The Medical Device Tax Makes Sense

Ezra Klein seems to be against the medical device tax - a 2.3% excise tax on medical devices that's supposed to help pay for the ACA. And sure, he's right about the fact that if you were designing optimal tax policy, the medical device tax would never enter the discussion. But, as the debt ceiling debate illustrates, we don't live in an optimal world. So, instead of comparing tax policy to the optimal, let's compare tax policy to the actual.

When writing the ACA, the House really wanted this to be a bill financed by taxes on the wealthy. However, the Senate wanted this to be a bill financed within the industry. This meant that a bill that aimed to expand health care coverage would be partially financed by the health care industry's stakeholders. The health insurance industry, hospitals, and others, would help partially pay for their increased business via taxes and fees. This included the medical device industry. And that makes sense; if you want to both expand coverage and contain costs, taxing and charging health care stakeholders for increased coverage achieves both of these goals while avoiding the economically strange outcome of redistributing resources from the wealthy to the health care industry. And thus was born the medical device tax.

Klein cites job losses and off-shoring as negative effects of the tax. In addition to these, the industry cites reduced R&D expenditures. However, the CBPP is not so convinced. Since the tax applies to both domestically-produced and imported devices, this tax will not increase the incentive to move production overseas. Additionally, cost-containment measures in the ACA may actually spur R&D spending for medical devices. Furthermore, the study that most people cite about increased job losses used economic models and demand elasticities that don't apply to the medical device industry. In other words, they were bogus.

The only plausible argument against the tax that I've seen is the argument of double taxation: that because hospitals agreed to cut costs and because Medicare is decreasing payments, both of which to help pay for the ACA, and because these cut costs and decreased payments will fall on the medical device industry, then the medical device industry will paying twice for increased business. But until the medical device industry releases a credible study on the effects of the ACA on the demand for their products as well as cuts in spending on their profit-margin, we simply won't know whether or not their argument has merit. My suspicion is that they did do a study and found that the ACA, including the taxes, was a net positive. But why release that study when you already stand a good chance of repealing a tax that negative affects you?