(A version of this column was published by The Hill.)
Bill Clinton’s pre-election criticism of Obamacare reflected a good understanding of labor economics. In October, he explained:
So you've 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. It's the craziest thing in the world.”
Clinton was referring to high marginal income tax rates that Obamacare imposes on workers through the design of its tax credits, which get clawed back in a very unfair way. The Administration recently confessed premiums for the benchmark Obamacare plans are going up 25 percent, on average. Trying to appease angry enrollees, the Administration feebly claims tax credits reduce net premiums people pay.
Nobody is satisfied by this excuse. However, even if Obamacare premiums were reasonable, they 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.
And it is not as if the tax credits decline at a constant rate as a worker’s household income increases. Indeed, the way they get clawed back makes it almost impossible for workers with somewhat unpredictable incomes to figure out the value of their tax credits until they do their tax return the spring after the enrollment year.
Scholars at the Kaiser Family Foundation estimated half of Obamacare beneficiaries who received tax credits in 2014 would have had to repay some. For beneficiaries in a family of four with an income less than $23,550, the average amount clawed back was estimated at $667. If that persists in 2017, almost six million people will have to repay tax credits back 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. The Kaiser Family Foundation estimates the 2016 annual Obamacare premium for a family of two adults and two children is $9,178. If the family’s modified adjusted gross income (MAGI) were $25,000, the family would benefit from a tax credit of $8,671 paid to its health plan. Its net premium (if it bought the benchmark Silver plan) would be $508. If the family’s income rose to $30,000, the tax credit would shrink by $101. Effectively, the family has had a two percent income tax levied on its raise ($101 divided by $5,000).
That is likely bearable. However, if the family’s income increases by another $5,000, to $35,000, the tax credit is clawed back another $696. That comprises an effective marginal income tax rate of 14 percent. This might make the family members think twice about whether the extra hours are 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 get clawed back. For a two thousand dollar raise, the family is taxed 43 percent!
For a family of four, this perverse and confusing effect riddles Obamacare’s 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 this 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 at a constant amount of the tax credit for every dollar increase in income (which would effectively be a flat rate of income tax). Although Hillary Clinton failed to win the election, President-elect Trump could use her husband’s argument to garner bipartisan support in Congress for such a reform.