Bill Clinton Is Right: Obamacare Is Crazy. Here’s a Sane Reform

34778261 - lisbon - january 14, 2014: photo of homepage on a monitor screen through a magnifying glass.

Bill Clinton’s criticism of Obamacare reflected a good understanding of labor economics. Last Monday, he explained:

So you’ve got this crazy system where all of a sudden 25 million more people have health care and then the people who are out there busting it, sometimes 60 hours a week, wind up with their premiums doubled and their coverage cut in half. It’s the craziest thing in the world.

Clinton is referring to high marginal income tax rates that Obamacare imposes on people through the design of its tax credits, which get clawed back in a very unfair way.

For example, if a four-person household’s 2015 income were $23,850, the family’s maximum annual premium would be $479, so it would benefit from a tax credit paid to its health insurer of $9,146.  If the family’s income rose to $31,720, its maximum annual premium would be $638, so its tax credit would go down to $8,987. The household income has increased by $7,870, and its tax credit has dropped by $159. Effectively, the household has experienced an income tax rate of 2.01 percent ($159 divided by $7,870).

However, when household income increases by one dollar from $31,720 to $31,721, the household is liable to pay 3.02 percent of household income ($958) for the same plan. For an increase of one dollar of income, the household net premium increases by $320 (from $638 to $958), resulting in a net loss of $319 and an effective marginal income tax of 32,000 percent!

This perverse effect riddles Obamacare’s tax credits all the way up to 400 percent of the Federal Poverty Level. It may be the most important reason for the stagnation of work among hourly employees.

The best solution to this problem would be a universal tax credit to finance medical spending. A second-best solution would be a tax credit that shrinks at a constant amount of the tax credit for every dollar increase in income (which would effectively be a flat rate of income tax).

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book, Priceless: Curing the Healthcare Crisis, by John C. Goodman.

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