Politics & Policy

The Individual Mandate Has Made Tax Day Even More Miserable for the Poor

(Anna Penigina/Dreamstime)
Perversely, Obamacare’s tax penalty is disproportionately harming those the bill was supposed to help.

This tax-filing season marks one of the largest tax hikes on the poor in more than 20 years, thanks to the Affordable Care Act signed into law five years ago. Through the law’s individual mandate, every U.S. person filing a tax return with the IRS is required to check a new box on their tax filings, attesting to whether or not they have health-insurance coverage, answering truthfully under the penalty of perjury.

Beginning this year, anyone without health insurance, regardless of their reasons, potentially faces a sizeable increase in their tax burden.

More specifically, households that did not have health insurance in 2014 are required to pay the maximum of either 1 percent of their household income or the sum of $95 per uninsured adult and $47.50 per child under 18. According to a recent analysis from H&R Block using data from this tax season, the average tax penalty for not having insurance has been $172, an indication that most taxpayers are paying more than the flat fee of $95 per uncovered adult.

Next year those tax penalties will soar even further, as households that do not have coverage will be required to pay the maximum of either 2 percent of household income or the sum of $325 per uninsured adult and $162.50 per child under 18.

Up to 6 million individuals, or 4 percent of tax filers, are estimated to have paid the fine this tax season for not having carried insurance in 2014, according to Treasury Department estimates released earlier this year.

#related#The Obamacare individual-mandate penalty may very likely be ignored by taxpayers in the upper or middle class, the vast majority of whom continue to have health insurance. However, individuals in the bottom income tiers, who are still largely without insurance, have received a substantial tax hike this season thanks to the Obama administration, despite its failed national ad campaigns encouraging enrollment on the federal exchanges.

The affected tax filers paying the penalty disproportionately belong to the working poor. Last year, the CBO estimated that nearly 70 percent of those incurring the individual-mandate penalty in 2016 will earn less than $46,680. The income distribution of individuals paying the individual-mandate tax this year will likely be very similar.

This widespread magnitude of the mandate tax largely results from Obamacare’s failure to reduce the number of uninsured individuals (the law’s primary goal) by the initial number forecasted.

Last November, Health and Human Services secretary Sylvia Burwell conceded estimates, using analysis conducted by her agency, that there would only be 9.1 to 9.9 million Obamacare enrollees by the end of 2015, substantially down from the original 13 million estimated by the CBO in April 2014.

Indeed, to make up for this shortfall, in February the Obama administration announced a special extension of the Obamacare enrollment period, from March 15 to April 30, for households that discovered during the tax-filing season that they were subject to the individual-mandate tax.

In all likelihood, the extended enrollment will not make a huge dent in reducing the number of uninsured individuals and sparing some of the nation’s poorest individuals from the Obamacare-mandate penalty.

Alternatively, as Avik Roy of the Manhattan Institute notes in his plan for health-care reform, the best way to increase health-insurance coverage is by decreasing the cost of health care. A larger bureaucracy, created by the Affordable Care Act, does the exact opposite by throwing more federal tax dollars at the problem.

Mr. Roy in his plan, along with many of his colleagues, suggests that the Obamacare individual and employer mandates should be scrapped, and they instead advocate for transforming the existing Medicaid subsidies into a premium-support system that allows the poor to harness the power of the free market by shopping on the state and federal health-insurance exchanges.

Free-market reforms to Medicare are also needed to drive down the cost of health care and health insurance. Premium-support plans like the one championed by House Way and Means Committee chairman Paul Ryan (R., Wisc.) would enable Medicare enrollees to choose a private health plan toward which the federal government would pay a predetermined contribution.

When taking budgetary concerns into consideration, means-testing and better indexing Medicare and Social Security benefits would also ensure that the government subsidizes only those who need assistance with health insurance, and not those like Warren Buffett who can already afford their own health care.

To ensure that health-care reform actually helps the poor economically rather than increasing their tax burden, the individual-mandate tax needs to be repealed. Until then, the same people with little means who were promised economic relief and affordable health care will be without either.

— Jon Hartley is a Forbes economics contributor and the co-founder of Real Time Macroeconomics LLC, a financial-technology firm.

Jon Hartley — Jon Hartley is an economics writer and researcher with interests in labor economics, public economics, financial economics, and macroeconomics. Jon is a regular economics contributor for Forbes and The Huffington ...

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