Saturday, October 18, 2008

Professor Mankiw's Taxing the Uninsured Neglects Trejo's Dissertation

Professor Mankiw has a great supply-demand-based discussion of Obama's health plan tax. I hope Greg is correct, but he may not be. Republicans, please do not read what is written below unless you want to have nightmares.

Obama plans to tax employers who do not offer health insurance. Professor Mankiw rightly points out that employers may want to react by paying their employees less. However, the law may get in the way of having wages lower than they would be in the absence of the tax because those wages were already at minimum wage (this was the point of Steve Trejo's dissertation written at Chicago about 20 years ago).

You might say that most jobs already pay above the minimum wage, so that Trejo's analysis rarely applies. However, I bet that the jobs without health insurance coverage are much more likely to be minimum wage than would be the average job. Furthermore, don't forget that Obama and a Democratic Congress could raise the minimum wage, and thereby invalidate your claim that most jobs already pay above the minimum wage.

Yes, I did let my six-year-old son watch "Jaws" before we went fishing.

P.S. There is also the question of, under Obama's plan, how many employees would be without employer coverage. This depends on the size of the tax as compared to the employer cost of obtaining and administering health insurance. Every employer has some critical value of the tax above which she would provide insurance to all of her employees (of which she could have zero) -- in this case the proper analysis is Professor Summers' "Some Simple Economics of Mandated Benefits." (cliff notes: mandated benefits are like a tax equal to the amount (if any) by which the benefit costs EXCEED the employee's valuation of them)


Tino said...

According to these guys:

“nearly 43 percent of uninsured employees are working within three dollars of the minimum wage.”.

They look at 1995-2003, so except the first two year the federal minimum wage was 5.15$, going up to 7.25$ in a few months.

Similarly for 1998 this other paper gets that 42% of uninsured employees earn less than 7$/hour. Put another way, 35% of workers making 7$ or less per hour were uninsured, compared to 5% of those making more than 75.000$ per year.

Obama’s payroll tax has been estimated at 7%, so at full pass-through it’s a 0.07/1.07=6.5% income tax for uninsured workers. That’s twice the 500$ tax cut Obama has promised even around minimum wage.

Of course this is not something the Republicans can campaign on, mainly because it involves incidence, which is too costly to communicate to voters.

That’s the bad news. The good news is that Obamas plan is assuming they will save 140 billion in health care costs by increasing spending, and deliver care to millions of people for 50-65 billion dollar. That is a concrete promise that is almost guaranteed to fail.

Around the time the government created Medicare, in 1964, they estimated it would cost 12 billion by 1990, including inflation. In fact it ended up costing over 100 billion by 1990 (almost 500 per year billion today).

Not only does tax financed health care make consumers change their behavior and increase costs through demand effects

it changes the direction of medical supply. Services and technology are focused on expensive high quality, rather than cost saving.

They Democrats are marketing their plan on the false premise that it will decrease health care costs without decreasing expenditure. Since that’s impossible, soon they will either ration care or raise taxes.

Unknown said...

Hi Professor,

I agree with your assertion that minimum wage workers affected by such requirements could not legally be affected in the form of money wages since those are set by the government, and do not, I believe, include the value of health insurance or other supplemental benefits. Do you think that there may still be a negative effect in the form of lower employment since because of the price restriction, the same argument made as when mandatory additional money compensation (higher minimum wage) is imposed?

On another point, the Census Bureau at writes on page 21 some good statistics regarding income and health insurance coverage. They write that in 2006, the uninsured rates sorted by household income category were
<$25,000: 24.9% uninsured
25K-50K: 21.1% uninsured
50K-75K: 14.4% uninsured
75K+: 8.5% uninsured
This data suggests to me that a lot of people in high paying households presumably with at least one above-minimum-wage job are without health insurance for some reason. Yes, because higher income households are rarer, that still means minimum wage workers are more likely to go without health care, but this data seems to suggest that they are certainly not the only ones without health care, for better or for worse, and may see a wage impact from the tax increase mechanism Greg Mankiw described. Any thoughts?

