Effects of the Affordable Care Act – Part 2

Effects of the Affordable Care Act – Part 2

Subsidized Health Insurance Exchanges

What of the tax distortions that come from the subsidized health insurance exchanges or marketplaces? To begin to think about this, imagine paying full price for your health care. How does full price work? Well, you pay the full price. The health care provider doesn’t look at your tax return and adjust the bill accordingly. So we would never call paying full price for health care an income tax of any kind. Or imagine there is a discount on the full price—for instance, 30 percent off for everybody, regardless of income. In that case it’s still not an income tax. No matter how much you earn, you pay the same price. But what if the discount (or subsidy) is tied to your employment situation? Not to your income, but to your employment situation. That’s how the exchanges work. If you have a full-time job with an employer that offers coverage—which is the case for most employees in our economy—you don’t get the subsidy offered through the exchanges. If you want to get the subsidy, you need to become a part-time worker or spend time off the job. In other words, this discount, too, is a tax on full-time employment. Of course, no politician ever calls it a tax. But when you are in a group of people that doesn’t receive a subsidy that people in another group receive, that’s a tax.

So far I have oversimplified things, because there isn’t just one subsidy for everybody in the exchanges. The subsidy depends on your income. So there’s also an income tax built in. The more you earn, the less of a discount you get. Indeed, if you earn enough, the discount disappears. The folks analyzing this law in Washington made the mistake of focusing only on the income-tax aspect of the subsidy. There will be only eight million people in the exchanges, they figured, so eight million people now have a new income tax. That’s no big deal, they thought. They were oblivious to the fact that they were implementing a full-time employment tax on the majority of American workers. In all of the economic analyses of the ACA, there was no mention of this full-time employment tax—despite the fact that it’s the single biggest tax in the law.

In describing the size of this tax, again I find it useful to think in terms of how many hours per week somebody has to work to create enough value to replace the government subsidy he is losing because of his full-time status. There are a number of full-time workers who may have to work ten, 20, or even 30 hours a week to create the value they would get for free if they worked part time or didn’t work under the ACA. In the old days, working part time meant you earned less, and your family had less to spend than if you worked full time. Under this new system, on the other hand, if you have a family of four and make $26 an hour, dropping to part time can actually improve your financial condition by qualifying you for well over $1,000 per month in subsidies through the health care exchanges—an amount that exceeds what you would make by working the extra eleven hours per week. This is an economically perverse situation.

We have decades of research showing that when you tax something, you get less of it. So if you tax labor, you get less labor. By that I mean on average—I don’t mean that every worker responds to every labor tax. That’s obviously not the case. But on average, if you tax labor you get less labor. As a result of the ACA, then, we are going to have fewer people working and less value created overall.

Nor will the loss of productivity end there. As with the ethanol example, there will be more and more tax distortions from the ACA as it continues to roll out. Businesses will change the way they do business, whether it’s by bending over backwards to stay below 50 employees or by having more part-time employees and fewer full-time employees—not because these policies create value or satisfy customers, but because they avoid penalties or enhance subsidies. The Chicago Cubs baseball team changed over to more part-time employees this past summer, and as a result there was a day when the grounds crew couldn’t handle the weather—reducing the value of the game for the fans in general. Incentives and disincentives in the tax code ripple through the economy in unimaginable ways.

This has not been well understood. Some analysts, for instance, have argued that not many employers, relatively speaking, are going to end up paying the penalty, so the harm of the penalty will be limited. And that’s just wrong. Adam Smith pointed out in The Wealth of Nations that if there’s a type of employment that’s evidently either more advantageous or less advantageous than other types of employment, so many people would crowd into it in the former case, or desert it in the latter case, that its advantages would soon return to the level of the other types. In terms of the ACA, whereas only some workers will experience the penalty directly, it will be felt across the economy because workers will move out of the penalized businesses—and customers will do the same, since those penalties are passed on to them in the form of higher costs. We’ll all experience it. Economists and politicians who looked at this law made the mistake of basing their analyses on models in which nothing matters except what happens directly to the individual worker and his employer. That is not how economics works.

In summary, the ACA has three major taxes in it. Two are taxes on full-time employment and the other is a tax on income. They may be implicit, they may be hidden, politicians may not call them taxes, but that’s what they are. Their economic impact on workers varies widely, affecting low-skill workers the most. They create all kinds of productivity problems and will have visible and permanent effects on the economy. I have estimated that employment will be three percent less over the long term because of the ACA, and that national income—or GDP, if you like to think of it that way—will be two percent less. If you look at the productivity costs alone—forgetting the fact that there will be a number of people not working anymore—they come to $6,000 per person who gets health insurance because of the law. And I’m not beginning to count the payments needed for health care providers.

In conclusion, I can make you this promise: If you like your weak economy, you can keep your weak economy.

“Reprinted by permission from Imprimis, a publication of Hillsdale College.”