Alex Hendrie and Isabelle Morales

Biden Competition EO Could Open U.S. to Unvetted Medicines, Harm Innovation, and Reduce Access to Cures

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Posted by Alex Hendrie and Isabelle Morales on Monday, July 12th, 2021, 3:05 PM PERMALINK

Last week, President Joe Biden issued an Executive Order on Competition policy. This EO contains several proposals related to prescription drugs, which if implemented could harm American innovation, reduce access to care, and pave the way for socialist healthcare policies. 

The EO directs the federal government to continue pushing for the importation of prescription medicines from Canada. In addition, the proposal calls for the HHS to develop a plan to reduce the cost of prescription medicines. 

Importation of prescription medicines from Canada is unrealistic, may not result in savings, and could even lead to unsafe drugs flooding the U.S. market. 

While importation may sound like a reasonable concept, this proposal is highly flawed and would likely do little or nothing to reduce costs. 

First, Canada does not have the scale to successfully import drugs to the U.S. in any meaningful way. Canada is one-tenth of the U.S. with a population of 37.5 million and an economy of $1.7 trillion. By comparison, the U.S. has a population of 327 million and an economy of $20.5 trillion. Canada also represents just 2 percent of the world’s pharmaceutical consumption while the U.S. makes up almost 45 percent. 

Instead, this proposal may destabilize the Canadian supply chain, a concern raised publicly by Canadian officials. If 40 percent of Canada’s existing prescriptions are diverted into America, Canadian supply would run out in just 118 days – or 16 weeks. In this scenario, Canadian officials would naturally be incentivized to reduce the supply of imported drugs to keep their prices low and avoid shortages.  

Second, it is unclear whether there will be any savings from importation. The non-partisan Congressional Budget Office (CBO) has previously estimated that importing drugs from Canada would have a “negligible reduction in drug spending.” 

Many high-cost drugs will likely be excluded from the importation plan, further undercutting the potential to deliver savings. According to the American Action Forum, 42 of the top 50 Medicare Part B drugs by total spend and 31 of the top 50 Medicare Part D drugs by total spend would not be eligible for importation under an earlier version of this proposed plan.  

Finally, there are also long-standing concerns that importation will flood the U.S. market with unsafe, unvetted drugs. Every single FDA Commissioner and HHS Secretary over the past two decades have raised concerns about importation and declined to vouch for its safety. Four former FDA commissioners from the Obama and Bush Administrations wrote a letter to members of Congress expressing numerous problems with importation, chief among them that importation “...could lead to a host of unintended consequences and undesirable effects, including serious harm stemming from the use of adulterated, substandard, or counterfeit drugs”  

There is no way for the FDA to properly verify that imported drugs are safe. Canada allows drugs to be imported from anywhere – including third world countries – into Canada and then into the United States, raising serious doubts about the safety of these drugs. 

The EO’s directive to combat high prescription drug prices and price gouging could result in socialist price controls. 

While this directive is vague, it is likely a precursor to socialist price controls that would dramatically expand the size and scope of the federal government.

House Democrats are pushing H.R. 3, the Lower Drug Costs Now Act. This legislation imposes new taxes and government price controls on American medical innovation. Under the legislation, pharmaceutical manufacturers that do not agree to foreign price controls would face a retroactive tax of up to 95 percent on the total sales of a drug (not net profits). This means that a manufacturer selling a medicine for $100 will owe $95 in tax for every product sold with no allowance for the costs incurred. No deductions would be allowed, and it would be imposed on manufacturers in addition to federal and state income taxes they must pay.  

Others on the Left are pushing to have the government takeover private sector negotiation in Medicare Part D. Instead of having the government directly provide care, Medicare Part D leverages competition between pharmacy benefit managers (PBMs), pharmaceutical manufacturers, plans, and pharmacies to provide coverage to seniors. This lowers costs and maximizes access for seniors.

At the core of this program is the non-interference clause which prevents the Secretary of Health and Human Services (HHS) from interfering with the robust private-sector negotiations. The Congressional Budget Office has even said that there would be a “negligible effect” on Medicare drug spending from ending non-interference.

