Empirical studies examining the medical device tax have differed regarding the exact magnitude of the tax’s negative economic impacts, but directionally, all studies agree that the tax will adversely impact the medical device industry specifically, and the economy more broadly. For example, a 2014 analysis by Congressional Research Service (CRS) recommended against implementing the tax and found that the tax would reduce industry output and employment by up to 0.2 percent. A study by Daeyong in 2018 found that when the medical device tax was effective between 2013 and 2015 it reduced industry R&D, sales, and profitability. A study by Bork in 2017 found that the actual tax revenue raised also fell short of targeted goals, which was due to lower industry sales and higher industry job losses.
The medical device tax also violates the widely agreed-upon principles of a sound tax system. Notwithstanding the partisan rancor, there is actually widespread agreement on several core principles to which efficient tax systems should adhere. The medical device tax violates such commonly agreed-upon tax principles as neutrality, simplicity, consistency, transparency, and avoiding double taxation of the same economic activity.
Tax neutrality: Tax neutrality (sometimes referred to as tax efficiency) refers to an unattainable ideal that taxes should not alter any economic incentives or decision, unless such altered incentives were explicitly desired. Simply put, tax neutrality means that taxes should avoid picking winners and losers. 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. Similarly, people’s economic well-being is best promoted when they base their decisions to work, save, and consume on their personal preferences, not based on the tax consequences.
Tax simplicity: 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. Simple taxes impose minimal direct costs on taxpayers when complying and require fewer outlays by the government to administer. 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. Consumers must devote time to tax compliance rather than spending time with their families or pursuing their interests. The result is slower income growth and lower overall economic welfare.
