Uwe Reinhardt Highlights The Absurdity Of The Drug Subsidy Controversy

I’ve spent a good part of this week arguing in favor of Congress’ decision to prevent companies from deducting their retiree prescription drug subsidy and I think Uwe Reindhardt makes the case in the clearest possible terms. In all the noise about health care reform bankrupting businesses, we’ve somehow missed the point that closing the double dipping provision does not result in a loss of real wealth.

Large corporations are complaining that the provision will cost them billions of dollars, but they’re not losing real wealth. For the last seven years taxpayers have been bribing these companies to continue providing prescription drug coverage to their retirees by paying for 28% of their expenses. AT&T; and Boeing cashed the checks and deducted the value of the credit from their taxes. Under the new health reform law, companies are still being bribed, but they’re no longer able to deduct that money from their taxes and so they must revise their future earning projections. That noise you hear isn’t a loss of current revenue, its a revision in how much companies think they will receive in subsidies in the future.

Or, as Uwe explains:

Enter now the Medicare Modernization Act of 2003, which since 2006 has provided Medicare beneficiaries with substantial federal subsidies for prescription drugs. To encourage corporations to continue the provision of prescription drugs to retirees under their retiree health plans, rather than dumping the outlay into the lap of the new Part D Medicare program, the law granted corporations a federal subsidy equal to 28 percent of their outlays on prescription drugs for retirees.

The sum of the projected subsidies in the year the law was passed then became a reduction in the firm’s liability for retiree health care, with a corresponding increase in the firm’s net worth. Once again, this book entry was not an increase in real wealth because the subsidies were mirrored in higher current or future taxes falling on other taxpaying entities….It is this accounting entry — the required deduction from book net worth — that The Wall Street Journal and like-minded critics of the current health reform bill appear to regard as a “wholesale destruction of wealth.”

I cannot imagine that many economists would take that view, however — unless the argument is that any time the government redistributes money from general taxpayers to businesses, the latter will automatically turn these funds into wealth-producing new capital investments, rather than use these tax savings to repurchase their own stock in the market or spend them on corporate mergers or simply on higher paychecks.

This situation is analogous to a homeowner being allowed to deduct a government mortgage subsidy from his taxes. “What amount should that homeowner then be allowed to deduct from taxable income for 2009 — the gross interest payment of $14,338, [his payments + government credit] or the net interest payment $10,037 [his payment — government credit]?,” Uwe asks. “If the former, the homeowner in effect could tax-deduct an expenditure that was actually made for him by the government. Would that be reasonable? Many people would say no.”


Indeed, it’s hard to believe that anyone could defend this behavior if it was coming from someone other than a fairly influential and politically generous entity. You either really have to believe in corporate welfare or look for any reason to pronounce health care reform a failure to take up this cause.