This structure has been successful in driving down costs. Since it was first created, federal spending has come in 45 percent below projections - the CBO estimated in 2005 that Part D would cost $172 billion in 2015, but it has cost less than half that – just $75 billion. Monthly premiums are also just half the originally projected amount, while 9 in 10 seniors are satisfied with the Part D drug coverage.

Either proposal would severely harm medical innovation, threaten high-paying manufacturing jobs, and limit access to cures. 

According to a study by the Galen Institute, patients in the U.S. had access to nearly 90 percent of new medical substances launched between 2011 and 2018. By contrast, other developed countries had a fraction of these new cures. Patients in the United Kingdom had 60 percent of new substances, Japan had 50 percent, Canada had 44 percent, and Spain had 14 percent. In many cases, Americans are able to buy less expensive generics before countries with socialized medicine can even access the underlying new medicines. 

Nationwide, the pharmaceutical industry directly or indirectly accounts for over four million jobs across the U.S and in every state, according to research by Economy Partners, LLC. This includes 800,000 direct jobs, 1.4 million indirect jobs, and 1.8 million induced jobs, which include retail and service jobs that are supported by spending from pharmaceutical workers and suppliers.

The Biden administration’s healthcare proposals could harm medical innovation and open the U.S. market to counterfeit, dangerous drugs. Rather than pushing proposals that dramatically expand the size and scope of the federal government, policymakers should look to solutions that promote competition and improve the quality of healthcare for Americans across the country.

Photo Credit: SteFou!

Biden Budget Calls for 30 Tax Increases

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Posted by Alex Hendrie and Isabelle Morales on Tuesday, June 1st, 2021, 4:35 PM PERMALINK

President Joe Biden’s Fiscal Year 2022 budget proposal calls for 30 tax increases on American individuals and businesses totaling $2.975 trillion over the next decade. 

The budget also calls for new IRS “enforcement” measures carried about by 87,000 new IRS agents that Biden claims will squeeze taxpayers for an additional $787 billion. 87,000 IRS agents could fill Nationals Park twice.

Combined, these proposals would increase federal revenues by $3.76 trillion over the next decade. 

The list of 30 tax increases is below: 

1. Raise the corporate income tax rate to 28 percent: $857 billion tax increase 

After accounting for state corporate taxes, Biden will give the U.S. a 32 percent corporate rate, a tax rate significantly higher than Communist China’s 25 percent tax rate. 

This tax increase will harm working families, as a significant portion of this tax is borne by workers in the form of wages and jobs. This is not a point of contention. In a 2017 report, Stephen Entin of the Tax Foundation argued that 70% of corporate taxes are borne by labor. Other economists argue that anywhere from 20% to 50%, to even 100% of the tax hits workers. 

It will also harm families by increasing the costs of household goods and services. A 2020 study by the National Bureau of Economic Research found that 31% of the corporate tax falls on consumers. 

This tax increase won't just hit large businesses. One million C-corporations are classified as small employers, defined by the Small Business Administration as any independent business with fewer than 500 employees. 

A corporate tax increase will also threaten the life savings of families by reducing the value of publicly traded stocks in brokerage accounts or in 401(k)s. Individual investors opened 10 million new brokerage accounts in 2020 and at least 53% of households own stock. In addition, 80 million to 100 million people have a 401(k), and 46.4 million households have an individual retirement account. 

2. Double the capital gains tax to 40.8 percent and the imposition of a second death tax by imposing capital gains taxes on unrealized assets at death: $322 billion tax increase 

The U.S. currently has a combined capital gains rate of over 29 percent, inclusive of the 3.8 percent Obamacare tax and the 5.4 percent state average capital gains rate. Under Biden, this rate would approach 50 percent. This would give the U.S. a capital gains tax that is significantly higher than foreign competitors. 

Under Biden’s plan, Californians will pay a top capital gains tax rate of 54.1 percent (37% + 3.8% + 13.3% California state rate = 54.1%). 

The budget will also impose the 40 percent capital gains tax on the unrealized gains of every asset owned by a taxpayer when they die. This will be imposed in addition to the existing 40 percent Death Tax and will disproportionately fall on family-owned businesses, many of which are asset rich, but cash poor. 

These businesses are already forced to liquidate structures, equipment, land, and other assets because of the Death Tax. Repealing step-up in basis will compound this problem and force family-owned businesses to sell a significant portion of their business or go into significant debt to pay their tax liability. 

