Bill Clintons criticism of Obamacare reflected a good understanding of labor economics. In October he explained:
So youve got this crazy system where all of a sudden 25 million more people have health care and then the people who are out there busting it, sometimes 60 hours a week, wind up with their premiums doubled and their coverage cut in half. Its the craziest thing in the world.
Clinton was referring to the high marginal income tax rates that Obamacare imposes on workers through its tax credits, which get clawed back in a very unfair way. The administration recently confessed that premiums for the benchmark Obamacare plans are going up 25 percent on average. Trying to appease angry enrollees, the administration feebly claims that tax credits will reduce the net premiums people pay.
Nobody is satisfied with that defense, but even if Obamacare premiums were reasonable, the system would still punish the people for whom Bill Clinton claims to speak. The more you work, the more you earn; and the more you earn, the higher net premium you pay. This is not a characteristic of the employer-based group market in which most of us participate.
Moreover, the tax credits do not decline at a constant rate as a workers household income increases. Indeed, they get clawed back in a way that makes it almost impossible for workers with somewhat unpredictable incomes to figure out the value of their tax credits until they do their tax returns the spring after the enrollment year.
Scholars at the Kaiser Family Foundation estimated that half of Obamacare beneficiaries who received tax credits in 2014 would have had to repay some of the money. For beneficiaries in a family of four with an income less than $23,550, the average amount clawed back was an estimated $667. If that persists in 2017, almost six million people will have to repay tax credits to the IRS, likely because they worked more hours than they had initially expected. Is that the kind of behavior we want the government to punish?
Here is how it works. Kaiser estimates that the 2016 annual Obamacare premium for a family of two adults and two children is $9,178. If the familys modified adjusted gross income (MAGI) were $25,000, the family would have a tax credit of $8,671 paid to its health plan. So its net premium (if it bought the benchmark Silver plan) would be $508. If the familys income rose to $30,000, the tax credit would shrink by $101. In effect the family would have a 2 percent income tax levied on its raise ($101 divided by $5,000).
That is likely bearable. However, if the familys income increased by another $5,000, to $35,000, the tax credit would be clawed back another $696. Thats an effective marginal income tax rate of 14 percent. This might make the family members think twice about whether the extra hours were worth it.
And it gets worse from there. Suppose the family members could work a few more hours during the year to bring the household income up to $37,000. In that case $855 of tax credits would get clawed back. For a $2,000 raise the family would be taxed 43 percent!
For a family of four this perverse and confusing effect riddles Obamacares tax credits all the way up to a household income of almost $100,000. No wonder large numbers of workers are apparently uninterested in working more hours. The proportion of workers who work part-time because they choose to limit their hours, rather than because employers will not give them more work, has increased from 71 percent of the part-time workforce in December 2013 (the month before Obamacare launched) to 78 percent last September.
The best solution to this problem would be a universal tax credit to finance medical spending. A second-best solution would be a tax credit that shrinks a constant amount for every dollar increase in income (which would effectively be a flat-rate income tax). If Bill Clintons wife is elected president, lets hope she can work with Congress to bring about this reform, which should garner bipartisan support.