Obamacare’s Regressive and Unfair Subsidies

Quite apart from the perverse economic incentives the subsidies of the Affordable Care Act create, the subsidies are completely arbitrary and unfair. For example, a $31,200-a-year family (about 133 percent of poverty) getting health insurance at work gets less than one-fourth as much help from the government, compared to a family making nearly three times that much income and getting insurance in the exchange.

Subsidies that Create High Marginal Tax Rates

Starting in 2014, subsidies in the health insurance exchanges will be available to families with incomes between 133 percent and 400 percent of the federal poverty line. The range is from $31,389 to $93,699 for a family of four. (People below 133 percent of poverty will be forced to turn to Medicaid.) An analysis by Daniel Kessler predicts that health coverage will cost $23,700 for a family of four headed by a 55 year old, living in a high-cost region.[1] The subsidy for this plan starts at $22,740 at the low end and falls to zero as income rises.

As I show in chapter 17 of my Independent Institute book, Priceless: Curing the Healthcare Crisis, the highest marginal tax rates fall on moderate-income earners. An individual earning between $20,000 and $30,000, say, will face a marginal tax rate substantially higher than the rate paid by Bill Gates or Warren Buffett.

What is the highest marginal tax rate a family could face? Although premiums for health insurance sold in the exchange are capped at 9.5 percent of income for the families earning between 350 and 400 percent of poverty, there are no subsidies for families earning more than 400 percent of poverty. That means premiums would be capped at $8,901—resulting in a subsidy of $14,799 ($23,700 – $8,901) for a family earning $93,699 (400 percent of poverty). But if the family earns $1 more ($93,700), they no longer qualify for a subsidy. Thus $1 in additional income results in a subsidy loss of $14,700, for an implicit tax rate of 1.47 million percent.

Notes:

1. Daniel P. Kessler, “How Health Reform Punishes Work,” Wall ­Street­ Journal, April 25, 2011, http://www.hoover.org/news/daily-report/76401.

[Cross-posted at Psychology Today]