Taking away step-up in basis has already been tried and failed. In 1976 congress eliminated stepped-up basis but it was so complicated and unworkable it was restored in 1980.

As noted in a July 3, 1979 New York Times article, it was "impossibly unworkable": 

“Almost immediately, however, the new law touched off a flood of complaints as unfair and impossibly unworkable. So many, in fact, that last year Congress retroactively delayed the law's effective date until 1980 while it struggled again with the issue.” 

3. Increase the top income tax rate to 39.6 percent: $132 billion tax increase 

This tax increase will hit small business that are organized as sole proprietorships, LLCs, partnerships and S-corporations. These “pass-through” entities don’t pay taxes themselves but pay taxes through the individual side of the tax code. 

A significant portion of business income is paid through the individual side of the tax code. As noted in a Senate Finance Committee report, "in 2016, only 42 percent of net business income in the United States was earned by corporations, down from 78.3 percent in 1980." 

4. Impose a 15 percent minimum tax on “book income”: $148 billion tax increase 

This tax increase will create a new minimum tax on American businesses and disallow important, bipartisan credits and deductions that help promote job creation and economic growth.  

The Left routinely disparages businesses that lower their federal income tax liability through the use of credits and deductions, falsely arguing that these businesses are using tax loopholes. In reality, these businesses are using a number important, bipartisan tax provisions, like research and development tax credits, full business expensing, and the deduction for net operating losses. 

For instance, in 2009, Speaker Pelosi hailed legislation expanding NOLs, arguing the provision helps businesses “succeed” and “hire new people.” Similarly, President Obama pushed to expand full business expensing, arguing it would be a “strong incentive to increase investment.” 

5. Create a 21 percent global minimum tax: $533 billion tax increase 

This would modify existing international tax rules to create a 21 percent global minimum tax on American businesses operating overseas. 

This will impose double taxation on American businesses and make it difficult for them to compete against foreign companies. Under Biden’s plan, an American business operating in the United Kingdom will face British taxes and then American taxes. By comparison, a British business operating in the U.S. will only pay U.S. taxes because the UK has a territorial system that only taxes income earned in that country. 

6. Repeal the deduction for foreign-derived intangible income: $123 billion tax increase 

This will impose a steep tax increase on American businesses that house their intellectual property in America. 

7. Replace the Base Erosion Anti-Abuse Tax (BEAT) with the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) Rule: $390 billion tax increase 

This would replace the BEAT with a new minimum tax set at either 21 percent or a rate agreed to by the Organisation for Economic Co-operation and Development. 

Treasury Secretary Janet Yellen wants to surrender U.S. sovereignty to the OECD and the G20, a group that includes China and Russia. She has previously stated she wants to “end the pressures of tax competition” and “make all citizens fairly share the burden of financing government.” 

8. Raise taxes on 1031 Like-kind exchanges: $19.5 billion tax increase 

The budget proposes disallowing taxpayers from utilizing 1031s if they have gains exceeding $500,000. 1031s are not a tax loophole as some claim but are important tax provisions promoting reinvestment and liquidity. Repealing this provision would harm smaller real estate investors by forcing them to forego new investments or go into debt to finance transactions. 

1031s are typically used for smaller real estate transactions. According to the National Association of Realtors, 1031s were used in about 12 percent of real estate sales. Almost 85 percent of these transactions were from smaller investors such as sole proprietorships or S corporations. 

Repealing 1031s would harm investment in property. It would increase holding periods as taxpayers would be encouraged to retain assets longer to avoid paying capital gains taxes. In fact, due to the added complexities of financing projects and taking on debt, an estimated 40 percent of real estate transactions would not have occurred without 1031s. 

9. Limit foreign tax credits from sales of hybrid entities: $436 million tax increase 

This proposal would prohibit American businesses from claiming foreign tax credits on certain foreign acquisitions. 

10. Deny businesses tax deductions related to certain international investment: $112 million tax increase 

11. Restrict interest deductions for certain financial reporting groups: $18.6 billion tax increase 

12. Makes permanent the cap on passthroughs deducting net operating losses: $42.9 billion tax increase 

The provision makes the $500,000 cap on passthrough businesses deducting excess business permanent. This could impact a restaurant, retailer, or other capital-intensive business that sees significant business losses in any year due to the cost of wages, rent, new equipment, inventory, and interest payments. 

