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Better Off Poor: How Obamacare Punishes Hard Work

Hans Bader

It’s perverse to drive up the costs of someone’s health insurance—and then punish them for working two jobs to pay for it. But that’s what Obamacare is doing to some people. It drives up the cost of their health insurance to the point where they have to get a second job just to pay for it. Then it suddenly takes away the tax credits that helped pay for that insurance if their second job pushes their income even a tiny bit above an arbitrary level.

It doesn’t gradually phase out their tax credits, it suddenly takes them all away.

As we discussed last week, health insurance costs are going up, and many people are paying more money for worse insurance than they had in the past. The cost of policies on the Obamacare exchanges will rise next year by at least 25% nationally, according to the Obama administration, and over 60% in some states.

As the New York Times points out, “Federal subsidies will generally grow with premiums, the administration says, even as rates soar 25 percent to 50 percent or more in some markets. . . Higher subsidies mean higher costs for taxpayers.” 

But some taxpayers will lose their subsidies entirely—due to their earlier decision to take a second job to pay for health insurance.  As the New York Times notes:

Emily Odza, a part-time librarian in Oakland, Calif., said the monthly premium for her Kaiser Permanente plan was rising next year to $900, from $800. Subsidies cover about half of the cost. She recently took a second part-time job. “I worry most about the fact my income may rise slightly above the cutoff point,” Ms. Odza said. “If you want to earn as much as you can just to survive, the government takes away the subsidy.” Financial aid becomes unavailable when an individual has income of more than $47,520 a year.

It may make sense to gradually phase out someone’s subsidies as their income rises. People who are wealthier need less government help.

But Obamacare does something far more extreme and indefensible. It suddenly takes away thousands of dollars in subsidies when many people earn a few extra dollars—blindsiding many of them in the process. It doesn’t gradually phase out their tax credits, it suddenly takes them all away. That leaves them much worse off than if they had never earned that extra income, potentially leaving them poorer for taking on a second job to pay the costs of their health insurance.

The eligibility requirements for Obamacare tax credits contain massive worse work disincentives for many older workers. For example, they effectively create an astronomical marginal tax rate for a hypothetical 62-year-old whose income rises by $22, by triggering the sudden loss of thousands of dollars in government tax credits, as Ted Frank explains:

[A] 62-year-old in a high-cost area earning $46,000 a year without health insurance is entitled to a $7,836 government tax credit. Leaving aside how our strapped government can afford that, here’s what’s interesting: if the same person makes a mistake and earns an extra $22 in income, he loses the entire $7,836 credit. (The cutoff, according to Kaiser, is between $46,021 and $46,022.) That’s a 35,618% marginal tax rate. Indeed, the problem is so severe that our 62-year-old subject will have more take-home pay if he earns $46,000 than if he earns $55,000. And even at lower income levels, there is as much as a 16% surcharge on income at the margin.

Obamacare also contains large marriage penalties for some people.

Obamacare’s tax-credit cliffs are not the only thing in the healthcare law that discourages people from working. Other provisions of the law have already reduced employment in most states by between 1.5% and 3%, according to a researcher at Georgetown University. The Congressional Budget Office says that Obamacare will reduce employment in America by over 2 million jobs by 2024, and increase the federal budget deficit, driving up debt service costs that will burden the economy further. 

Republished from the Competitive Enterprise Institute.

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