The ObamaCare Tax on the Middle Class

So the new Republican argument (which Mitt Romney was against before he was in favor of it) is that the individual mandate is an oppressive tax on the middle class. Cute, isn’t it, adopting John Roberts’s argument?

First of all, there’s the little matter that the word “tax” in legal doctrine means something different from the word “tax” in ordinary English. And there’s nothing wrong with that. Plenty of words have precise legal meanings that would be foreign to ordinary English speakers, like “negligent,” “reckless,” “material,” and so on, and billions of dollars turn on those precise legal meanings. But that’s not going to sway many people, so let’s go to the numbers.

If you get health insurance through your employer, the individual mandate doesn’t apply to you. There’s no chance you’ll pay the penalty, so the amount of the “tax” is exactly zero.

If you get health insurance from the government (primarily Medicare or Medicaid), the same thing applies. Your tax: zero.

If you already buy health insurance in the individual market, you can continue buying insurance the same way. The main change is that prices will probably come down (or at least grow more slowly) because of transparent competition in the insurance exchanges. (Curious? Check out what we have in Massachusetts, thanks to RomneyCare.) Your tax: zero.

All right, that covers more than eighty percent of you. What if you’re among the roughly 50 million Americans who are currently uninsured?

The typical uninsured household is a family of three that makes between $25,000 and $50,000 per year, probably around $35,000 (see Table 8). If you are a single parent with two children under eighteen, your penalty for not buying insurance is $1,390.

But: Because your household income is less than 200 percent of the applicable federal poverty level, you also receive a premium credit. At most, you will have to pay 6.3 percent of your income on health insurance, or $2,205. (In addition, you get a 13 percent reduction in the amount of cost sharing under your plan.) So you get to buy a family plan, which would ordinarily cost around $12,000, for just $2,205. That’s a benefit of $10,000.

So here you have a law that offers you $10,000 to buy health insurance (or, put another way, gives you a discount of more than 80 percent), but says that if you decline to buy it you’ll have to pay a penalty of $1,390. You can call that $1,390 a tax if you want, but the real question is: does the law make you better off than you were before? Unless most uninsured families like being uninsured, it’s pretty clear that it does make them better off.

(For a broader analysis of who is subject to the individual mandate, see the simulations by Jonathan Gruber. The answer: almost no one.)

In short: Very few people are even theoretically subject to the tax, and most of them are made much better off by the law, since they are transfer beneficiaries.

How can this be? How can a law make everyone better off? Well, it doesn’t. There is a tax-and-transfer element to the Affordable Care Act. The main people who are paying more are the rich (because of a Medicare payroll tax surcharge) and those with good health plans (because of the excise tax on “Cadillac plans”). In addition, the new spending is financed in part by reductions in Medicare spending; those reductions may or may not result in reduced availability of care for Medicare beneficiaries.

The Affordable Care Act is not painless, and there are definitely taxes involved. But the individual mandate “tax” is not one of them.

This post originally appeared at The Baseline Scenario and is posted with permission.

20 Responses to "The ObamaCare Tax on the Middle Class"

  1. LCR   July 7, 2012 at 7:29 am

    "If you get health insurance from the government (primarily Medicare or Medicaid), the same thing applies. Your tax: zero."

    You are so naive at this point I should have stop reading. The government NEVER gets free money. We are borrowing 40% of the money for federal obligations and we will have to pay that back with interest. Who pays for that? Well, let me remind you it is the future children of this country. You try to escape reality. This Obamacare is a future tax weighing on a generation of young people, even if you claim there is no immediate individual taxes. Obamacare will distort the free market in medicine and the government should not be involved at all. The federal government and our people would be better off in the long run if Medicare was privatized completely. Then we would see proper deflation in prices not the intense year over year inflation in medical prices we are seeing.

    • gzuckier   July 7, 2012 at 8:31 pm

      "Obamacare will distort the free market in medicine "

      The one where hospitals, doctors, etc. set excessively high prices and then collude with the insurance companies to determine what small fraction of that the actual payment will be based on realistic expectations, and I go to the doctor who proposes some service without even knowing what it will cost either the insurance company or myself, on the basic theory that it's not going to cost me anything significant so we might as well give it a shot and the insurance company becomes the final judge of whether it's worth it or not. And if it happens to involve a hospital, the insurance company gets saddled with an average of $1400 additional to cover the "free!" care that everybody can get from the hospital if they need it, some of which cost gets passed onto me. That free market? Note that the government didn't create this mutant monster, the free market did, the government just steps in from time to time to ensure that this mess doesn't kill too many people while passing the money from hand to hand .

