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Posts Tagged ‘Drugs’

Senator Jeanne Shaheen (D-NH) and a score of Democratic cosponsors want to use the tax code to discourage direct-to-consumer advertising by drug companies. Their bill, the End Taxpayer Subsidies for Drug Ads Act, would prohibit firms from taking tax deductions for any consumer advertising of prescription drugs.

Limiting tax deductions is a blunt and arbitrary way of approaching a legitimate concern. Consumer drug ads play an important role in debates about the costs of prescription drugs, the risks of misuse and overuse of some medications, the balance of authority between doctors and patients, the limits of commercial speech, and a host of other issues. For overviews, see here, here, and here.

But the bill is not well crafted to address those issues. The problem starts with the legislation’s name: Allowing drug companies to deduct advertising costs is not a subsidy. Many other deductions are: The charitable deduction in the personal income tax, for example, subsidizes charitable giving. And the mortgage interest deduction subsidizes borrowing to buy a home.

But the business deduction for advertising costs is not a subsidy. The corporate income tax is a tax on corporate income. To calculate income properly, businesses tote up their revenues and deduct their expenses. Those expenses may include wages for workers, rent for office space, and yes, the costs of advertising.

Under an income tax, companies deduct those expenses because they incur them in pursuit of the profits we have chosen to tax. One can debate how rapidly companies in any industry should write-off their advertising costs. But in an income tax, there is no question that they should write them off.

Rhetoric aside, the broader question is whether limiting deductibility is a good way to discourage consumer drug advertising. Using the corporate income tax to impose penalties this way has the same strengths and weaknesses as much more common efforts to offer rewards.

On the plus side, the tax code provides ready infrastructure for creating a financial penalty. With little legislative effort (the bill is less than three pages), lawmakers can design a meaningful deterrent to consumer ads.

But limiting deductibility is a blunt and arbitrary instrument. In principle, lawmakers should discourage ads based on the harms they want to reduce. Congress should impose large deterrents against the most damaging forms of consumer ads, smaller disincentives to less damaging ads, and rewards for beneficial ads (there is evidence some consumer drug ads create benefits).

Ending the tax deduction does not allow such careful calibration. Instead, it creates a single financial penalty based on the corporate tax rate. Recent tax changes illustrate how arbitrary this can be.

When proposals to eliminate tax deductibility for drug ads were floated in 2009, 2015, and 2016, the corporate tax rate was 35 percent. Eliminating the tax deduction would have increased the effective cost of drug ads by more than half. Without deductibility, a $100,000 ad would have cost as much as a $154,000 ad with the deduction.

But the 2017 Tax Cuts and Jobs Act (TCJA) lowered the corporate rate to 21 percent. Now, eliminating tax deductibility would increase ad costs only by about a quarter. A non-deductible $100,000 ad would cost as much as a deductible $127,000 one.

To those not steeped in tax policy, the Shaheen bill has the same rhetorical power as earlier proposals to eliminate tax deductibility for consumer ads. Indeed, it may have even more rhetorical power – a similar billgarnered only four sponsors last year. In practical terms, however, the bill has lost half its economic effect since passage of the TCJA.

For better or worse, advocates for limiting the tax deductibility of drug ads have lowered their ambition. Such are the perils of basing policy on arbitrary parameters of the tax code, rather than focusing on the real costs and benefits of drug advertising.

So what’s a better approach? Well, as much as I enjoy talking tax, regulation should be the first line of attack here. The Food and Drug Administration should weigh the pros and cons of consumer ads and how they vary across different conditions, therapies, and advertising media.

If taxes are the only game in town, lawmakers should do the hard of work of deciding how bad consumer ads are. They do that when they impose taxes on alcohol and tobacco. They do that when they propose taxes on carbon dioxide. And they do that (for goods not bads) when they decide how big tax credits should be for electric cars and research and development. Arbitrary tweaks to the tax code are not the way to go.

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In real life, economists never get elected president (sorry Larry Kotlikoff), probably with good reason.

In fiction, though, our odds are better. Jed Barlett is one of the most popular presidents ever, and a Nobel Laurate to boot.

And now the Planet Money team is offering up a new, faux candidate for 2012. His six-point plan for getting America going again — built on the suggestions of a diverse group of well-known economists — is five parts tax reform (repeal the mortgage interest deduction, repeal the tax benefit for employer-provided health insurance, eliminate the corporate income tax, institute a carbon tax, tax consumption not saving) and one part marijuana legalization.

