Quick Note on ACA Alternatives and the Child Tax Credit

Josh Barro makes a number of strong arguments against the conservative critique of the Affordable Care Act, and he notes some of the ACA’s relative strengths, in his latest attack on the GOP domestic policy consensus. For example, the ACA targets spending more narrowly than the emerging GOP approach, which is to offer flat refundable credits for the purchase of medical insurance, a more progressive approach than the current tax exclusion:

Even if you somehow convinced Republicans that funding high-risk pools was a conservative priority, you would still have the issue of everybody else: Most of the uninsured are not medical hard cases. They simply have low to moderate incomes and no employer-provided insurance, and can’t easily afford to pay premiums. Obamacare addresses these problems with sliding-scale subsidies: If you’re poor, you can go on expanded Medicaid at almost no cost to you; if you have a moderate income, the more you make, the more you pay in premiums.

Ponnuru, like many conservatives, supports a less efficient approach: a flat subsidy, regardless of need. This is a better idea than the policy status quo, which is a tax preference that actually becomes worth more the higher your income gets. But even with a lump-sum tax credit, some people with low incomes won’t be able to afford coverage, and people with high incomes will get a larger subsidy than they need.

The Congressional Budget Office hasn’t scored the Patients’ Choice Act or similar approaches to health-care reform, but because of the inefficient targeting of subsidies, what they will probably find is that such an approach gets health coverage to fewer people per dollar spent than Obamacare does.

This is why conservative ideas for health reform don’t get off the launchpad. They cost a lot of money, which conservatives don’t want to spend, and they get fewer results per dollar of spending than liberal ideas do. That is, the ideas are bad. [Emphasis added]

Given Josh’s characterization of sliding-scale subsidies vs. a flat subsidy, one has to wonder why anyone would favor a flat subsidy. My guess is that at least some of Josh’s readers will assume that Republicans are being pointlessly wasteful.

Fortunately, Eugene Steuerle of the Urban Institute addressed a closely related issue back in 2010. As currently structured, the four-tranche health system created by the ACA will be extremely difficult to administer, as it requires the creation of a parallel tax system; it provides different subsidy levels to different households earning similar incomes; and it creates implicit marginal tax rates that will have a hard-to-predict impact on labor supply. Flat subsidies will mean that households will not be in danger of being penalized for increasing their market income. This is indeed expensive, as Josh makes clear, but rather than compare an expensive flat subsidy to a cheaper sliding-scale subsidies, we need to take the impact on labor supply into account. This does not mean that a flat subsidy is necessarily superior. But it is part of the reason why a flat subsidy might be preferable, particularly if we weigh preserving work incentives somewhat more heavily than saving money by clawing back subsidies. It should go without saying that for many conservatives, the latter is a higher priority than the former. It is unclear, however, that it should be.

Apart from noting that well-funded high-risk pools won’t do much for low-income households, Josh doesn’t bother to make a case against them. This presumably reflects the fact they are a relatively cost-effective solution for the problem of meeting the needs of the uninsurable, particularly when contrasted against the potential costs of community rating and guaranteed issue, as Mark Pauly has explainedRather, Josh argues that Republicans haven’t pursued them and are unlikely to do so. As long as that is true, Republicans ought to be criticized for failing to offer a credible solution to the problem of preexisting conditions.

There is (always) more to say about potential alternatives to the Affordable Care Act, a subject I will revisit later this week.

Josh’s critique of Ramesh Ponnuru’s call for an expanded child tax credit similarly rests on the fact that Republicans haven’t embraced it yet, and that they will probably not accept higher marginal tax rates. More precisely, the tax bargain Ramesh and others have in mind is to increase average tax rates on high-earning households without minor children living in high-tax, high-cost jurisdictions to pay for an expanded child tax credit. We have at least some evidence, from the fiscal cliff deal, that Republicans might be willing to accept tax increases on some discrete group of taxpayers under the right circumstances, but of course Josh could be right. Ultimately, Ramesh is making a case to conservatives that may or may not be persuasive. If it is not, I would agree that Republicans will have a difficult time turning the tax issue to their advantage. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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