Sweet Spots and Doughnut Holes

Paul Krugman is on vacation, so here's a column from October, 2003. The column explains how the 2001 and 2003 tax cuts contain provisions designed to make it politically difficult to call for a rollback of the tax cuts to their original levels:

The Sweet Spot, by Paul Krugman, Commentary, NY Times, October 17, 2003: "What we have here is a form of looting." So says George Akerlof, a Nobel laureate in economics, of the Bush administration's budget policies — and he's right. With startling speed, we've blown right through the usual concerns about budget deficits — about their effects on interest rates and economic growth — and into a range where the very solvency of the federal government is at stake. Almost every expert not on the administration's payroll now sees budget deficits equal to about a quarter of government spending for the next decade, and getting worse after that.

Yet the administration insists that there's no problem, that economic growth will solve everything painlessly. And that puts those who want to stop the looting — which should include anyone who wants this country to avoid a Latin-American-style fiscal crisis, somewhere down the road — in a difficult position. Faced with a what-me-worry president, how do you avoid sounding like a dour party pooper?

One answer is to explain that the administration's tax cuts are, in a fundamental sense, phony, because the government is simply borrowing to make up for the loss of revenue. In 2004, the typical family will pay about $700 less in taxes than it would have without the Bush tax cuts — but meanwhile, the government will run up about $1,500 in debt on that family's behalf.

George W. Bush is like a man who tells you that he's bought you a fancy new TV set for Christmas, but neglects to tell you that he charged it to your credit card, and that while he was at it he also used the card to buy some stuff for himself. Eventually, the bill will come due — and it will be your problem, not his.

Still, those who want to restore fiscal sanity probably need to frame their proposals in a way that neutralizes some of the administration's demagoguery. In particular, they probably shouldn't propose a rollback of all of the Bush tax cuts.

Here's why: while the central thrust of both the 2001 and the 2003 tax cuts was to cut taxes on the wealthy, the bills also included provisions that provided fairly large tax cuts to some — but only some — middle-income families. Chief among these were child tax credits and a "cutout" that reduced the tax rate on some income to 10 percent from 15 percent.

These middle-class tax cuts were designed to create a "sweet spot" that would allow the administration to point to "typical" families that received big tax cuts. If a middle-income family had two or more children 17 or younger, and an income just high enough to take full advantage of the provisions, it did get a significant tax cut. And such families played a big role in selling the overall package.

So if a Democratic candidate proposes a total rollback of the Bush tax cuts, he'll be offering an easy target: administration spokespeople will be able to provide reporters with carefully chosen examples of middle-income families who would lose $1,500 or $2,000 a year from tax-cut repeal. By leaving the child tax credits and the cutout in place while proposing to repeal the rest, contenders will recapture most of the revenue lost because of the tax cuts, while making the job of the administration propagandists that much harder.

Purists will raise two objections. The first is that an incomplete rollback of the Bush tax cuts won't be enough to restore long-run solvency. In fact, even a full rollback wouldn't be enough. According to my rough calculations, keeping the child credits and the cutout while rolling back the rest would close only about half the fiscal gap. But it would be a lot better than current policy.

The other objection is that the tricks used to sell the Bush tax cuts have made an already messy tax system, full of special breaks for particular classes of taxpayers, even messier. Shouldn't we favor a reform that cleans it up?

In principle, the answer is yes. But an ambitious reform plan would be demagogued and portrayed as a tax increase for the middle class. My guess is that we should propose a selective rollback as the first step, with broader reform to follow.

Will someone be able to find the political sweet spot, the combination of fiscal responsibility and electoral smarts that brings the looting to an end? The future of the nation depends on the answer.

Sweet spots seem to have a lot in common with doughnut holes. But on the broader question, two and a half years after the column was written, is it smart politics to call for "selective rollback as the first step, with broader reform to follow" as the elections approach in the fall?  I haven't heard anyone hit the political sweet spot yet.

Comments

[anne]

Clever analogy; a deceptive middle class tax reduction sweet spot to cover the general effect favoring the wealthiest of the tax cut series, and a deceptive first dollar saving on prescription drugs covering a rough second dollar expense as drug costs increase. As the tax cuts have become increasingly slanted to the wealthiest, so the Medicare drug bill has already become more advantageous to drug companies and decidely less helpful to patients.

[anne]

http://www.nytimes.com/2006/06/26/opinion/26mon4.html

June 26, 2006

Escalating Prescription Drug Prices

Two recent surveys of drug prices by consumer advocacy groups show a disturbing pattern of increases as the new Medicare drug benefit was getting under way. The surveys make it clear that health plans and individual consumers will need to be especially vigilant to keep spending on medications within reasonable bounds.

