It’s simple: climbing the opportunity ladder into the middle class or higher requires a job. And there’s your trouble with the Affordable Care Act. It slaps working class and low-income families with a big tax increase if they try and climb that ladder. Higher incomes are offset by lower insurance subsidies from government. As a result of steep effective marginal tax rates, some people will work fewer hours. Other will quit the job market completely.
Obamacare supporters call that a feature not a bug. People who are only working to pay for health care will now have the ability to make a different “choice.” Older workers doing physical labor will be able to retire earlier. Moms can switch to part-time work or even stay home full-time. Workers will have more flexibility to change jobs or start a business. So it’s good news … wait … fantastic news that the Congressional Budget Office now says that “more than 2.5 million people are likely to reduce the amount of labor they choose to supply to some degree because of the ACA,” three times more than its earlier forecast.
But even the best-intended, smartly-devised plans often have unintended and harmful consequences. Here is one trade-off, one reality that President Obama doesn’t want to talk about. Keith Hennessey offers the example of a working-class family of four whose sole wage earner makes $35,000 a year and doesn’t get health insurance through a job. The other spouse wants to take a $12,000 part-time job to raise the family’s income. But doing that would reduce Obamacare’s subsidy and raise the family’s effective federal tax rate to 50% from 37%. Yes, the Obamacare subsidies help the family afford health insurance. But there is the trade-off:
Do the benefits of the premium subsidy to this family outweigh the costs of trapping this family at this income level by killing the financial benefit they receive from more work, education, training, or other professional advancement? … Nobody wants to trap people and discourage further economic advancement, even if they do so by helping that family with generous subsidies.
For that fictional family – and maybe thousands or hundreds of thousands real-life counterparts – Obamacare pulls up the opportunity ladder and leaves them mired in a kind of poverty trap.
Does the Obama White House know the impact on the broad middle-class who are now more resemble the poor in having to value government subsidies versus the return from work? As AEI’s Scott Gottlieb puts it, “We are now subsidizing the middle class who are employed and grow their income incrementally in the form of small promotions and overtime. So this creates a giant distortion to that productive part of the market.”
Along those same lines, Tyler Cowen looks at the research and raises the issue that all those folks choosing more “leisure” — as economists would put it — over work might possibly “undervalue the benefits of having a job and … also underestimate the costs of remaining unemployed.” Hayekian information problems abound. Maybe we don’t care as much, as Ross Douthat argues, when we are talking about 800,000 people versus 2.5 million people. But we are talking about that larger number, if not more, which contributes to the long-term economic drag of slowing labor force growth. All these problems deserve more than a hand wave from Obama — which is all they’ve received so far.