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The Effect of the Obamacare Tax

Posted by Larry Doyle on February 5, 2014 12:46 PM |

The release of the Congressional Budget Office report yesterday on the effects of Obamacare has not surprisingly set off a firestorm in respective political camps and among their media friends.

Let’s dispense with the heavy clanging noise connected to this topic that is resonating throughout our land and take a more measured approach in assessing the impact of the tax connected to Obamacare.

First and foremost, although many do not like associating the term “tax” in discussing Obamacare, let’s not forget that none other than Chief Justice Roberts told us that is exactly what it is in handing down his ruling upholding Obamacare.

Without being overly simplistic, whenever taxes are imposed behaviors change. To think otherwise is naive. 

Those upon whom taxes are imposed, be they individuals or companies, will typically look to offset the effect of the increased cost by compensating elsewhere. Individuals will typically decrease their spending on discretionary items. Companies will typically look to decrease their costs in any number of areas but the most likely being the costs connected to personnel. Those costs would be in terms of lessened hours worked, lessened overall headcount, or a combination of the two. This typically will lead to a slower overall rate of growth and output for a company and in turn the economy as a whole.

For those who are the beneficiaries of a tax imposed elsewhere, the question begs whether they will utilize the benefits they receive to augment their current level of productivity so as to offset the decline in productivity elsewhere in the economy. Not that this reality could not play out but the immediate questions beg if, where, when, and why it has played out in this fashion elsewhere.

I would maintain that the answers to these questions are not hard and fast one way or the other as either of our political camps may care to promote. This said, I personally believe there is more evidence supporting the case that increased taxes have a negative effect on the overall economy that is not meaningfully offset by an increased level of productivity elsewhere. What do I expect we will see, though, when both taxes and benefits are increased as is and will happen with Obamacare?

I certainly expect that we will see people on both ends of the spectrum trying to beat the system. That is, companies will see where and how they might be able to get around the increased taxes and regulations. This means more business likely taking place under the table or in a black market.  On the other side of the coin, I would also expect that we will see more individuals trying to figure out how they can receive benefits that otherwise should not accrue to them.

Who is left in the middle to get increasingly squeezed? Those purchasing insurance through the individual marketplace with no place to hide.

Those with personal insights please share them.

Navigate accordingly.

Larry Doyle

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  • Sam

    Yep – I work 2 full time jobs to support my family and all that I get for is more taxes – can’t deduct my student loan interest – and now I get to pay for other people to have better health insurance than I do. I’m trying through hard work to pull away from possible poverty and move to independently sustainable success but it feels like the administration is just trying to pull me back down into the thunderdome. The rich don’t care and the poor love it – I guess I’ll just take my place at the oar and slave away at a ship going in circles.

    Wait till the real cost of the subsidies come out and the risk pools are shark tanks with Obama letting people keep their coverage for a year if it was cancelled and the young people not caring enough to help bail out the older generation that is giving nothing back to them.

    I definitely care about people receiving health coverage but the exchanges weren’t even needed as they could have just given the tax credits and the subscriber enrolls directly with the carrier – so wasted billions there.

    Insurance is the balance of risk and cost of that risk – so Obamacare just raised the risk on the insurance carriers and is trying to limit the cost on them – what about the whole rest of the system? Like limiting malpractice claims – having oversight over drug companies and the prescription costs – like actively looking into the hospitals for overcharging/wasted costs? Maybe a little too close to home for the government to suggest something like that…

    I guess my point is, it’s like being pissed at the mechanic because of the bill when he can’t control how much he is charged by the manufacturer for the part. I’m not suggesting that the carriers are angels or even well vultures but picking on them doesn’t help the problem with an entire industry.

    In theory people with 5,000,000 in the bank can get a subsidy for healthcare. I deal with mostly self-employed people – so their MAGI comes in eligible for a subsidy and they live in Beverly Hills.

    Sorry to vent – I take great pride in my company and helping people – but these days I feel I’m just helping people cheat the system and get freebies that the US doesn’t have the money for anyway. It’s sad when people tell me that they don’t like the idea of getting a subsidy (and ask who’s paying for it) and I have to tell them regardless of their feelings they can’t throw $10,000 away.

  • Justin Murphy

    In terms of impact on employmemt, the reasons matter more than the numbers. If
    people are choosing not to work, or to work for themselves, then that can be a
    good thing that will ultimately make the overall economy more productive. If
    people are staying employed in jobs, or with companies, that they don’t like
    just to maintain employer sponsored health insurance then productivity will
    suffer. Being able to remove the “Golden Handcuffs” will serve to increase the
    dynamism of the American workforce. No doubt there are plenty of things wrong with the ACA that I won’t regurgitate here, but work mobility is at least one benefit of the ACA, and
    I think an important one. It derives from one simple, but important aspect in the law, whereby applicants can’t be denied coverage for preexisting conditions. I think this provision is needed, and I am not smart enough to figure out how you maintain this needed provision without mandated coverage. All good things come with a cost.

  • David Lynch

    The central point here seems to of gotten lost in news coverage. With the CBO is pointing out is that individuals who were working only to maintain health care coverage at their job, now have the freedom to quit start a business or do something else.

    • Always Learning

      True, but the CBO report also indicates that the ACA inherently provides a disincentive to work. If people quit their jobs or reduce hours just to qualify for health care subsidies, I find it extremely difficult to view that situation as good news for our economy and/or American culture.

      CBO Director Doug Elmendorf had this to say yesterday when speaking to the House Budget Committee:

      “The effect is principally on the labor supply of lower wage workers. The reason is what the Affordable Care Act does is provide subsidies focused on lower and lower-middle income people to buy health insurance, and in order to encourage a sufficient number of people to buy an expensive product like health insurance the subsidies are fairly large in dollar terms. Those subsidies are then withdrawn over time for people as their income rises. By providing heavily subsidized health-insurance to people with very low income and withdrawing those subsidies as income rises, the act creates a disincentive for people to work, relative to what would have been the case in the absence of that act. The subsidies are, of course, make those lower income people better off. This is an implicit tax, not the sort of tax we normally think about, where if the government raises taxes we are worse off and face a disincentive to work more, but providing a subsidy people are better off, but they do have less of an incentive to work.”

      Budget Committee Chairman Paul Ryan replied, “I guess I understand the ‘better off’ in the context of health care. But better off in inducing the person not to work who’s on the low-income scale, not to get on the ladder of life, to begin working, getting the dignity of work, getting more opportunities, [raising] their income, joining the middle class, this means fewer people will do that.”

      • Justin Murphy

        You touched on 3 things:
        1. Subsidized health premiums
        2. Decreasing subsidies as income increases
        3. Resulting disinsentive to work

        #1 and 2 exist in nearly all employer sponsored health plans, plus the community based pricing that many opponents are complaining about. Community based pricing (ie equal cost regardless of age, gender or health) is imbedded in all employer sponsored health plans. I’ve never heard anyone turn down a raise because it resulted in a higher contribution to their insurance premium.

        • Always Learning

          “I’ve never heard anyone turn down a raise because it resulted in a higher contribution to their insurance premium.”

          Yet that is exactly what the CBO report is telling us: there will be some workers who choose to earn less money in order to maintain the maximize subsidy rather than take an opportunity to earn more money, which would thereby decrease their subsidy. It’s a catch-22. I do not have the policy answer to solve this issue, but I do feel it is a problem — even if it only affects a small percentage of the population. Isn’t the goal to incentivize people to strive to the next level to be better able to provide for themselves with as minimal government assistance as possible?

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