Thursday, November 29, 2012

Obamacare, Tax Incentives and Patriotism

Now that Obamacare (PPACA) is being implemented we can see what the response to some of the law's incentives have been. Because the PPACA requires employers of a certain size to provide health care coverage to any full time worker, employers have an additional incentive to limit full time workers to only those who are absolutely necessary. If you happen not to be absolutely necessary or your employer's business model does not provide for a large number of full time workers, then your employer might decide to limit your hours so that you don't get full time work.

Employers from community colleges to Darden Group (Red Lobster, Olive Garden, Longhorn Steakhouse) to Applebee's have indicated that workers' hours could be limited to avoid health care liability. Stryker, a medical device manufacturer, is not very happy about the new 2.3% medical device excise tax, paid regardless of a company's profits, and has announced that it is reducing staffing levels by 5%. Stryker had other problems already of course, but no one who makes medical devices is pleased with the new tax. Papa John's founder John Schnatter, said that while he was happy that everyone would be getting health care, nothing was for free and he couldn't predict what the independently owned and operated franchises might do.

One study claims that increased costs under Obamacare for small businesses will be negligible thanks to statutory exclusions and tax credits. The problem is that the real world data doesn't line up with the study. Only 170,000 small employers, not 1,000,000 or more, claimed a tax credit. Per the GAO report, this is far fewer employers than originally estimated. It may well turn out that the employers know their business needs and costs better than the federal government does. And if it doesn't make financial sense for them to purchase health insurance they won't do so. It may be cheaper for a company to pay a penalty or reduce staffing rather than to provide health care insurance.

Fewer small employers claimed the Small Employer Health Insurance Tax Credit in tax year 2010 than were estimated to be eligible. While 170,300 small employers claimed it, estimates of the eligible pool by government agencies and small business advocacy groups ranged from 1.4 million to 4 million. The cost of credits claimed was $468 million. Most claims were limited to partial rather than full percentage credits (35 percent for small businesses) because of the average wage or full-time equivalent (FTE) requirements. 28,100 employers claimed the full credit percentage. In addition, 30 percent of claims had the base premium limited by the state premium average.
One factor limiting the credit’s use is that most very small employers, 83 percent by one estimate, do not offer health insurance. According to employer representatives, tax preparers, and insurance brokers that GAO met with, the credit was not large enough to incentivize employers to begin offering insurance. 

In addition, since there is a good chance that taxes will increase in whatever deal the President and Congress work out, some people are making moves now to reduce their tax burden by all available legal means. This could backfire on these people because taking a smaller gain now with a lower tax rate might not net them as much as a larger future gain with a higher tax rate but each individual must make the financial decision that is right for them. If you think the future gains won't offset the higher taxes then recording income now while taxes are low could be the smart move.
Business owners and investors are rapidly maneuvering to shield themselves from the prospect of higher taxes next year, a strategy that is sending ripples across Wall Street and broad areas of the economy.Take Steve Wynn, the casino magnate, who has been a vocal critic of higher tax rates. He and his fellow shareholders in Wynn Resorts, the company announced, will collect a special dividend of $750 million on Tuesday, a payout timed to take advantage of current rates. Experts estimated that taking the payout this year instead of next could save Mr. Wynn, who owns a sizable stake in the company, more than $20 million. 
For the wealthy like Mr. Wynn, the overriding goal is to record as much of their future income this year as they can. This includes moves as diverse as sales of businesses, one-time dividends and the sale of stocks that have been big winners.“In my 30 years in practice, I’ve never seen such a flood of desire and action to transfer a business and cash out,” said Kenneth K. Bezozo, a partner in New York with the law firm Haynes and Boone. “We’re seeing a watershed event.”Whether small business owners or individuals saving for retirement, investors are being urged by their advisers to reconsider their holdings.
Along the way, many are shedding the very investments that have been the most popular over the last year, contributing to recent sell-offs in formerly high-flying shares like Apple and Amazon. Investors typically take profits in their own portfolio at year-end, but the selling appears to be more targeted this year. Stocks with large dividends, for instance, are seen as less attractive because of the perceived likelihood of a sharp increase in the tax rate on dividends.
These moves were thoroughly predictable. Some people who opposed the PPACA pointed these things out before hand but they were often ignored. These decisions seem to have incited some derision and anger among people who supported the PPACA and higher marginal tax rates. Some have argued that paying (higher) taxes is patriotic. Certainly the late NY Mafia Boss Frank Costello thought so. But regardless of your patriotism and love for your country, business is business. Nobody in their right mind sits down to do their taxes and then decides to pay more than what is owed to the Federal government. If the Federal government passes a law that says if you do x, y, and z then you owe this amount, it should not be surprised or upset if people do their best to avoid doing x, y, and z. The government might get less than what it expected to get in revenue because, ceteris paribus, people suddenly find incentives to change their behavior. If the behavior being taxed is not strictly speaking 100% necessary or otherwise unable to be changed, when you tax something you will generally get a little less of it.

And tax avoidance is 100% legal. It's tax evasion that will get you in trouble. If a state raises its income tax I can move. If the federal government tells me that capital gains are taxed more lightly than income, I can start buying more stocks, real estate and start or purchase a business. If a city tells me there is a toll involved in using a particular expressway, I can take another route. If the federal government tells me that I pay less in taxes by using an IRA or 401K to save for retirement, then I may well investigate doing so. If I am paying $2000/mth in rent and discover that I could pay the same amount for a mortgage and deduct local property taxes and interest from my federal taxes, you know I just might consider that move. And if the federal government tells me that hiring this person will cost more than I think the employee is worth, then I may do my best to get along without hiring that person. This is the essence of economics. People respond to incentives.

People supported the PPACA because they thought it was the just thing to do. And maybe it was. Time will tell. The costs involved and changes made may be quite small once all the dust settles. But that doesn't change the fact that it will cost. At the margins, some behaviors will change. I don't see this as especially surprising or troubling. What I do see as troubling is the outrage and bewilderment among supporters of the PPACA that people actually make decisions based in part on economic incentives. Just as there is an observer effect in physics, there is a taxing effect in economics. No one likes The Taxman.

Questions

1) Do companies have the right to investigate changing staffing and pricing in response to the PPACA? Are you surprised by these moves?

2) Are some companies and individuals blaming the PPACA for their own poor financial decisions? Are these just post-election temper tantrums?

3) Do you pay more taxes than you owe? Is it unpatriotic to limit your tax liability? 

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