Saturday, October 03, 2009
The latest mark-up of the Senate Finance Committee bill regulates the compensation that may be paid to executives of health insurance companies:
The Finance panel slogged through an extensive list of amendments throughout the course of the mark-up, but adopted few that would affect the bill’s financing provisions. The most significant approved tax-related amendment, sponsored by Sen. Blanche Lincoln, D-Ark., would limit deductions for executive compensation for certain health insurance providers.
Although legislative text was not available, the amendment appears to prohibit any health insurance provider from deducting executive pay over $500,000 per year if at least 25 percent of the provider’s gross premium income is derived from health insurance plans that meet the minimum creditable coverage requirements in the chairman’s mark. Currently, businesses may deduct up to $1 million per year per executive.
Individuals subject to the restriction include all officers, employees, and directors of a covered health insurance provider.
First, there is no more effective means to subvert an industry -- as opposed to destroying it directly -- than by undermining its ability to recruit good employees and top executives. If they cannot degrade private insurance via a "public option" funded by free capital, then they will do it by making it much more costly for the industry to attract strong people.
Second, I thought we wanted to encourage competition in health insurance? What company that is not now offering health insurance is going to enter the business if it means that its executives have to take a huge cut in pay or its tax bill goes through the roof? This bit of populism is exactly calculated to prevent competition in health insurance, rather than promote it. No doubt to set up the industry for more populist attacks down the road.
Third, lest American businesses thought that the regulation of compensation was purely a function of the financial crisis and would be limited to banks and such, this bit of stupidity teaches otherwise. If you did not know it before, know it now: If the current Congress decides to regulate your business for any reason, whether or not you are on the dole and whether or not you have done a poor job, it will cap your salary. Just don't call them socialists.
The country is in the best of hands.
I think there's a big difference between giving favorable tax treatment of high salaries and prohibiting high salaries.
There's no reason that a company can't pay $5 million to its executives. All this says is that they will get a smaller tax deduction, and the larger they salary that they wish to give, the smaller a relative fraction this is, because it's already capped at $1 million. If the executive is worth the money, they will pay him/her.
This is like the mortgage interest deduction. The limit is $100,000. That doesn't make it impossible for me to buy a house greater than $100,000. It just means I'm not getting a subsidy on the interest for the part of the mortgage that's over $100,000.
Of course, nothing is guaranteed. However, it is reasonable to believe that you get what you pay for most of the time at the margin. If you wanted to bring a Jack Welsh or a Lee Iacocca out of retirement, it would take a lot of $$$
It would appear that the CONCEPT of the government regulating the compensation of private businesses (by whatever means) is being met with a shrug becaus it only affects the rich.
The same response occurred with the introduction of the income tax (1% on the top 1%...gee, who cares about that!!).
Government has no role in the regulation of salaries...PERIOD, END OF SENTENCE!
Allow this...and it won't be long before they are looking lustfully at YOUR salary.
I checked. The mortgage interest deduction goes up to $1,000,000 acquisition debt, not $100,000. There would be quite an effect on home prices. The effect on CEO salaries will also occur. Whether there will be an effect on company performance remains to be seen.
PS: What business is it of congress anyway?
"This bit of populism is exactly calculated to prevent competition in health insurance, rather than promote it."
Say one thing, so another has been a long honored practice among the political class. "Creeping socialism" is happening right now in front of our eyes and too many people think it is only going to affect those other people.
AnthonyH - how is the deductability of employee compensation "favorable tax treatment"? In theory, the corporate income tax is a tax on income, and employee compensation is an expense that subtracts from income, just like the cost of rent, electricity, raw materials, or any other input. The analogy to the home mortgage interest deduction is, well, invalid, since home mortgage interest is personal consumption, just like any other money that you would spend (such as for food, large screen televisions, football tickets, porn, designer clothes, or a weekend in Vegas). Do you seriously not see the difference?
It's favorable because the government generously permits the enterprise to deduct the full salary amount, unlike treatment given to other corporate deductions that often are compensation (like certain entertainment expenses).
But let's not quibble: the purpose of this whole effort is to replace private sector employees with public hires. The CEO's pay will necessarily be less, once he is a bureaucrat. Until that time, insurance company CEO's should simply be thankful they're permitted to keep anything at all.
"Until that time, insurance company CEO's should simply be thankful they're permitted to keep anything at all."
First they came for the bankers, and I did not speak out because I was not a banker.
Then they came for the insurance officers...
Salaries are an expense. If you don't allow a deduction for expenses, at the margin you're taxing revenue -- not income. If you tax income too heavily, you discourage the activity. But if you tax revenue -- not just income -- you're trying to use the tax system as a stealth ban on whatever it is your taxing. This rarely works out the way intended, and often has pernicious unforeseen effects. The federal government sometimes uses punitive taxes in this way as a stealth means to regulate or ban things when it doesn't have the constitutional authority to do so directly. That alone should give pause.