The cap was originally created by the Tax Cuts and Jobs Act passed by Congressional Republicans. It was used to offset the creation of the 20 percent deduction for passthrough businesses, which resulted in a net tax cut for taxpayers. The budget proposes making the cap permanent, but not the 20 percent deduction, resulting in a significant tax increase. 

13. Increase taxes on carried interest capital gains: $1.5 billion tax increase 

In addition to raising the capital gains tax, Biden would increase taxes on carried interest capital gains. Not only would this have the same negative impact as the capital gains tax increase, but it will also threaten the retirement savings of Americans across the country. 

Carried interest is the tax treatment for investment made by private equity investors. Private equity is an investment class structured as a partnership agreement between an expert investor and individuals with capital. 

Private equity seeks to invest in companies with growth potential and, as a result, has the potential to deliver strong returns. In fact, according to a recent study, private equity returned gains exceeding 15 percent over 10 years. 

Because of these strong gains, private equity is a popular and reliable investment strategy for Americans across the country. The largest investor in private equity is public pension funds, which have collectively invested an estimated $150 billion in private equity. As noted by one study, 165 funds representing 20 million public sector workers have invested an average of 9 percent of their portfolios in private equity. 

The financial security these returns provide to American savers, including firefighters, teachers, and police officers, will be threatened if lawmakers raise taxes on carried interest capital gains. 

14. Close the “Biden” loophole on Medicare Payroll Taxes: $236 billion tax increase 

The budget proposes disallowing taxpayers from using passthrough entities like S-corporations to avoid the 3.8 percent Obamacare net investment income tax.  

Biden has repeatedly utilized this loophole in a practice that left-leaning tax experts described as “aggressive.” Specifically, he avoided paying $500,000 in payroll taxes including $121,000 in Obamacare taxes by sheltering $13 million of income in several S-corporations. 

It is clear hypocrisy that Biden used the same loophole that he now wants to close. Moreover, Biden supports expanding Obamacare and routinely says “the rich” need to pay their fair share. 

15. Repeal expensing of intangible drilling costs (IDCs): $10.5 billion tax increase  

The expensing of IDCs allows companies to recover costs such as labor, site preparation, equipment rentals, and other expenditures for which there is no salvage value. IDCs often represent 60 to 80 percent of total production costs. This tax hike could result in the loss of over a quarter million good-paying jobs by 2023. As a recent letter by Rep. Jodey Arrington (R-Texas) and over 50 members of Congress explains, IDCs are neither unique nor lavish tax breaks for the oil and gas industry:  

“IDCs are not credits, loopholes, or subsidies. They are ordinary and necessary deductions, and a far cry from the lavish tax credits flowing to wealthy green energy investors and electric vehicle owners. Our tax code is designed to levy taxes on net profits, not on dollars used for operational costs or capital expenditures. Every business since the inception of the tax code, has used cost recovery provisions.” 

Biden is proposing to repeal many oil and gas tax provisions even though the cost of gasoline and energy is increasing, with the cost of gas at a seven-year high.

Not only would these tax increases further increase the cost of energy, they will also threaten millions of high-paying manufacturing jobs that the oil and gas sector supports. Biden routinely claims he is a champion of high-paying manufacturing jobs, yet these tax increases undermine this claim.

16. Modify foreign oil and gas extraction income and foreign oil related income rules: $84.8 billion tax increase  

This proposal would increase taxes on foreign oil and gas extraction income for American businesses operating overseas. 

17. Repeal enhanced oil recovery credit: $7.8 billion tax increase  

This provision would repeal the 15 percent credit for eligible costs attributable to enhanced oil recovery (EOR) projects like the costs of depreciable or amortizable tangible property or intangible drilling and development costs (IDCs). This credit is a bipartisan provision to incentivize carbon capture and sequestration, ultimately leading to less greenhouse gas emissions. 

18. Repeal credit for oil and natural gas produced from marginal wells: $516 million tax increase  

This repeals a credit for oil and natural gas produced from marginal wells, which is limited to 1,095 barrels of oil or barrel-of-oil equivalents per year.   

