MASSDEVICE ON CALL — A pair of economists have taken to the internet to pen contrary opinions on the medical device tax, with 1 arguing that the tax may be good for an industry that needs a jolt and the other warning that it could drive innovation away from the U.S.
Kelly School of Business professor emeritus Larry Davidson this week published on his blog an in-depth post decrying the tax and tearing apart arguments made by a fellow follower of the so-called "dismal science" of economics.
Davidson wrote concerns about the medical device tax are "well-founded" and that Center for Governmental Research chief economist Kent Gardner was "wrong on a lot of counts" in his op-ed defending the levy.
"This tax is not good for U.S. employment nor U.S.-based innovation and competitiveness," Davidson wrote. "The U.S. should be happy to have the world’s leading medical device companies and it should be fighting to keep it that way."
Gardner had written in a November op-ed for the Rochester Business Journal that the 2.3% medical device sales tax created by the Affordable Care Act would do little harm to the industry, its workforce or its profits.
"What we need is a more competitive medical device industry. This would reduce the cost of joint replacement, make the procedure more readily available to those of us who walk with pain, and slow health care inflation. And it could spur innovation in a newly vibrant market," Gardner wrote. "But unless these firms are caught fixing prices, there are no legal options to force them to be competitive. We do know that the Affordable Care Act, title notwithstanding, is going to significantly increase public spending on health care. A tax on medical devices may be a more acceptable way to pay the bill than many of the obvious alternatives."
Davidson called out Gardner’s analysis, saying that the medtech companies can’t really afford to give up a percentage of its revenues if the U.S. wants to remain the home for global innovation in the industry.
"While a 2.3% tax on revenue sounds trivial, the result is that the tax is a much larger percent of a company’s profits," Davidson wrote. "While some people think profit is a dirty word, the fact is that profits are used to invest in research, product development, safety, and other critical outlays that invent and improve products."
"the negative impact on smaller entrepreneurial firms is disproportionate because in the early years a company often makes small or no profits despite having rising revenues," he added. "The upshot is that a 2.3% revenue tax will mean business losses and an end to these small businesses. Inasmuch, the bigger firms will gobble their assets and this will lead to less, not more, competition. A correlated worry is that all these firms will turn away from devices that cannot promise immediate returns or serve smaller markets. This bodes ill for future important improvements in the device industry."
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