Tax Policy and the Economy, Volume 34

This volume presents five new studies on current topics in taxation and government spending.  Mark Shepard, Katherine Baicker, and Jonathan Skinner explore implementation aspects of a Medicare-for-All program, which provides a uniform health insurance benefit to everyone, and contrast it with a program providing a basic benefit that can be supplemented voluntarily. John Beshears, James Choi, Mark Iwry, David John, David Laibson, and Brigitte Madrian examine the design and feasibility of firm-sponsored “rainy day funds,” short-term savings accounts for employees that can be used when faced with temporary periods of high expenditure. Robert Barro and Brian Wheaton investigate the impact of taxation on choice of corporate form, on the formation and legal structure of new businesses, and indirectly on productivity in the economy. Jonathan Meer and Benjamin Priday examine the impact of the 2017 federal income tax reform, which reduced marginal tax rates and the incentive for charitable giving, on such giving. Finally, Casey Mulligan analyzes the impact of the Affordable Care Act on whether firms employ fewer than 50 employees, the employment threshold below which they are exempt from the requirement to provide health insurance to their employees.

• Language: English
• Publisher: University of Chicago Press Journals
• Release date: Jun 22, 2020
• ISBN: 9780226708256

Book preview

Contents

Acknowledgments

Robert A. Moffitt

Introduction

Robert A. Moffitt

Does One Medicare Fit All? The Economics of Uniform Health Insurance Benefits

Mark Shepard, Katherine Baicker, and Jonathan Skinner

Building Emergency Savings through Employer-Sponsored Rainy-Day Savings Accounts

John Beshears, James J. Choi, J. Mark Iwry, David C. John, David Laibson, and Brigitte C. Madrian

Taxes, Incorporation, and Productivity

Robert J. Barro and Brian Wheaton

Tax Prices and Charitable Giving: Projected Changes in Donations under the 2017 Tax Cuts and Jobs Act

Jonathan Meer and Benjamin A. Priday

The Employer Penalty, Voluntary Compliance, and the Size Distribution of Firms: Evidence from a Survey of Small Businesses

Casey B. Mulligan

Tax Policy and the Economy no. 34 (2020): xi–xi.

Acknowledgments

Robert A. Moffitt

Johns Hopkins University and NBER

This issue of the NBER’s Tax Policy and the Economy journal series contains revised versions of papers presented at a conference at the National Press Club on September 26, 2019. The papers continue the journal’s tradition of bringing high-quality, policy-relevant research by NBER researchers to an audience of economists in government and in policy positions in Washington and to economists around the country with interests in policy-oriented economic research. The papers in this issue are wide ranging, from the effects of taxation on charitable giving, productivity, and firm size to studies of proposed policies for Medicare for All plans and employer-sponsored rainy-day savings accounts.

The attendees at the conference were also lucky to hear an interesting lunch presentation by Kevin Hassett of the Hoover Institution and the Lindsey Group, and former chairman of the Council of Economic Advisers, who discussed the evidence on the effect of the 2017 Tax Cuts and Jobs Act on investment, growth, wages, and labor force participation.

I would like to thank Rob Shannon of NBER for his usual expertise and organizational acumen in overseeing the logistical details, invitations, and operational aspects of the conference and to Jim Poterba for his continued assistance with the organization of the meeting. I would also like to thank Helena Fitz-Patrick for assistance in many other aspects of the conference, especially the shepherding of the papers toward final publication. And I would like to acknowledge the continued financial support of the Lynde and Harry Bradley Foundation. Finally, let me express my thanks to the authors themselves for the hard work they devoted to producing high-quality papers living up to the Tax Policy and the Economy standard.

© 2020 by the National Bureau of Economic Research. All rights reserved.

Tax Policy and the Economy no. 34 (2020): xiii–xvi.

Introduction

Robert A. Moffitt

Johns Hopkins University and NBER

The five papers in this issue of Tax Policy and the Economy are all directly related to important issues concerning the US tax system and its transfer system and their effects on productivity, charitable giving, and the distribution of firm sizes.

