Starving us of health care innovation, a new tax

The following was published as a Letter to The Editor.
I have added more that was not published below.

Coming in 2013 (after the election) is a new tax 2.3% Obamacare excise tax on medical devices. That’s like a sales tax. It’s a tax on revenue, not profits.

That 2.3% tax will, according to Cook Group chairman Stephen Ferguson, raise their federal corporate taxes from 35% to 50% of profits. Let’s not forget to kick in another 4%-or-so in state income taxes. 25% of the profits that could go towards R&D vanish into the government’s maw.

This will raise, maybe, $20 billion in taxes.

Now, if you want innovation in health care, why in the world would you levy a special tax on it? For the tiny tax revenue, 0.005 of the federal budget?

I can come up with an answer: the government does not want innovation in health care.

New technologies can be expensive. For instance, MRI machines are $1 to $3 million each.

Clearly, one cannot stop innovation but one can slow it down. As Ferguson says, “”Many companies are being forced to limit investments in R&D in the U.S. and go abroad.” The U.S.’s competitive advantage in innovation will be shipped abroad. And those are GOOD jobs. But innovation will slow for a while.

So the government bean counters compute that if you slow down innovation, the cost of health care doesn’t go up even faster.

Of course, people will die because treatments weren’t brought to market. No need for death panels when the government-distorted market in health care will do it for them.

Not published in the letter is the following:

As if the effects listed above aren’t bad enough, there is a horrid effect on medical devices investment.

Consider two companies. Company X makes a computer-controlled electrical distributor for car engines. Company Y makes a computer-controlled pacemaker for human hearts.

Both companies are equally profitable before taxes. That is, they each make $10 on a sale of $100.

It really doesn’t matter what the federal corporate income tax is for these companies in terms of their relative merits but let’s say they have good accountants and have gotten the effective tax rate down from 35% to 20%.

On sales of $100, Company X gets to $8 ($10 less 20%) o distribute to investors as dividends or reinvest in R&D.

Company Y will also have $8 in the absence of the excise tax. But it’s going to be hit with an extra $2.30 (2.3% of $100) in taxes leavening Company Y with $5.80 in profits.

If you were going to invest in X or Y, which one would you invest in? Of course you’d invest in the car company rather than the medical devices company because it will spin off more cash. It;s like asking which bank you would put your money into: one which offers 1% or 2% on its CDs.

It should be easy to see that the medical devices companies will be starved for investment capital.

Which, I believe, was the intent of the drafters of the Obamamcare legislation in order to hold down the cost of health care by robbing us and our children of the innovation that these companies would create to make all of our lives better.

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