Flashback – Robbing Peter to Pay Paul

[Here, from over seven years ago, are some examples of government actions showing how failures in economic understanding lead to bad outcomes. Politicians will never change their tactics and sales pitch until voters wise up. In many cases we have to lead the people we elected  away from senseless legislation with hidden, but predictable, consequences.]

When I call for economic understanding by saying that there is no magic money tree, here is what I mean. When corporations incur added costs, whether it be shoplifting, a utility rate increase, wage increases or higher taxes, they find a way to pass the cost along to their customers, usually as higher prices. When governments decide to spend more money, they either raise taxes or borrow, leaving the taxpayers to absorb the cost directly or pay the interest now and leave the principle repayment to future generations.  No magic money tree means that the funds must come from somewhere, not out of thin air, and that somewhere is usually from our wallets, directly or indirectly.  The consumer/taxpayer is the bottom of the economic food chain.

As 2013 begins, the Affordable Care Act (ObamaCare) requires manufacturers of medical devices to pay an excise tax, 2.3% of sales. Besides the possibility of reducing costs by outsourcing to other countries and reducing development budgets, the industry also hints that the added costs will result in a price increase. As this article points out:  “Recent surveys show that medical technology executives are examining a host of other options that will have negative consequences, including passing along the added costs through price increases.” (Emphasis added) Those of us who don’t believe in a magic money tree are not at all surprised.

But look at how circular this situation becomes. The government adds a tax to help offset the cost of healthcare. The companies pay the tax by raising prices. Healthcare providers, doctors and hospitals, raise their prices to account for their now higher costs. Insurance companies raise their premiums or co-pays to account for their now higher costs. The government uses the tax money to subsidize health insurance that is now more expensive due to the tax itself! If anything, the cost of the whole system increases due to the added administration associated with paying and collecting a new tax.

In an economy such as ours, this concept of punishing greedy companies with taxes or penalties doesn’t seem to work very well, and why would we even want to punish someone who provides us with a product or service that we want or need? In general, magic-money-tree thinking leads to a host of unintended consequences.  

As citizens and voters we can solve this, but not until we stop thinking this way ourselves. This type of logic drives decisions by both parties at all levels. They tell us that most of a project will be paid for by a federal government grant, as if that's not our money too.  They try to make us believe that corporations pay taxes by just reducing their profits or paying their CEO less. They spend as if the bills will never have to be paid, as if there is some magic money tree or secret treasury to make it all right.