{"id":516845,"date":"2010-04-05T15:21:44","date_gmt":"2010-04-05T19:21:44","guid":{"rendered":"http:\/\/www.theatlantic.com\/business\/archive\/2010\/04\/accounting-for-drug-subsidies\/38499\/"},"modified":"2010-04-05T15:21:44","modified_gmt":"2010-04-05T19:21:44","slug":"accounting-for-drug-subsidies","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/516845","title":{"rendered":"Accounting for Drug Subsidies"},"content":{"rendered":"

Tim Carney has a terrific column<\/a> on the legislative history that led up to the prescription drug kerfuffle I read about last week.  It makes something clear that I found hard to explain during the back and forth with commenters (as I said to Tim last week, this is the most semantically complicated, and yet least actually complicated, issue I’ve tried to explain in a long while).  <\/p>\n

Say you have a company that in 2002 was providing drug benefits to its retirees at a hypothetical cost of $2500* per retiree.  Each $2500 you pay reduces the taxes you owe by about a third of that amount, so the actual cost of the subsidy to the corporation is about $1700.<\/p>\n

In 2003, the Congress passes a Medicare prescription drug benefit.  Worried that corporations would drop their benefits and stick the government with the tab, they offer a subsidy for firms that continue their retiree drug benefits.  That subsidy, 28% of the total benefit cost (up to a cap), costs the taxpayer on average much less than providing the drug benefits, so it’s a good deal for the taxpayer.<\/p>\n

So now the cost to the company for these benefits is $1700-700 or about $1000.  The cost to the taxpayer is $2500-1000, or about $1500–still slightly less than Medicare pays for the average Part D beneficiary, but for much more generous benefits.  One can argue about the economic distortion, but it’s not your traditional “corporate giveaway”.  If it’s a giveaway to anyone, it’s to corporate retirees.<\/p>\n

However, had the Congress structured it the way that is now mandated by the new reform, the company would minimize its tax bill by about $600 instead of $800.  The cost of the drug benefits to the company would be $1200; the cost to the taxpayer, about $1300.<\/p>\n

So this really is an instance of giving the subsidy, and taxing part of it back, because the company was already getting the standard tax subsidy for its retirement benefit<\/i>.  On the one hand, you’re giving them a new subsidy; on the other hand, you’re taking away part of the old subsidy.<\/p>\n

Now, that doesn’t tell you whether this was the right thing to do; I don’t know how many companies will drop their now-more-expensive retiree benefits as a result, which is the relevant question.  But I feel like a lot of people were struggling with the notion that this was the equivalent of taxing the subsidy, so I thought it worth highlighting.<\/p>\n

*This is an arbitrary number mostly chosen because the math is easy.  Please do not attempt to engage me in a discussion of whether or not this corresponds with real-world averages.<\/p>\n



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Tim Carney has a terrific column on the legislative history that led up to the prescription drug kerfuffle I read about last week.  It makes something clear that I found hard to explain during the back and forth with commenters (as I said to Tim last week, this is the most semantically complicated, and yet […]<\/p>\n","protected":false},"author":80,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-516845","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/516845","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/80"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=516845"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/516845\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=516845"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=516845"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=516845"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}