Even in its dubious goal of increasing taxes, Obamacare fell short.
Even in its dubious goal of increasing taxes, Obamacare fell short.
L ast week the White House released data showing that one of the major taxes in the 2010 Affordable Care Act (ACA) turned out to be a big lie.
When Congress was debating the ACA, the experts told us that consumers must be forced to buy health insurance or else they would sign up only when they were sick. Anyone who did not comply must be disciplined for the greater good, they said. The 111th Congress embraced this conclusion when it passed the ACA. The law included an “individual mandate” forcing everyone to buy health insurance and an “employer mandate” forcing employers to sell health insurance to their workers. Individuals or employers who disobeyed would pay hefty tax penalties.
The Congressional Budget Office advised Congress that those two tax penalties would yield fiscal benefits offsetting some of the bill’s costs. In reality, and unique in the history of taxation, the two tax penalties ended up costing the government money.
The employer penalty has a complex, four-step enforcement scheme, which incentivized employers to remain small and to favor part-time employment over full-time employment. These drags on the labor market reduced the payroll and personal-income tax revenue received by the federal treasury. Nonetheless, Congress was told, revenue from the penalty itself would add up to $46 billion through fiscal year 2018 (see page 6 of this document). In fact, the employer penalty generated $0 (rounded to the nearest billion) because of the complexity of the enforcement scheme.
The individual mandate, which President Trump and a Republican Congress repealed in 2017, was just as absurd. It punished individuals who turned down Obamacare plans and the generous tax credits that went with them.
Take Ben Winslett, a Baptist pastor, husband, and father of five from Alabama, who describes himself as “securely in the middle class earning nearly the exact average US income each year.” His family’s health insurance was “taken care of on my own in the previous system,” but the ACA outlawed their $250 monthly policy, leaving them with far more expensive alternatives. As he describes it, the ACA “has placed an enormous financial burden on normal, everyday people quite literally forcing us onto government assistance we didn’t need before” (emphasis added). In other words, consumers are encouraged to buy subsidized health insurance, even when they are perfectly happy with unsubsidized plans. Consumers who turn down the government aid by neglecting to accept subsidies are owed gratitude by us federal taxpayers. The ACA did the opposite with its “individual mandate,” administering a financial punishment.
Many consumers nonetheless chose to forgo subsidies and pay for the “privilege” of purchasing a nonconforming (by federal standards) plan. Instead of improving the ACA-compliant plans so that they would be more attractive to buyers, the Obama administration doubled and tripled down on its punishment by prohibiting the nonconforming plans that people wanted. Some of the prohibited plans were inexpensive “short term” plans and plans offered by groups of small employers. The major health-insurance companies were overjoyed because the federal government not only penalized consumers who did not purchase their product but it also destroyed competing insurance products that consumers preferred instead. President Trump’s Secretaries of Treasury, Labor, and Health and Human Services ended these prohibitions, but they are expected to return in a Biden administration.
Arthur Laffer and his “Laffer curve” made famous the possibility that governments might lose revenue by increasing a tax, because a higher tax discourages taxpayers from engaging in the taxed activity. A sufficiently high cigarette tax, for example, could stop everyone from smoking legal, taxed cigarettes and thereby reduce government revenue. The so-called discouragement effect of real-world taxes, even in extreme cases, provokes vigorous debate among academics, who disagree about whether it is dominant enough to fit Mr. Laffer’s description. By contrast, the discouragement effect of the ACA’s individual and employer mandate taxes were so large and obvious as to occupy an exclusive spot in the history of taxation. The two mandate penalties are truly tax unicorns.
It’s time for the health-insurance experts to acknowledge their errors. Attempts to prevent consumers from turning down government assistance have heavy economic costs.