An analysis of 193 brand-name prescription drugs by AARP, which represents older Americans, found that their average wholesale prices increased 3.9 percent over the first three months of this year, almost four times the general inflation rate. Those increases will almost certainly drive up retail prices for consumers who pay out of pocket and will result in higher insurance premiums for many of those who have drug coverage.

Indeed, the second survey, by Families USA, a patient advocacy group, found that virtually all of the new private drug plans under Medicare raised their prices for frequently used medicines between mid-November 2005, when enrollment began, to mid-April 2006. For 19 of the top 20 drugs prescribed for older Americans, these changes were virtually identical, on average, to changes in the wholesale prices charged by manufacturers.

These price trends ought to put enormous pressure on Medicare drug plans to get the steepest possible discounts and rebates from the manufacturers when negotiating drug prices for the coming year....

[anne]

Notice how decisively drug companies followed the passing of Medicare drug coverage with a series of price increases, since there was no threat of allowing Medicare negotiation of drug prices. When the slightest evidence is given that government will not attend to price increases in the industry, there are immediate increases in a pattern repeated for 25 years. Lovely for investors, awful for patients.

[anne]

The turning for the durg companies came in 1980, when the companies were allowed to patent medicines that were developed with public financing. The change allowed for a dramatic increase in patents, dramatic price increases for new drugs that has carried to old drugs, and dramatic profits for the industry. The drug company sector has been the most profitable stock index sector these 25 years. I expect no change.

[anne]

What was darkly comical, by the way, was knowing how drug prices would rise as the possibility of a health care program by Bill Clinton was forgotten and Congress became increasingly Republican and increasingly turned from worrying about drug price increases. Company stock prices show how closely investors anticipated political changes through the years.

[anne]

http://www.nytimes.com/2006/06/21/business/21drug.html?ex=1308542400&en=cf6cbcd54fe7b50f&ei=5090&partner=rssuserland&emc=rss

June 21, 2006

Drug Prices Up Sharply This Year
By MILT FREUDENHEIM

Prices of the most widely used prescription drugs rose sharply in this year's first quarter, just as the new Medicare drug coverage program was going into effect, according to separate studies issued yesterday by two large consumer advocacy groups.

AARP, which represents older Americans, said prices charged by drug makers for brand-name pharmaceuticals jumped 3.9 percent, four times the general inflation rate during the first three months of this year and the largest quarterly price increase in six years.

Price increases for some of the most popular brand-name drugs were much steeper; the sleeping pill Ambien was up 13.3 percent, and the best-selling cholesterol drug, Lipitor, was up 4.7 to 6.5 percent, depending on dosage.

Over all, AARP said, higher prices mean that the cost of providing brand-name drugs to the typical older American, who takes four prescription medicines daily, rose by nearly $240 on average over the 12-month period that ended on March 31.

"When the manufacturers' wholesale prices increase, it gets passed through the system, regardless of who the final purchaser is," said John Rother, the policy director of AARP. Although the drug industry's main trade association challenged the accuracy of the AARP survey, a separate study, by Families USA, a patient advocacy group, found similar inflation rates among brand-name drug prices. While the higher prices have a general impact on the drug-taking public, consumer advocates said the higher prices have special implications for Medicare, which Congress barred from negotiating prices with drug makers when lawmakers devised the new so-called Part D drug program.

Commercial insurers, which are offering the drug insurance plans under Medicare's auspices, do have negotiating power. And they say that by switching to generic drugs, consumers can avoid most of the price increases.

The surveys measured manufacturers' wholesale prices, which would not necessarily reflect any discounts insurers might be able to negotiate.

But even so, the price increases in the Medicare drug plans since they began were identical in many cases with the jump in wholesale prices, Families USA said.

Some health care economists said the price increases, if they continued, could have a devastating effect on the new Medicare drug program.

"Higher drug prices may lead to higher premiums next year, which may discourage enrollees from joining or staying in the program, and fewer enrollees could drive premiums even higher," said Stephen W. Schondelmeyer, a University of Minnesota economist who specializes in drug industry issues.

Mr. Schondelmeyer said one clear indication of the inflation's impact could be seen among the six million low-income elderly and disabled people who previously received drug coverage through Medicaid but were automatically switched to the Part D program when it began in January.

That shift was a windfall for drug makers, he said. "Medicaid would have paid 25 to 30 percent less under the old system, including rebates from the manufacturers, than the new Medicare Part D program is paying." ...

