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The ObamaCare Tax on the Middle Class

This is a syndicated repost published with the permission of The Baseline Scenario. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

By James Kwak

So the new Republican argument (which Mitt Romney was against before he was in favor of it) is that the individual mandate is an oppressive tax on the middle class. Cute, isn’t it, adopting John Roberts’s argument?

First of all, there’s the little matter that the word “tax” in legal doctrine means something different from the word “tax” in ordinary English. And there’s nothing wrong with that. Plenty of words have precise legal meanings that would be foreign to ordinary English speakers, like “negligent,” “reckless,” “material,” and so on, and billions of dollars turn on those precise legal meanings. But that’s not going to sway many people, so let’s go to the numbers.

If you get health insurance through your employer, the individual mandate doesn’t apply to you. There’s no chance you’ll pay the penalty, so the amount of the “tax” is exactly zero.

If you get health insurance from the government (primarily Medicare or Medicaid), the same thing applies. Your tax: zero.

If you already buy health insurance in the individual market, you can continue buying insurance the same way. The main change is that prices will probably come down (or at least grow more slowly) because of transparent competition in the insurance exchanges. (Curious? Check out what we have in Massachusetts, thanks to RomneyCare.) Your tax: zero.

All right, that covers more than eighty percent of you. What if you’re among the roughly 50 million Americans who are currently uninsured?

The typical uninsured household is a family of three that makes between $25,000 and $50,000 per year, probably around $35,000 (see Table 8). If you are a single parent with two children under eighteen, your penalty for not buying insurance is $1,390.

But: Because your household income is less than 200 percent of the applicable federal poverty level, you also receive a premium credit. At most, you will have to pay 6.3 percent of your income on health insurance, or $2,205. (In addition, you get a 13 percent reduction in the amount of cost sharing under your plan.) So you get to buy a family plan, which would ordinarily cost around $12,000, for just $2,205. That’s a benefit of $10,000.

So here you have a law that offers you $10,000 to buy health insurance (or, put another way, gives you a discount of more than 80 percent), but says that if you decline to buy it you’ll have to pay a penalty of $1,390. You can call that $1,390 a tax if you want, but the real question is: does the law make you better off than you were before? Unless most uninsured families like being uninsured, it’s pretty clear that it does make them better off.

(For a broader analysis of who is subject to the individual mandate, see the simulations by Jonathan Gruber. The answer: almost no one.)

In short: Very few people are even theoretically subject to the tax, and most of them are made much better off by the law, since they are transfer beneficiaries.

How can this be? How can a law make everyone better off? Well, it doesn’t. There is a tax-and-transfer element to the Affordable Care Act. The main people who are paying more are the rich (because of a Medicare payroll tax surcharge) and those with good health plans (because of the excise tax on “Cadillac plans”). In addition, the new spending is financed in part by reductions in Medicare spending; those reductions may or may not result in reduced availability of care for Medicare beneficiaries.

The Affordable Care Act is not painless, and there are definitely taxes involved. But the individual mandate “tax” is not one of them.


  1. jeff m

    The law, as the author clearly points out, is about coercion. If some does not want to buy insurance for whatever reason (maybe because they understand that insurance is not health care) the government will penalize them. Further, the premium credit is money that is extracted from tax payers and redistributed to others. I’d bet that nearly all of these people using the credit would never dream of walking up to a fellow citizen and demanding payment for his health care, but somehow when the government washes the money the conscious of the taker is somehow soothed and the objective theft is somehow seen as “charity” from the government.

  2. Lee Adler

    I’ll just repeat my note to Charles Hugh Smith’s piece.

    The US portion of GDP that goes to health care is variously reported at 17-19%. In other developed nations, all of which have universal care, the rate is reported by the OECD at 10-11%. Those are akin to the effective tax rates. The 60-80% higher cost in the US is a legal protection racket, not a tax.I do not have medical insurance, not by choice. I have a pre-existing condition, and while the new law makes it available now if I jump through hoops, I cannot afford the cost in Florida. I could move to another state that has lower rates, but then I’d have to pay local and state income taxes that would add 7% to my tax bill, so I still could not afford it. Part of the reason I cannot afford it is that I must contribute to my mother’s support. She’s 90, has Alzheimers, and is in assisted living. I could move to Canada, and pay much
    higher taxes, but then I would not be able to afford to supplement my mother’s cost of care which is not fully covered by her government stipends. So there is a very real difference between the US and other countries in terms of taxes.

    The US tax rates are comparable to other nations only if you consider the legal medical protection racket a tax. That’s just semantics. You can make the case for it, but it’s not correct to say that it’s mandatory. Many people go without by choice, and many, like me, have no choice. To me, the cost of medical services is more like extortion—a mafia protection racket.

    The private medical industry must be abolished and its leaders prosecuted for the murder of 26,000 people a year. Then the US government should cut the costs to be in line with the rest of the world. It would also stop the brain drain of medical professionals from around the world to the US where they can profiteer and take part in the protection racket. US medical service providers make 50-100% more than in any other developed country under the existing scam. That’s not a tax. It’s legalized criminal activity.

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