19. Repeal capital gains tax treatment for royalties: $455 million tax increase 

Royalties received on the disposition of coal or lignite currently qualify as a long-term capital gain. The budget repeals this, requiring this income to be taxed at the higher ordinary income rate. 

20. Repeal exception to passive loss limitations provided to working interests in oil and natural gas properties: $86 million tax increase  

21. Repeal percentage depletion with respect to oil and natural gas wells: $9.2 billion tax increase  

Percentage Depletion allows taxpayers to deduct the cost of oil and gas wells as a statutory percentage of the gross income of such property. This provision is used by small, independent, and family-owned oil and gas companies, and royalty owners like farmers and ranchers. 

22. Modify tax rule for dual capacity taxpayers: $1.4 billion tax increase  

23. Increase geological and geophysical amortization period for independent producers: $2 billion tax increase  

The amortization period for geological and geophysical expenditures incurred in connection with oil and natural gas exploration in the United States is two years for independent producers and seven years for integrated oil and natural gas producers. This proposal would require these expenses to be amortized over a seven-year period. 

24. Repeal expensing of exploration and development costs: $911 million tax increase  

Producers of oil, gas, coal, and minerals can fully immediately deduct 70 percent of the costs associated with exploration and development of a domestic ore or mineral deposit. The remaining 30 percent can be deducted over 60 months. This proposal would repeal this provision, requiring these costs to be depreciated over many years. 

25. Repeal percentage depletion for hard mineral fossil fuels: $1.3 billion tax increase  

Repeals a provision of the tax code that allows companies to deduct 10 percent of their sales revenue to reflect the declining value of their investment. 

26. Repeal the exemption from the corporate income tax for fossil fuel publicly traded partnerships: $1 billion tax increase  

Partnerships that derive at least 90 percent of their gross income from depletable natural resources, real estate, or commodities are exempt from the corporate income tax. Instead, they are taxed as partnerships. This proposal would repeal this provision for publicly traded fossil fuel partnerships, requiring them to be taxed as corporations.   

27. Repeal the Oil Spill Liability Trust Fund (OSTLF) excise tax exemption for crude oil derived from bitumen and kerogen-rich rock: $395 million tax increase  

Because crude oil derived from bitumen and kerogen-rich rock are not treated as crude oil or petroleum products, it is exempt from the Oil Spill Liability Trust Fund tax of $0.09 per barrel of crude oil. This proposal would repeal this exemption. 

28. Repeal amortization of air pollution control facilities: $901 million tax increase   

Under current law, expenses related to certain pollution control facilities can be amortized over 60 months or 84 months. The budget would repeal this provision, requiring these expenses to be depreciated over 39 years.  

29. Reinstate Superfund excise taxes: $25 billion tax increase   

The proposal would reinstate the three Superfund excise taxes at double the previous rates: (1) crude oil received at a U.S. refinery; (2) imported petroleum products (including crude oil) entered into the United States for consumption, use, or warehousing; and (3) any domestically produced crude oil that is used in or exported from the United States if, before such use or exportation, no taxes were imposed on the crude oil.   

30. Modify Oil Spill Liability Trust Fund financing: $513 million tax increase  

This proposal would extend the Superfund excise tax to other crudes such as those produced from bituminous deposits as well as kerogen- rich rock. It would also extend the Oil Spill Liability Trust Fund (OSLTF) tax to include these crudes as well. It would also eliminate the eligibility of the OSLTF for drawback. 

Photo Credit: Gage Skidmore

A Financial Transaction Tax is Neither Reasonable nor Bipartisan

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Posted by Alex Hendrie and Isabelle Morales on Tuesday, March 30th, 2021, 3:15 PM PERMALINK

Last week, various media outlets reported that a conservative think tank had endorsed a financial transactions tax (FTT).

This does not mean an FTT is bipartisan. The FTT is supported by a long-list of far-left politicians. It is opposed by conservatives in Congress and by dozens of organizations and activists. 

Progressives including Senator Bernie Sanders (I-Vt.), Representatives Alexandria Ocasio Cortez (D-N.Y.), Ilhan Omar (D-Minn.), Ro Khanna (D-Calif.), and Peter DeFazio (D-Ore.) have called for this new tax, which would be imposed at a rate of 0.1 percent on any buying and selling of stocks, bonds, and other financial instruments.  