Also, what does this policy proposal mean for high income households with one high income earner who receives health insurance and perhaps someone else (a spouse) who wants to work at a low wage to earn some extra money? Do you think that the unemployment effect I mentioned in the first paragraph might reduce such prospects for people not in the labor force who otherwise might be working? Would their employer be taxed for not providing health care even if they are willing to work without it because they are covered by a spouse's plan? If so, it would seem that would discourage new entry into the labor force by spouses, mainly women, because of lower wages. Any comments?

happyjuggler0 said...

First off, thanks for the blog, "Doctor Chicago". I read it a lot now that I am aware of it. I forget where I got the link from, likely Mankiw's blog, or Marginal Revolution, or Gabriel Mihalche's blog. The wonders of networks, and I'm not talking only about the internet! :)

This is semi off topic, but since it pertains to getting uninsured people to *voluntarily* buy insurance, not to mention ending a black market, perhaps you'll bear with me.

How about selling green cards instead of giving them away for "free"? We (i.e. the US) would still use the same background checks on immigrants that we currently use by the way.

Here is the kicker though. For a 5-year green card, the immigrant would pay $5,000 in advance, plus provide proof of having bought health insurance, and must annually provide that proof.

With one million new immigrants per year, we could build a "real" wall (regardless of however odious many people feel that would be) between the US and Mexico that would cost $10,000,000,000 in undiscounted dollars and have it completely paid for via green card fees in two years, surely before it is even complete! Note we would still charge the green card fee after the wall is paid for.

Once the wall is built, all illegal immigrants get an amnesty green card for the sum of $10,000, assuming they have never been convicted of a crime (other than actually being an illegal immigrant). Plus they also have to have health insurance to get a green card.

Once the wall is built, and once the offer of amnesty has been extended, anyone who is then deported may never receive a green card, and anyone who has been deported who illegally returns goes to prison (in Alaska, our closest equivalent to Siberia, and with any luck an added deterrent to those from warmer climes).

We could continue to have (preferably much larger) quota per country, with a preference for those from economically developed countries (a quasi-proxy for skilled labor), and for those countries south of our border (e.g. poor Mexicans instead of poor folks from India) who might more easily cross illegally.

We could also have an overflow category (all countries in one pool) for those who don't want to wait on the waiting list. Yes, a waiting list is a (politically necessary) "feature" of my plan anyway. This overflow category must pay at least $5,000 and have health insurance too, but we would auction (a la US treasuries) for x amount of green cards each year.

So for example, if the waiting list for Mexico was five years, and you were a wealthy Mexican entrepreneur eager to move to the US and start a new business here, you could simply put in a ridiculously high bid ($50,000 perhaps), and via the auction rules you'd get a green card at what might turn out to be perhaps $10,000 instead of waiting five years.

The way I see it this policy (i.e. selling green cards combined with a "real" wall) kills at least three birds with one stone.

1) It shuts up the I'm for immigrants, it is illegal immigrants I'm opposed to crowd.

2) It reduces the amount of uninsured (for health) people living in our country.

3) It creates a valuable supply for something that is heavily in demand, and for a profit for US citizens!

For those afraid of terrorists illegally slipping across the US/Mexico border (the 9/11 terrorists entered the US across normal entry procedures with ID, and not via Mexico FWIW), or who are in favor of the drug war and want to win (ha!) it, this is also a bonus.

happyjuggler0 said...

By the way, for point 3 in my previous post, there are two "valuable" somethings in demand, namely green cards as well as immigrants. As usual with capitalism, it is win/win.

Or as I like to think of it, as a classic case of a double thank you (I forget where I first heard the term, but anyway, "there is nothing new under the sun"). When I, and many others, go into a store and pay for something, what often happens after I get my receipt and purchases, is that we both say thank you, having both been supplied with something we wanted.

Also, going back to the original post, I was wondering if you noticed that Massachusetts politicians and the local media and "experts" all said that the MA plan would to a large extent pay for itself as uninsured folks signed up and then stopped using emergency rooms for routine care.

"Shockingly" it didn't work out that way (who'd of thunk it?), and it costed much more than budgeted for.