      • LCR   July 7, 2012 at 10:35 pm

        It is precisely due to government involvement in medicine that prices were not free market driven for the past 30 years. We are seeing a bubble in the medical field just as we are seeing in higher education and have seen in housing. There should never have been a Medicare program. It caused people to stop saving for their real needs of their older life. It distorted the scale of payments to concentrated medical centers. The average cost to care for a senior is well above the tax paid during their "working years". Medicare is technically solvent but since other areas of government are not, it does not matter. My point here is that a government subsidized medical insurance program is doomed to fail, regardless of how many people you think won't be "killed". Instead the citizens will be financially suppressed though this government intervention. There is no free health care and prices can only deflate though free markets.

        • gzuckier   July 8, 2012 at 12:44 am

          But Medicare is the portion of the US healthcare system which is not only the least costly for comparable services, but actually the one age group where American healthcare outcomes are, in fact, the highest or near the highest of all industrialized nations. Not much evidence there for the negative effect of government involvement.

    • Tom   July 9, 2012 at 10:35 pm

      THere is not now and never has been a free market in insurance. And it is already badly distorted and the ACA may reduce the distortions.

  2. MBS   July 7, 2012 at 9:47 am

    Cheer up, LCR: the "future children of This country" will be healthier and consequently more productive as a result of the extension of healthcare availability, and their future costs for that care will be dramatically reduced as a result of the "distortion" of free market pressures on a decidedly non-free market service (how can anyone claim comparison shopping occurs when a patient is rushed to a hospital or emergency care?). Privatizing Medicare has about as much appeal to the general public as privatizing Social Security; Left or Right, citizens agree those programs run more efficiently without private enterprise adding profit to the costs.

    • LCR   July 7, 2012 at 10:38 pm

      There is no reason to believe our next generation will be healthier and more productive. There is nothing to support that considering the financial suppression we are going to see in order to pay for government interventions, I am sure the EU thought the same and look at them now. There must be privatization and we will only reach it once the dollar is no longer a reserve currency. Perhaps in my lifetime.

  3. spider   July 7, 2012 at 3:52 pm

    The argument is ridiculous…and the author knows it and admits knowing it in the last 2 paragraphs. But even then he dodges the unpalatable truth; the poor can't pay and the rich won't pay (they're too smart and too nimble to be fleeced) so it'll be the white middle class which ends up paying for the black poor and the latin illegals.

    Race war, anyone?

    • Jerry Brown   July 7, 2012 at 6:08 pm

      The hate is pouring through the holes in your leaky argument. What- are you too scared to use your real name or just too embarassed?

      • spider   July 8, 2012 at 1:01 am

        My argument is the standard progressive criticism of the right … but without the guilt. Don't like that, do you, … since guilt-mongering is your specialty. From that I deduce that you are very likely white, middle-class, and Jewish.

    • gzuckier   July 7, 2012 at 8:37 pm

      As the Republicans delight in telling us while explaining that there is no need for reform, the "black poor and the latin illegals" (latin illegals being the subject of numerous studies to try and understand why they need so few medical services compared to the "white middle class" and yet remain healthy, but let's not quibble) now get "free" care from the hospitals if they need it, thanks to sainted President Reagan; the question is now who pays for it. Currently that would be every sucker who has a hospital encounter and actually pays a bill, to the tune of an additional $1400 average per hospital bill; some of us think that it might be more fair if the cost were spread over the entire population rather than just tacked on to those who are randomly getting stuck with a big bill to start with.

    • gzuckier   July 8, 2012 at 1:21 am

      But if we can run two simultaneous overseas wars without incurring any additional taxes, I don't understand why we can't manage the simpler and cheaper task of paying for medical care which the uninsured are already getting from the hospitals. I can't help feeling I"m rather more in line with Mr. Reagan's thoughts on the matter, since he instituted the care for all comers without feeling the need to finance it.

      • spider   July 8, 2012 at 7:06 am

        EMTALA didn't provide near universal access to hospital rooms. Hill-Burton of 1946 did that. EMTALA attempted to prevent patient dumping. It was a bad law, not fully appreciated at the time, and it led to today's dire failure of the emergency room system.

        Nor is your understanding of the consequences of unfunded mandates any better.

        • spider   July 8, 2012 at 7:16 am

          Correction. It should be "near universal access to hospital EMERGENCY rooms."

  4. barf   July 8, 2012 at 9:31 am

    i still feel completely uninformed on what to me relative to healthcare is absolutely the biggest legislation since the creation of the National Security apparatus in 1945. we shall see. hopefully there will be an informative debate on the matter…but i doubt it.

  5. Dmack   July 8, 2012 at 2:44 pm

    We're fighting fire with fire. Obama captured the youth vote last election with videos on YouTube. Republicans can fight back this time with youth-targeted videos like this (paste in your browser to listen)