Another Word on Subsidies

11 Apr

I’ve written before about how the federal government’s tax-exemption for employer-based insurance premiums is the equivalent of a federal subsidy for a private product. Each time I’ve written that, I’ve encountered some resistance from readers. Now, I could get into a protracted debate in the comments section of the blog, but I have other things to do. Therefore, I refer you to this piece from Princeton economics professor Uwe Reinhardt. And, for those of you who would argue with a fencepost, ask yourself one simple question: Do you really think you know as much about what is or is not a subsidy as a full professor of economics at an Ivy League university? (Hint: Unless you have a PhD in economics and a few decades of work experience, you don’t.)


Posted by on April 11, 2011 in Uncategorized


5 responses to “Another Word on Subsidies

  1. Michael Kirsch, M.D.

    April 11, 2011 at 1:25 pm

    Let's be cautious before waving the 'PhD' flag. Lots of PhDs are on both sides of the issue. In addition, it is a known fact that most academics are liberal, so it is not surprising what view on health care a Princeton prof would have. Best, MK

  2. Joel

    April 15, 2011 at 9:37 pm

    Once again, the argument is very simple: Exemptions from taxation and subsidies are not the same thing. They are not equivalent, they do not produce the same results, and no amount of whining and appealing to authority will change it. When an activity or organization claims tax exempt status, no money is exchanged. The exact industry in which they are applied is not relevant to the argument.Let's use federal ethanol subsidies as an easy example. If your growing activity is tax exempt, you will need to evaluate how profitable the growing of feed grains will be: you are guaranteed no income. As the beneficiary of a farm subsidy, however, the difference is clear. You are guaranteed a revenue stream, even for a potentially unprofitable enterprise. It may even make sense to grow entire fields of corn and then simply set fire to them. Understand?Put even more simply, subsidies involve the direct transfer of wealth from one party to another, whereas tax exemption simply allows an operation that will occur regardless to continue unburdened by taxation.Put *even* more simply: Tax exemption alone does not compel action, whereas subsidies do.Sigh. Liberals are very proud of their PhDs, despite rarely being the smartest people in the room. I've generally found that they think credibility can be cheaply substituted for a legitimate argument. Why actually think when you can lean on your credibility or someone else's? My grandfather had 3 PhDs, and never once did I hear him back up an argument with "hint, hint: you don't know as much as me".Suffice it to say that as a builder of highly complex accounting systems that allow large corporations to participate in the very economy of which you speak, I am quite confident in my own credibility on economic matters. That said, it wouldn't matter if Stephen Hawking (CH, CBE, FRS, FRSA, LOL, BBQ) claimed a hot stove wouldn't burn you – you still wouldn't touch it. Keep blogging, Brad.

  3. D. Brad Wright

    April 16, 2011 at 12:05 pm

    Let's look at it this way: If it were a subsidy, the government would tax us and then give that money to employers and require them to purchase health insurance for their employees. Let's say that they collect $250 billion in taxes for that purpose and then spend $250 billion on the subsidy. Now, let's say it's just tax exempt. That encourages employers to buy more expensive coverage and the government goes without $250 billion in revenue. Either way, at the end of the day, the government is out $250 billion because of conditions which encourage employers to purchase more expensive coverage than necessary. The third option, which I prefer, involves neither a tax exemption nor a subsidy, but would make all income taxable. Just as you say, subsidies encourage irrational behavior–growing crops only to burn them down. Well, so can tax exemption have perverse consequences. That's why your salary is a lot less than it should be. Your employer is better off giving you more in the form of benefits rather than salary, because the benefits are exempt from taxation. If they could get you to agree to it, they'd love to pay you in nothing but benefits. A Porsche may not be a Ferrari per se, but both can get you to the same place in a hurry. Likewise with tax exemptions and subsidies.

  4. Joel

    April 16, 2011 at 2:22 pm

    "Now, let's say it's just tax exempt. That encourages employers to buy more expensive coverage and the government goes without $250 billion in revenue."No. The misunderstanding is right there. There is no economic incentive to buy something you don't need (or an excess of something you do) just because it's tax exempt. An exemption and a subsidy will absolutely not net the government an equivalent deficit. There are plenty of ag and tech sector examples, look them up."If they could get you to agree to it, they'd love to pay you in nothing but benefits."Everything you need to know about basic econ is right there in that statement. If you could get people to pay for this blog, you would. An employer sponsored insurance plan is a nice perk, but try making that their sole compensation and the world will be minus one employer. It simply doesn't make sense to provide a group of employees with a lackluster incentive like unnecessary health insurance in lieu of a better salary with their only justification being that it is a tax-free form of compensation.Removing the tax schemes altogether might be fine if it weren't for the massive spending programs already in place. The total federal tax bill needs to be far lower, regardless of how it is collected.

  5. D. Brad Wright

    April 16, 2011 at 2:54 pm

    There is no economic incentive to buy something you don't need (or an excess of something you do) just because it is tax exempt? Au contraire. Food is a pretty basic necessity yes? Now, let's say that produce was tax exempt, while all other groceries were taxable. Are you suggesting that people wouldn't start purchasing relatively more fruits and vegetables than they might otherwise? Their money would go further towards buying those items because of the favorable tax treatment. Similarly, if the government issued vouchers (subsidies) that were only valid for purchasing produce, people would also end up purchasing more fruits and vegetables. Both the tax exemption and the subsidy motivate similar changes in consumer behavior. It isn't rocket science. Both approaches make the item in question less expensive to purchase, so people purchase more of it than they would otherwise. Perhaps not in every case, but on the average. I'm not saying they're perfect substitutes, but to assert that the tax exemption doesn't encourage wasteful purchasing is just wrong.Also, why does having massive spending programs in place pose an issue to making all income taxable? If anything, making health insurance an after-tax purchase would do more to bring costs under control, and would raise revenue that would help reduce the deficit. Care to explain your thinking on this one?As to the total federal tax bill needing to be lower, it is far lower now than it has been since the 1950s.


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