Here’s his first campaign ad:

I don’t think President Obama, Governor Romney, or even Governor Johnson have much to fear.

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Scary theme of the week? Rising antibiotic resistance.

Megan McArdle highlighted this challenge in her presentation at the Kauffman bloggers event on Friday; if you have a moment, check out her chart at the 2:00 mark, showing that resistance to new antibiotics has been developing faster and faster.

You’ll hear more about resistance later in the week, as the World Health Organization will make make it the focus of Thursday’s World Health Day. It’s also the subject of a helpful overview in this week’s Economist.

Antibiotic resistance isn’t new. Indeed, as the Economist notes, Alexander Fleming identified this threat in the 1940s. But it appears to be getting worse. Evolutionary pressure combines with market failure to speed the creation of resistant bacteria:

Convenience and laziness top the list of causes of antibiotic resistance. That is because those who misuse these drugs mostly do not pay the cost. Antibiotics work against bacteria, not viruses, yet patients who press their doctors to prescribe them for viral infections such as colds or influenza are seldom harmed by their self-indulgence. Nor are the doctors who write useless prescriptions in order to rid their surgeries of such hypochondriacs. The hypochondriacs can, though, act as breeding grounds for resistant bacteria that may infect others. Even when the drug has been correctly prescribed, those who fail to finish the course are similarly guilty of promoting resistance. In some parts of the world, even prescription is unnecessary. Many antibiotics are bought over the counter, with neither diagnosis nor proper recommendations for use, multiplying still further the number of human reaction vessels from which resistance can emerge.

In economics lingo, there is an externality. If I take an antibiotic, I get the health or psychological benefits. But I also increase the odds of a new resistant strain of bacteria developing, particularly if I don’t take the drug appropriately. But patients and doctors often don’t take that risk into account when deciding whether and how to use an antibiotic.

That’s a tough problem to crack. The standard economist playbook says we ought to disseminate better information and strengthen incentives so that patients and doctors take these risks into account. Better guidelines for prescribing doctors, perhaps, along with better ways of monitoring and rewarding patients for taking the drugs appropriately. One might even consider a Pigouvian tax to discourage antibiotic use, although that raises a host of concerns of its own.

In addition, we could try to expand the supply of new antibiotics.

That raises the usual questions of how best to encourage innovation through patents, prizes, government-subsidized R&D, changes to the drug approval process, etc. But even intelligent policy can’t overcome nature itself. As the graph from the Economist suggests, the potential pool of antibiotics may be drying up.

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If you are troubled by opium production in Afghanistan, Jeff Clemens at Harvard has some bad news for you: eradication efforts are doing little to reduce opiate production. (ht: Tyler Cowen at Marginal Revolution). Moreover, to the extent they are having an effect, it’s to drive up prices and thus enrich the farmers who illicitly grow poppies.

I mention this not only because I find it interesting, but also because it nicely illustrates one of the ideas that I teach my microeconomics students. When you think about policy interventions – in this case poppy eradication efforts – it’s important to understand both the qualitative impacts of the intervention and the magnitude of those impacts.

Your basic supply and demand model will tell you, for example, that eradication efforts will shift the supply curve left (up), resulting in higher prices and lower production. To gauge the relative importance of those two changes, you need to know something about demand. And in this case, the key fact is that demand (from other countries, not Afghan consumers) responds very little to price. In the lingo, opium demand is very price-inelastic (Jeff estimates the elasticity at about -0.09). As a result, efforts to restrict supply translate primarily into price increases, rather than production declines.

The same problem has bedeviled U.S. efforts to restrict illicit drugs. (For example, see this old New York Times editorial about cocaine, which I use in my class – the editorial that is, not cocaine itself.) I haven’t followed the debate in recent years, but my sense is that many observers concluded that demand-side policies (i.e., discouraging consumption) were often a better strategy than supply-side policies. After all, successful demand-side policies would lower both consumption and price, thus lowering profits from drug production.

Given Jeff’s results, I suspect the same may be true in the world of opium production. If policymakers want to reduce consumption, they may want to turn to demand-side policies (assuming, of course, they can design demand-side policies that would have a substantive effect).

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