Taxing income is of course a way for the government to raise revenue. But if you use the tax machinery for other purposes it usually backfires. Obama for example is on record as wanting to use taxation to effect income redistribution, not just to raise revenue. A lowering tide strands all boats.
AnthonyH seems to be one of those who thinks that "it's all our money" so that anyone in business should only get to keep what the government lets them. This turns the way our economy actually works -- and the way our government finances itself -- on its head. If the private sector becomes no longer profitable enough to support government, this will become clear. We're getting there by degrees, actually. We're already seeing this in unemployment numbers. A corollary is that we can't tax our way to prosperity.
Good government can promote an economy. A sound currency is the most basic element. But bad government or even no government just drives an economy back to its primitive foundations -- barter and the black market.
The tax code favors certain kinds of consumer spending by allowing deductions for them or treating them as "above the line." Mortgage interest is one example -- economists would say we live in houses that are too big because of it. Another is employer paid health insurance -- economists would say that this leads to plans that are too rich for the beneficiaries. It's actually comical that the Democrats have targeted these "too rich" plans on the assumption that it's only fat cat executives who have them ... when most of those who have them are actually union members.
The Law of Unintended Consequences says three things here:
1) This will screw with the companies affected in ways nobody now knows.
2) Eventually companies will find a different way to provide incentives that are tax-deductable to the best and brightest who they need to attract.
3) End tax receipts will not come anywhere near where Congress expects.
"Second, I thought we wanted to encourage competition in health insurance? "
Do you? Wouldn't it be better to do away with it altogether. Health insurance is a parasitic industry, like money-laundering.
Every cent that goes to the salary of a Health Insurance executive is one cent less to spend on medicine.
"Every cent that goes to the salary of a Health Insurance executive is one cent less to spend on medicine"
Don, you can extrapolate that statement to ANY industry. Any money paid to the executive class is money taken away from the proletariat. It's certainly not a new idea...Karl Marx made this point a long time ago.
There is not a FINITE amount of money. The concept that the bigger piece of pie one person gets smeans that a smaller piece of pie is available for everybody else is a common fallacy. In a healthy economy, the pie just gets bigger...unless, of course, the government disallows a bigger plate.
Having sais that, I am somewhat appalled by the compensation paid to some executives. I think that corporate boards should tighten up on the performance parameters that allow huge reimbursement...but NOT take away the opportunity for huge reimbursement.
Limiting salaries is a very old idea among Democrats. I remember hearing a recording of an old FDR speech c 1942. In it FDR said he didn't believe anyone needed to make over $25000/yr. But somehow I think the threat of salary limitations is overblown. Given the creativity that lawyers an accountants have shown in the financial sector, I am sure there will be ways found to keep the compensation flowing. There are always ways to beat the system.
I agree that there is not a finite amount of money, but the insurance companies are acting as completely unnecessary middle-men between doctors and patients. In effect, they are a heavy tax on medicine. Nothing that they do is of any use to anyone but themselves.
By "executives", I meant the lower as well as the top grades.
Link to Don Cox,
Getting rid of insurance company executives isn't the answer -- we'd just be replacing them with less accountable, less responsible government bureaucrats. Making these people the scapegoat is right out of the Alinsky playbook: "Personalize it" ... Go after people and not institutions; people hurt faster than institutions.
Much of the problem with insurers is the lack of competition. When policy terms are mandated "one size fits all" and there's few insurers they have the perverse incentive of being slow payers and finding ways to weasal on coverage. But don't think the government would be any better. We'll just add an overlay of who gets covered and for what.
We don't expect employers to directly pay for employee housing or groceries ... so why healthcare? Employer paid healthcare is an historical accident -- companies used it as a way to do an end-run around WWII wage and price controls. It's paid above the line, and hence is tax advantaged. Clever union negotiators bargained for it, as companies and governments were often too short-term focused. So it became the norm.
So we have a crazy ass healthcare system that no one would design from scratch, but it's the system we have. I'd be wary of our passing a 1000 page piece of legislation that will change what we have in ways we can't foresee. We haven't even seen the last minute additions to the bill that are sure to show up in the wee small hours of the morning of the day our legislators vote -- the devil is always in these details. It's insane to say we have to spend a trillion dollars more as a necessary downpayment to achieve supposed savings later. Reminds me of "we had to destroy the village in order to save it."
There's a lot of fundamental reforms that we could implement today ... like opening up competition across state lines, allowing more flexibility in plans, and tort reform. We could also experiment with disease management programs. The Whole Foods CEO actually laid out a good plan but got boycotted for not toeing the party line.
"the insurance companies are acting as completely unnecessary middle-men between doctors and patients"
Perhaps, but I'm sure that government Bureaucrats will be a much worse replacement. As much as I hate auguing with insurance companies over treatments and payments, the old saying "You can't fight city hall" comes to mind when I think of goverment replacement.