[anne]

http://www.nytimes.com/2006/03/12/business/12price.html?ex=1299819600&en=58f5b388064887dd&ei=5090&partner=rssuserland&emc=rss

March 12, 2006

A Cancer Drug's Big Price Rise Disturbs Doctors and Patients
By ALEX BERENSON

On Feb. 3, Joyce Elkins filled a prescription for a two-week supply of nitrogen mustard, a decades-old cancer drug used to treat a rare form of lymphoma. The cost was $77.50.

On Feb. 17, Ms. Elkins, a 64-year-old retiree who lives in Georgetown, Tex., returned to her pharmacy for a refill. This time, following a huge increase in the wholesale price of the drug, the cost was $548.01.

Ms. Elkins's insurance does not cover nitrogen mustard, which she must take for at least the next six months at a cost that will now total nearly $7,000. She and her husband, who works for the Texas Department of Transportation, are paying for the medicine by spending less on utilities and food, she said.

The medicine, also known as Mustargen, was developed more than 60 years ago and is among the oldest chemotherapy drugs. For decades, it has been blended into an ointment by pharmacists and used as a topical treatment for a cancer called cutaneous T-cell lymphoma, a form of cancer that mainly affects the skin.

Last August, Merck, which makes Mustargen, sold the rights to manufacture and market it and Cosmegen, another cancer drug, to Ovation Pharmaceuticals, a six-year-old company in Deerfield, Ill., that buys slow-selling medicines from big pharmaceutical companies.

The two drugs are used by fewer than 5,000 patients a year and had combined sales of about $1 million in 2004.

Now Ovation has raised the wholesale price of Mustargen roughly tenfold and that of Cosmegen even more, according to several pharmacists and patients.

Sean Nolan, vice president of commercial development for Ovation, said that the price increases were needed to invest in manufacturing facilities for the drugs. He said the company was petitioning insurers to obtain coverage for patients.

The increase has stunned doctors, who say it starkly illustrates two trends in the pharmaceutical industry: the soaring price of cancer medicines and the tendency for those prices to have little relation to the cost of developing or making the drugs.

Genentech, for example, has indicated it will effectively double the price of its colon cancer drug Avastin, to about $100,000, when Avastin's use is expanded to breast and lung cancer patients. As with Avastin, nothing about nitrogen mustard is changing but the price.

The increases have caused doctors to question Ovation's motive — and left lymphoma patients wondering how they will afford Mustargen, which is sometimes not covered by insurance, because the drug's label does not indicate that it can be used as an ointment. When given intravenously to treat Hodgkin's disease, its other primary use, the drug is generally covered by insurance.

"Nitrogen mustard has been around forever," said Dr. Len Lichtenfeld, the deputy chief medical officer of the American Cancer Society. "There's nothing that I am aware of in the treatment environment that would explain an increase in the cost of the drug." ...

[reason]

I have had an idea in the past, that I think could be an effective political spur to fiscal responsibility - and annual citizens dividend. Have the government aim for a surplus that it distributes to taxpayers. Would sure make fiscal responsibility look good - no surplus/no dividend.

[John H. Morrison]

I would like to see someone propose a 90% tax bracket, on individual income (not business income) amounts over (say) three million dollars per year. (This is a tax bracket; the first three million of income would still be taxed at the lower ordinary rates.) This could be a throwaway proposal shifting the medium to make other tax increases more palatable.

Several things argue in favor of that 90% bracket. First, amounts above three million a year aren't hard-earned. It's all pure gravy. A dollar a minute, forty hours a week, fifty weeks a year, is $120,000 a year. Two dollars a minute, eighty hours a week, fifty weeks a year, is still less than half a million a year.

Second, the 90% brack would help establish a somewhat effective maximum income, and eliminate most of the buggaboos of CEOs and high management raking in hundreds of millions or billions of dollars a year while squeezing the maximum productivity out of the lucky-duckies making only fourteen thousand a year.

Third, if someone refuses to work for such "low" wages, such as a CEO refusing to serve, or a movie star refusing to star in more than one movie every five years, good riddance. Many excellent quallified up-and-coming persons would be happy to work for "only" a million dollars a year.

No doubt many details would have to be worked out, but one does not nitpick over details when presenting ideas to the public. The GOP certainly doesn't.

Another proposal would be to tax borrowing as income, deducting repayment of principle so that only real income is taxed overall. This would discourage borrowing. More important, it would eliminate a whole class of tax shelters and the necessity of various rules (passive investment rules, for example) to get around the tax shelters.