Economics, Health Care, Pethokoukis

Does Obamacare exchange an opportunity ladder for a poverty trap?

Image credit: shutterstock

Image credit: shutterstock

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.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


5 thoughts on “Does Obamacare exchange an opportunity ladder for a poverty trap?

  1. Those percentages sound scary.
    But let’s look at what the family actually has to pay:
    - sole earner, $35k = federal income tax $1503; Hennessy says insurance $1410/year. Fine.
    - Two incomes, $47k = fed income tax $3161 (unrelated to ACA!); insurance $2970/year (related to ACA subsidies).

    I don’t know why H is adding employer-side payroll taxes to the worker’s taxes. And EITC, payroll taxes etc. are going to be a factor even in the absence of ACA, just like the federal income tax.

    So the ACA-specific penalty is just $1400 on that extra $12k. The family can take personal responsibility for that call, surely…

  2. do we have evidence of the poor remaining poor and refusing to take a job so they could remain eligible for Medicaid? unless we’ve seen that, it’s hard to imagine anyone making that choice with an ACA subsidized health care plan…

    • This is a critical question, for which I only have a small anecdote. The men I employ are THE target audience for the ACA and many other social programs. Not a single one has ever said to me, “Boss, don’t give me that raise… you’re paying me too much.”

  3. I get that as a family climbs up the income ladder, it leads to reduced EITC and reduced refundable child credits, as well as higher employer and employee-side payroll taxes.

    Why does Hennessey attempt to pin that specifically on Obamacare?

  4. I hate to bring this up, but the CBO is comprised of, you know, people… who make projections that, however well-intended, don’t necessarily come true.

    The argument that it is likely to come true is pretty sound. But, so is its counter: The target audience for this social program is unlikely to “do the math” to determine the break-even point for total income. Consequently, the impact on labor will be negligible.

    Which one will prove out? We won’t ever know for sure. The only way to know for certain would be to “turn back time” and replay the next few years without the ACA. Since that can’t happen, we’ll be down to anecdotes and projections once again when we try to “calculate” the law’s effects at some future date. It will be a pointless effort that can only yield opinion, not fact.

    All social programs produce winners, losers, and unintended (and/or unmeasurable) consequences. Social Security almost certainly influences people to retire rather than keep working. Welfare almost certainly influences people to lower their ambitions. But these programs are generally popular, in part because their absences would seem to be far worse alternatives. So, maybe “popularity” is the sole yardstick for measuring the worth of a social program? If a program proves popular, we keep it. If not, we either change it or get rid of it. I give enough credit to the collective wisdom of the people being governed to be able to discern the difference.

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