charitable purpose. Charitable organisations have embraced this benchmark as a powerful marketing tool.

Healthcare Transparency

Healthcare has its own transparency challenges. The traditional advice to doctors has been to avoid apologising for mistakes in treatment on the basis that this may risk increasing the likelihood and/or cost of litigation. In at least one case – the University of Michigan Health System –  another path has been chosen, and doctors have found that transparency has not only been found to bring them into better alignment with their Hippocratic Oath, but has also reduced litigation costs.

Transparency has not always operated as expected, however, as the New York Times revealed at the end of 2016. No doubt there are many reasons for this. Here are three: firstly, patients are, in most cases, not responsible for their healthcare costs; secondly, they are not sufficiently well informed to make price value decisions about their healthcare; and thirdly, the often substantial – in the case of hospitals, very substantial – difference between billing rates and reimbursement rates leaves patients confused about what actual costs ought to be.

There are many articles discussing the issue of billing and reimbursement costs, but none is more eloquent in capturing the essence of the problem than this simple advertisement from Goodwin College promising that a career in medical billing and coding can be launched with their help in 12-18 months.

Truth – the Casualty

So, what is the relationship between taxes and healthcare? The Trump Administration promised it would address the repeal of Obamacare and then move on to tax reform (this author has written elsewhere on this platform about tax reform). When Congress resisted, the President said he would simply allow Obamacare to implode (or explode) and move on to tax reform.

He has now changed course and suggested that there will be no tax reform before healthcare is addressed. At least one reason for this is the 3.8% Medicare tax on net investment income. Repealing Obamacare and the resulting removal of the Medicare tax would reduce Federal Taxes by around $1trn over 10 years. That, not surprisingly, would reduce some of the heavy lifting of tax reform legislation. The two initiatives are inextricably linked.

It is not surprising that the average voter wonders where the truth lies when it comes to understanding the forces in Washington D.C. that influence two of the very real costs – taxation and healthcare – that impact their personal budget on a regular basis. The complexity of the information, the disingenuous way in which the information is reported, and the resulting vast range of cost estimates leave taxpayers with the impression that understanding healthcare is about as easy as grasping water from a flowing river with their bare hands. The vastness of the defence budget and the ease with which it is spent (59 cruise missiles and one MOAB) leave taxpayers wondering about how wisely and measurably the government is spending their tax dollars. At least the price and benefit of a piece of chocolate cake are easily understood.

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