In the first paper, Shepard, Baicker, and Skinner note increasing recent interest in expanding Medicare coverage, often through so-called Medicare for All plans. Traditional Medicare in the United States covers a uniform set of benefits for all enrollees that is much more generous than public plans in nearly all other developed countries, but over time the efficiency costs of this uniform structure have grown substantially. Focusing on the elderly Medicare population, the authors develop an economic framework to assess the potential efficiency and equity gains from reforming Medicare’s current benefit designs. They argue that there is an inherent inefficiency in providing a uniform benefit to all enrollees because those with higher incomes might prefer a more generous insurance plan than those with lower incomes, who might prefer more money income coupled with a less generous plan. Shepard et al. show that three major shifts have increased this cost of uniformity since Medicare began in 1965: rising income inequality, expanding availability of expensive medical technologies, and increasing costs of financing the program. They then study optimal plans, finding that the optimal uniform Medicare benefit would be substantially less generous than the current plan and that an alternative design with a basic insurance plan that could be supplemented with additional benefits—as seen in many other countries—would generate even higher social welfare benefits. Such a plan may appear less equitable, but the authors demonstrate that the resulting Medicare savings could be distributed in a manner that raised social welfare at all income levels.

In the second paper, Beshears, Choi, Iwry, John, Laibson, and Madrian provide a detailed discussion of the potential of employer-sponsored rainy-day savings accounts. Noting that roughly half of Americans live paycheck to paycheck and that, when financial shocks occur during their working lives, many of these households tap their retirement savings accounts, the authors explore the practical considerations and challenges associated with helping households accumulate liquid savings that can be deployed when urgent preretirement needs arise. In particular, they consider plans that would allow employers to automatically enroll workers into an employer-sponsored payroll deduction rainy-day or emergency savings account. They argue that having separate rainy-day and retirement savings accounts can facilitate greater saving for short- and long-term purposes by helping to psychologically segregate and catalyze these two motives to save and that auto-features and mental accounting can be jointly deployed to reduce the frequency with which short-term needs crowd out long-run retirement savings. Beshears et al. describe three specific implementation options: (1) after-tax employee 401(k) accounts, (2) deemed Roth individual retirement accounts under a 401(k) plan, and (3) depository institution accounts. They present the pros and cons of each approach, given the existing regulatory regime, relative to the following criteria: the ability to automatically enroll employees into the rainy-day account; the targeted size of the rainy-day account; the investment allocation used for the rainy-day account; the fees and expenses associated with setting up and administering the rainy-day account; employers’ ability to match employee contributions to the rainy-day account and the destination of those matching contributions; the ability of the rainy-day account to provide liquidity when the funds are needed; the tax treatment of contributions to, earnings in, and withdrawals from the rainy-day account; the portability of account balances when employees separate from a sponsoring employer; and compliance and potential interactions with the nondiscrimination rules that apply to tax-qualified employer-sponsored plans. They conclude that field testing would provide important new information on the performance of each of these options and that new legislation would be needed to address some of the drawbacks with each approach.

In the third paper, Barro and Wheaton return to the issue of the effect of corporate legal form in the tax system, considering its effect on productivity. The authors note that there are differences in the tax liability between businesses organized as C-corporations and those organized as pass-through entities such as S-corporations, limited liability companies (LLCs), and partnerships. Corporate versus pass-through status trades off benefits (e.g., perpetual identity, limited liability, public trading, and earnings retention) against tax wedges, and incentives to organize in one form or another are affected by a tax wedge. Barro and Wheaton show that those wedges have changed over time and were affected by the Tax Cuts and Jobs Act (TCJA) of 2017, which lowered the tax rate on C-corporations while also liberalizing some rules on taxation of pass-through entities. They note that changes in the tax wedge may affect not just the choice of organizational form but also productivity in the economy. They then go on to assemble a data set that charts the changes in the tax wedge over time, the share of economic activity going through C-corporate versus pass-through form, and measures of productivity. Their results show that the tax wedge has declined, on average, over time, implying that the C-corporate form has been increasingly favored. In further work using regression analysis, they find that C-corporate economic shares decline with the wedge and exhibit negative trends that they relate to legal changes for LLCs. A model that they calibrate to observed total factor productivity (TFP) and C-corporate shares implies that, for 1958–2013, the declining wedge and the gap between corporate and pass-through productivity contributed 0.37% per year out of a total TFP growth rate of 1.09%. From 1994 to 2004, when the TFP growth rate was unusually high at 2.00% per year, they find the contribution from the falling productivity gap to have also been unusually large at 0.77% per year.

