If economists cared as much about inefficiency when it benefited higher income people as when it benefits more moderate income people, they would spend 2000 times as much effort talking flexible spending accounts as tariffs on tire imports. The ratio of administrative waste to tax savings on flexible spending cuts is probably very close to 1. The accounts impose administrative costs on the employer, the insurers and the provider, as well as requiring time from the beneficiary. They also encourage people to waste money on little needed expenditures near the end of the year in order to avoid losing the money in the account. The arithmetic on this is straightforward. Suppose someone puts $2,000 a year into an account (more than the median contribution). If they are in the 15 percent tax bracket, then their tax saving is $300 a year. The administrative cost to the employer alone could easily exceed $50 a year, which would immediately consume more than 15 percent of the tax savings. If the worker spends 2 hours dealing with the paperwork over the course of the year, this would come to $60 at the median compensation level. These two items alone would consume more than one-third of the tax savings. If the worker rushes to spend 20 percent of their money ($400) at the end of the year on little needed items like glasses or aspirin (assume half value of this spending), then this could easily take up the equivalent of two-thirds of the tax savings. In short, it is easy to come up with scenarios in which beneficiaries and their employers end up being losers from these accounts. However, economists will spend much less time yelling about the waste associated with flexible saving accounts than they do about the waste associated with tire tariffs. The first form of waste benefits health care providers and higher income workers (who do get larger benefits from flexible saving accounts). Tire tariffs are likely to benefit unionized workers. The NYT could have given readers a better sense of the enormous inefficiency of this method of providing health care benefits to workers.
--Dean Baker.
