"As the congressional session winds down, Congress has some unfinished business – taking action to repeal the medical device tax," said Wayne Winegarden, author of the report. "The medical device tax is bad tax policy that has increased patient costs, reduced access to life-saving technology, and reduced profits and jobs. Repealing the tax would bring many benefits, such as increased medical innovation and better-quality care for patients."
The House of Representatives voted in July to permanently repeal the 2.3% medical device tax that was included in the Affordable Care Act in 2010. The tax has been highly criticized on both sides of the political aisle and has been suspended twice. It's now up to the Senate to end the medical device excise tax once and for all.
Looking at the tax through the lens of ideal tax policy, the new study shows that the tax is a failure. Winegarden cites recent data showing that Congress isn't even collecting the revenue it anticipated - $2.1 billion below estimates between 2013 and 2015. Winegarden is a senior fellow in business and economics at the Pacific Research Institute. He is also the principal of Capitol Economic Advisors.
The study points to the five core tax principles and how the 2.3% medical device tax violates each.
1. The Tax Violates the Neutrality Principle
Simply put, tax neutrality means that taxes should avoid picking winners and losers, Winegarden explains. He said tax neutrality is important because economic growth is best promoted when investors undertake projects based on their economic merits, not based on minimizing their tax liabilities.
The medical device tax violates the neutrality principle, according to the report, because it is designed to tax only a subset of medical devices. Winegarden also argues that the tax, if it is not repealed, would not impact manufacturers of the same type of device equally. Some companies may be able to absorb the costs or make up for lost revenues on one device by raising prices on other devices, while smaller companies may be unable to absorb these costs.
2. The Tax Violates the Simplicity Principle
The principle of tax simplicity means that taxes should be as easy for taxpayers to comply with as possible, and as simple as possible for the government to administer, Winegarden says in the report. Complex taxes, on the other hand, create confusion for taxpayers regarding how much to pay, or whether the tax is applicable or not. Complex taxes are also costly for the government to administer and enable inequitable treatment across similar taxpayers. When taxes violate the simplicity principle, resources are unnecessarily diverted away from productivity-enhancing activities toward tax administration and compliance activities. Efforts by businesses that could be devoted toward innovating or better serving customers are spent complying with the tax.
Complying with the medical device tax is complex for many firms and the high compliance costs disproportionately harm smaller firms, Winegarden noted in the report. For one thing, the tax is complex in how firms calculate the actual sales price of taxable devices because sometimes manufacturers sell directly to hospitals rather than through a distributor. According to the report, this requires companies to create an artificial wholesale price on which to apply the tax.
Ultimately, the complexity of the tax places an additional, disproportionate administrative burden on smaller firms. Smaller firms, in the process of compliance, need to expend a greater percentage of their resources on administration than a larger company. For many medical device firms, adding one more person in the tax department likely means not adding one more scientist in the R&D laboratory, the author argues.
3. The Tax Is Not Transparent
According to Winegarden, tax transparency is essential for both legitimacy and for ensuring that the other desired tax principles are not eroded over time. The more transparent a tax is, the easier it is to determine how it impacts different groups and who is ultimately bearing the burden of the tax.
The medical device tax violates the principle of tax transparency because it is hidden from the consumer who is generally unaware that this tax is priced into the costs of the product, according to the report.
4. The Tax Violates the Consistency Principle
Ideally, taxes should be applied consistently over time and across similar economic activities, Winegarden explains in his report. When taxes are applied consistently, taxpayers know, with certainty, how their actions will impact their future tax liabilities. Take for example a low-rate, broad-based tax on consumption, he said. If the rate is rarely changed, then both producers and consumers know what the tax implications are from selling or buying goods and services today, tomorrow, and next year.
5. The Tax Subjects Some Medical Devices to Double Taxation
Double taxing income, assets, or consumer purchases violates three of the commonly agreed upon tax principles. Systems that double tax the same activity are complex, difficult to comprehend, and biases an economy away from the activity that is being taxed multiple times. Because the medical device tax violates the core tax principles of economic neutrality, simplicity, and consistency, Winegarden argues that the tax subjects some devices to double taxation.