In the next paper, Meer and Priday consider the effect of the 2017 TCJA on charitable giving. The authors note that the US tax code subsidizes charitable giving through the itemized deduction, with the justification that charitable organizations may provide valuable societal services while being more responsive than the government. They argue that the degree to which donations are responsive to the tax incentive is a crucial one, especially in light of the changes introduced by the TCJA, especially its reduction in marginal tax rates and substantial increases in the standard deduction. They note that the former directly changes the tax price of charitable giving—that is, the net cost of donating a dollar after accounting for the tax subsidy—whereas the latter reduces the number of taxpayers who are eligible for that subsidy. Meer and Priday provide estimates of the responsiveness of charitable giving to its tax price using newly updated data and then apply those estimates to the parameters of the TCJA. Consistent with previous findings, they find that giving is sensitive to its tax treatment, with a 10% increase in the tax price of giving expected to reduce giving by about 10.4%. They find that the TCJA should be expected to reduce giving by a significant amount for households that stop itemizing as a result of the policy and that increases in disposable income resulting from the reduction in tax liability offset a small proportion of this projected reduction.

In the final paper, Mulligan provides a new study of the effect of the employer mandate in the 2010 Affordable Care Act (ACA). Mulligan notes that taxes and regulations are known to affect the size distribution of businesses because smaller businesses are less subject to enforcement. The author argues that large informal sectors are an obvious result in developing countries but that measurement challenges have hindered quantifying the size distortion’s impact on employment and productivity in developed countries. His analysis uses new and unique data that are readily linked to the specific regulation of the ACA’s employer mandate, which establishes a bright-line legal definition of a large business at 50 full-time-equivalent employees. He reports on the results of a new survey of 745 small businesses that shows little change in the size distribution of businesses between 2012 and 2016, except among businesses with 40–74 employees, in a way that is closely related to whether they offer health insurance coverage. Using measures of both size and voluntary regulatory compliance, Mulligan then links these changes to the Affordable Care Act’s employer mandate. As of 2017, he finds that between 28,000 and 50,000 businesses nationwide appear to be reducing their number of full-time-equivalent employees to below 50 because of that mandate. This reduction translates to roughly 250,000 positions eliminated from those businesses. He concludes that the amount and character of distortions going forward may be different if the mandate proves to be exceptionally difficult to enforce.

Endnote

For acknowledgments, sources of research support, and disclosure of the author’s material financial relationships, if any, please see https://www.nber.org/chapters/c14342.ack.

© 2020 by the National Bureau of Economic Research. All rights reserved.

978-0-226-70811-9/2020/0034-0002$10.00

Tax Policy and the Economy no. 34 (2020): 1–41.

Does One Medicare Fit All? The Economics of Uniform Health Insurance Benefits

Mark Shepard

Harvard Kennedy School and NBER

Katherine Baicker

University of Chicago and NBER

Jonathan Skinner

Dartmouth College and NBER

Executive Summary

There is increasing interest in expanding Medicare health insurance coverage in the United States, but it is not clear whether the current program is the right foundation on which to build. Traditional Medicare covers a uniform set of benefits for all income groups and provides more generous access to providers and new treatments than public programs in other developed countries. We develop an economic framework to assess the efficiency and equity trade-offs involved with reforming this generous uniform structure. We argue that three major shifts make a uniform design less efficient today than when Medicare began in 1965. First, rising income inequality makes it more difficult to design a single plan that serves the needs of both higher- and lower-income people. Second, the dramatic expansion of expensive medical technology means that a generous program increasingly crowds out other public programs valued by the poor and middle class. Finally, as medical spending rises, the tax financing of the system creates mounting economic costs and increasingly untenable policy constraints. These forces motivate reforms that shift toward a more basic public benefit that individuals can top up with private spending. If combined with an increase in other progressive transfers, such a reform could improve efficiency and reduce public spending while benefiting low-income populations.

I. Introduction

The United States spends 18% of gross domestic product (GDP) on health care, and at 6% of GDP, federal health spending represents a quarter of the federal budget. With baby boomers reaching retirement age and the continuing development of expensive new medical treatments, the Congressional Budget Office (CBO) projects a more than doubling of Medicare spending in the next decade, from $711 billion in 2018 to $1.5 trillion in 2029 (CBO 2019). Recent proposals to extend Medicare to new populations, ranging from lowering the eligibility age to Medicare for All, further raise the stakes of using the current Medicare program structure for government-funded health insurance.

Most countries face similar pressures arising from an aging population and medical technology growth, but the traditional Medicare program has specific features that distinguish it from many other insurance plans. It provides a uniform benefit to all enrollees that places few limits on the scope of coverage, even for unproven technologies. By contrast, many countries such as England limit access to new treatments and technologies based explicitly or implicitly on estimates of cost-effectiveness (e.g., Thorlby and Arora 2019). Unlike most employer-sponsored commercial plans, the traditional fee-for-service Medicare also has neither network restrictions on providers nor (with the wrap-around plans held by most enrollees) significant deductibles or copayments.

