If I Had a Hammer

When you hear the name Abraham Maslow, you probably think of his hierarchy of needs: a pyramid, starting with a base of life-sustaining fundamentals like air, food, and water at the bottom, progressing upward through shelter and security, love and belonging, self-esteem, and finally an aspirational triangle of self-actualization at the top. Generations of therapists have made good livings helping clients claw their way up that pyramid, along with figuring out where things like Porsches and Birkin bags belong on its rungs.

Maslow is also known for something called Maslow’s Hammer: a cognitive bias that involves over-reliance on a familiar tool. As Maslow wrote in 1966, “If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.”

Uncle Sam faces those sorts of biases just like the rest of us. And he’s got a big challenge raising $6 trillion to spend every year. Bake sales won’t do it (although we hear the apple pie is great). Fortunately, he’s got a hammer: taxes. But sometimes, he uses that hammer when maybe a screwdriver or wrench would be a better tool.

Medicare is one of Washington’s most popular programs. Back in the 1960s, when President Johnson was pushing it through Congress as a cornerstone of his Great Society, opponents attacked it as a step towards socialism. Today you’ll occasionally see the comic spectacle of straight-faced seniors protesting with signs saying, “Keep Your Government Hands Off My Medicare!”

Unfortunately, Medicare is also expensive. Last year the program spent $747 billion, including $220 billion on prescription drugs. Naturally, Washington would love to save a buck or two if they can. Last year’s Inflation Reduction Act finally allowed the government to negotiate the price that Medicare will pay for certain prescription drugs. Pharmaceutical companies that don’t play ball can face penalty excise taxes up to 1900%. (Not a misprint.)

What will this mean to the government’s bottom line? The Congressional Budget Office estimated the drug pricing provision would save Medicare $101.8 billion over 10 years. And how much will the excise tax raise? Zero, actually. That’s because companies that balk at Uncle Sam’s price will just take their drugs off the market. So you can call it a “tax,” if you like. But it’s more like the tax equivalent of a mobster walking into a laboratory and saying, “Nice drug you got there . . . sure would be a shame if anything happened to it.”

Here’s the downside of negotiating drug prices. Drug companies invent new drugs to make money. (Saving lives is great and all, but that’s not why Big Pharma is in business.) It takes an average of 10 years and $2 billion to bring a new drug to market. Ultimately, just 12% of drugs that enter clinical trials actually make it to pharmacy shelves. The new pricing rule will squeeze the profits that drug companies say they need to finance researching new treatments for conditions like cancer, Alzheimer’s, and Parkinson’s disease.

The whole debate poses a classic conflict between short-term savings and long-term innovation. More than that, it raises the question of whether taxing a product so much that we run it off the market is an acceptable use of the tax hammer in the first place. Or should Washington just be honest for a change and say, “Our seniors can’t afford to fund the profits you want”?

As far as we’re concerned, it doesn’t matter why Washington passes new tax laws, or how effective they are at shaping our economy. We’re here to help you pay less. Call us with your questions!