If the government wants you to have something, it will try to bribe you to get it using the tax system. These days, Washington bureaucrats want you to buy an electric vehicle, so they offer up to $7,500 in tax credits. State governments may pile on even more tax breaks (in California it is another $7,500) to get you to do what they want.
On the other hand, when the government doesn’t want you to have something, it increases taxes on that product to dissuade you from buying it. That’s why a pack of cigarettes costs so much. The District of Columbia’s government recently calculated that taxes comprise 80 percent of the total wholesale cost of a pack of cigarettes.
That may make sense with cigarettes. Giving up smoking is better for your health. But imagine that the government applied the same approach to important products like automobiles. It could apply a tax that would effectively double the cost of a gasoline-powered car. The cost for a simple Honda Civic could go from about $25,000 to $50,000 overnight. Drivers wouldn’t sit still for it.
So why is the government considering jacking up prices on another important product, one that is vital to so many people’s health: prescription drugs? Ironically, Washington may increase prices while lawmakers and the administration are claiming they want to make prescription drugs more affordable. This is a story that is so mixed up, it could only have been written in Washington, D.C.
When the Biden administration enacted what it called the “Inflation Reduction Act'' in 2022, prices actually went up, as anyone who has shopped for anything in the last two years knows. It also included a provision that would impose a 95% excise tax on prescription drugs sold by companies that refuse to allow the government to set the price of that drug.
The bureaucrats call this “price negotiation,” and they are careful to avoid more accurate terms like “price-fixing.” But, of course, the federal government has all the power in this exchange. In the event that a drug manufacturer decides to charge more than the federal government is willing to pay for a drug, the IRS (and remember that the Biden administration is adding thousands of IRS agents to help it enforce its will) would collect the new tax. The additional cost would, of course, be passed along to consumers.
The problem is, this wouldn’t make drugs more affordable. It would simply make them more scarce. It would also reduce future development, so the drugs of tomorrow might never be formulated. The tax would also limit the drugs that would be available to seniors in Medicare Part D, since the taxed drugs would only be available through the manufacturer – with the 95% tax added.
This is all taking us far away from effective health care policy. Instead of setting prices, the federal government should empower consumers through free market competition. Free markets are working, and over the decades they have encouraged companies to develop and deliver effective new drugs that help patients.
“Thirty-six percent of all NMEs (that is, ‘new molecular entities’ or ‘new drugs’) were developed in the United States,” a federal report a few years ago found. “The United Kingdom was the next largest source of NME development (10.4%). Examination of drugs with patents (n = 288) revealed that 126 (43.7%) of the NMEs had their earliest patent filed by inventors in the United States.” So roughly three times as many new drugs were developed in the U.S. as in England, the next largest country.
That is, in large part, because the U.S. does not fix prices, and price signals encourage drug makers to experiment and invent. This is exactly the sort of inventiveness that would dry up if free markets went away.
The federal government tells us it wants to make drugs affordable and available to seniors. However, Biden’s IRA is doing the opposite. We simply can’t afford it.