In this paper, we focus on the design of the current Medicare program for the elderly to assess its trade-offs and provide insights about the implications of using it as a foundation for expanding coverage. We first ask about the efficiency and equity trade-offs involved with its current generous uniform design. Second, we address the question of how rising income inequality, ongoing medical technology innovation, and the budget pressures imposed by an aging population affect the efficiency of the current benefit structure. Finally, we examine the effects of an alternative, nonuniform benefit structure on economic efficiency and equity.

To study these questions, we build on a rich literature in health economics and social insurance design to develop a simple economic model of Medicare that incorporates income inequality, medical technology growth, and distortionary taxes.¹ The model allows us to assess how the welfare consequences of Medicare’s uniform benefit structure have evolved, as well as the welfare effects of potential alternative public insurance designs. We derive predictions using both a stylized graphical framework and simulations from a calibrated version of the model.

The model suggests that Medicare’s uniform benefit has the advantages of simplicity and lower administrative costs, but it also comes with a cost of uniformity. Although high-income households would likely prefer a very generous plan, low-income households would likely prefer lower health care spending and higher take-home pay or more generous nonmedical benefits such as food stamps or housing assistance (Baicker 2001). A uniform program pools everyone into the same plan, creating inefficiency due to mismatch between the public benefit and privately optimal generosity. This cost of uniformity is closely related to the standard efficiency loss from in-kind transfers relative to cash transfers (Currie and Gahvari 2008), but it remains in our model that includes an explicit role for in-kind transfers to provide more equitable access to health care.

Our central argument is that three macro trends have increased this cost of uniformity appreciably since Medicare’s creation in 1965. First, income inequality has risen substantially (Piketty and Saez 2014). Rising inequality leads to growing divergence between rich and poor in willingness (and ability) to pay for generous medical care. Second, there have been dramatic innovations in medical technology: there was much less health care available to buy in the 1960s, and even advanced technologies of the day were relatively inexpensive. Third, average marginal tax rates (MTRs) have increased from less than 25% in 1965 to 30% in 2012 (Mertens and Olea 2018), commensurately increasing the deadweight loss (or economic cost) associated with publicly financed benefits—a trend that will likely continue with the budget pressures from population aging (Baicker, Shepard, and Skinner 2013).

These changes imply that demand among the rich for generous medical care increasingly diverges from what a uniform public system can afford to fund. Although a universal, generous Medicare program may have been efficient in 1965 when options for treatment were both limited and relatively inexpensive, tax rates were lower, and income more evenly distributed, the efficiency cost of maintaining uniform coverage has grown over time. The current benefit design thus may not be a sustainable foundation on which to expand public health insurance.

We describe an alternative insurance benefit design in which the government provides basic insurance but allows higher-income households to top up by purchasing additional coverage for additional services. (Medicare does have in place supplemental Medigap plans, but these are primarily designed to cover copayments and deductibles rather than to cover additional services.) The basic plan is intended to be similar to public insurance provided in many other countries with low patient copayments and deductibles but with more modest provider payment rates and with coverage of treatments restricted to those with proven effectiveness relative to lower-cost alternatives.

Supplemental top-up plans are also common in other countries. Governments often underwrite a basic insurance plan (or mandate the purchase of regulated and subsidized private plans) but then allow households to add on private supplemental insurance.² For example, although Swiss citizens are required by law to have basic health insurance, discretionary private insurance accounts for about one-third of total health care spending (Sturny 2019). In Australia, private insurance offers access to a wider choice of hospitals and faster access to discretionary services (Glover 2019), whereas in England, 10.5% of the population opts for private health insurance coverage (Thorlby and Arora 2019).

Our calibrated model suggests that switching from a uniform Medicare benefit to a top-up structure could generate substantial cost reductions and efficiency gains in the long term. The distributional implications of such a policy change would depend on the alternative uses to which the resources saved on public insurance would be devoted. Many European countries spend substantially more on other social insurance programs than the United States, and some of those nonmedical programs themselves are likely to yield health benefits (e.g., Baicker, Chandra, and Skinner 2012; Bradley and Taylor 2013; Papanicolas et al. 2019). We show in the model that there exists a redistribution of the Medicare dividend that would raise well-being across all income groups.

Our analysis of uniform versus top-up