The Medical Device Tax Redux

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Update September 1, 2012: St. Jude Medical, Inc. (Minneapolis, MN) has announced layoffs of 300 workers.  Here are the first three paragraphs of the article:

“St. Jude Medical Inc. said Thursday that it has laid off 300 employees, including 80 of its workers in Minnesota, as part of a broader companywide reorganization expected to slash $50 million to $60 million in costs in 2013.

The layoffs are ‘effective immediately,’ said company spokeswoman Amy Jo Meyer. Meyer said the jobs being cut come from ‘a broad range of geographies and types of position.’ She declined to offer further details.

The amount of anticipated savings is close to what company executives expect St. Jude will have to pay in 2013 as part of a new federal medical device tax, but Meyer said, ‘The medical device tax was one of many factors that contributed to the rationale for the realignment of our business, which resulted in the reduction of operating expenses.’ ”

<end of update>

A few days ago I wrote about the burden of the ACA medical device tax.  This post is the medical device tax redux revisiting the previous article in light of a post by the Center on Budget and Policy Priorities that was brought to my attention in the last few days: “Excise Tax on Medical Devices Should Not Be Repealed” by … wait for it … Paul N. Van de Water.  You may recall Dr. Van de Water from my earlier entry.  If not, allow me to excerpt it:

“Dr. Van de Walter got his Ph.D. in economics from MIT in 1975.  Speaking as an MIT alumnus, this embarrasses me.”

The latest post is more of the same.  None of the sources cited are reputable economic studies in any way.  The article is made up of nothing but assertions with no empirical and minimal theoretical basis.  But the real clincher is this:

“The effect of the excise tax on consumers’ costs for health care and health insurance will be minimal and will be swamped by other factors.  Spending on taxable medical devices represents less than 1 percent of total personal health expenditures, so a small increase in their price would have an almost imperceptible effect on health insurance premiums.”

Except for one small detail.  Consumers do not purchase many CT scanners, MRI machines, or PET scanners.  That’s where the real tax revenue comes from.  “Dr.” Van de Walter is apparently denying the second law of supply: cost increases lead to inward shifts of the supply curve which, in turn, lead to price increases for consumers.  While the tax will not increase short-run marginal costs (since, presumably, these large machines last more than one year), the long-run marginal cost curve will inevitably shift up.

I have previously called on Paul Krugman to return his Nobel prize.  I now call on Dr. Van de Walter to give up his Ph.D.


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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.