While they argue that an FTT is needed to reduce market volatility and make Wall Street pay “their fair share,” this tax will actually harm millions of Americans that invest their lifesavings in the stock market and own 401(k)s, pensions, and index funds. 

There is strong conservative opposition to an FTT. In fact, there is strong opposition to an FTT among all political leanings. 

Republicans on the House Financial Services Committee unanimously oppose an FTT. Members of the committee led by Ranking Member Patrick McHenry (R-NC) released a resolution condemning attempts to impose this new tax. As Rep. McHenry noted this tax would harm Americans saving for retirement, cost jobs, and reduce access to new capital. 

The resolution was signed by Reps. McHenry, Frank Lucas (R-Okla.), Bill Posey (R-Fla.), Blaine Luetkemeyer (R-Mo.), Bill Huizenga (R-Mich.), Steve Stivers (R-Ohio), Ann Wagner (R-Mo.), Andy Barr (R-Ky.), Roger Williams (R-Texas), French Hill (R-Ark.), Tom Emmer (R-Minn.), Lee Zeldin (R-N.Y.), Barry Loudermilk (R-Ga.), Alex Mooney (R-W.Va.), Warren Davidson (R-Ohio), Ted Budd (R-NC), David Kustoff (R-Tenn.), Trey Hollingsworth (R-Ind.), Anthony Gonzalez (R-Ohio), John Rose (R-Tenn.), Bryan Steil (R-Wis.), Lance Gooden (R-Texas), William Timmons (R-S.C.), and Van Taylor (R-Texas). 

A coalition of 30 conservative & free market organizations recently released a letter opposed to an FTT. The letter was released by ATR and signed by organizations including Americans for Prosperity, Club for Growth, Heritage Action for America, ALEC Action, Citizens Against Government Waste, Competitive Enterprise Institute, National Taxpayers Union, and Taxpayers Protection Alliance. 

The letter calls on all members of Congress to reject any proposal to implement a financial transaction tax. As the signatories note, the FTT is the latest attempt by the Left to take advantage of a “crisis” to implement a massive new tax on the American people. Contrary to their rhetoric, this tax would be borne by the American people, not Wall Street. It would punish investment, leading to lower returns for American retirees and savers and increased market volatility. 

Voters opposes a financial transaction tax by a margin of three-to-one. The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness conducted a national polof 2,000 likely voters. According to this data, 63 percent of voters opposed an FTT including 49 percent of voters that were “strongly opposed.” Just 23 percent of voters supported an FTT.

Several Congressional Democrats oppose a financial transaction tax. As reported in Politico, Congressman Gregory Meeks (D-NY) recently argued that an FTT “hurts New Yoek in a big way” because it would cause trading to leave the State.

Similarly, Rep. Bill Foster (D-Ill.) argued that an FTT would reduce trading volumes and fail to raise revenue. He said:  

“My suspicion is that when you would actually score something like that, you'd look at the drop in trading volume that would happen and you'd find that the revenue raised would be small.” 

His suspicion is correct. The tax simply would not raise the revenue supporters claim it would. This is because it would reduce the volume of transactions, output, and employment. FTTs also cause capital to flee to jurisdictions that do not tax transactions, further reducing revenues. When Italy and France imposed FTTs in 2012, both countries raised less than a quarter of expected revenues.    

Further, a study by BlackRock found that a financial transaction tax of 0.1 percent would result in an investor losing $2,300 in returns on a $10,000 investment in a global equity fund over ten years. It would also cut deeply into retirement accounts. A 2021 study conducted by the Modern Markets Initiative found a proposed financial transaction tax would cost $45,000 to $65,000 over the lifetime of a 401(k) account.    

Not only would an FTT harm retirees and investors, but it has a long history of failure. FTTs were repealed in Sweden, Spain, the Netherlands, Germany, Norway, Portugal, Italy, Denmark, Japan, Austria, France, and even the United States. 

A financial transaction tax is not a “reasonable, bipartisan solution.” It has a long list of opponents, from conservatives to the general public to moderate Democrats.  

Photo Credit: Matt Johnson