Obamacare as Regressive Taxation
Last Thursday the Supreme Court upheld President Obama’s signature domestic policy –the Affordable Health Care Act –by arguing that its individual mandate falls under Congress’s jurisdiction to levy taxes. Chief Justice Roberts wrote in his majority opinion that the Affordable Care Act’s mandate to purchase health insurance may “reasonably be characterized as a tax [and because] the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”
Meanwhile, the Obama administration has long asserted that the mandate—the bill’s fulcrum, really—is necessary to ensure that other provisions of the law function smoothly. That is, supporters view the mandate as essential to market based reform; without it, they argue, many healthy people would remain without insurance coverage, premiums for individuals and employers would accelerate, and insurance markets could become unstable. When the uninsured who can afford premiums do become ill, unaffordable health care costs are often absorbed by the rest of the population.
Unfortunately, the penalty-tax that the individual mandate imposes will soon constitute one of the most regressive taxes in the United States. (The terms “penalty” and “tax” here are effectively fungible. Whatever the nomenclature, it’s the functional equivalent of a tax.) The penalty-tax structure authorized by this law inherently disadvantages low income earners who, in effect, pay proportionally more on fewer dollars. Taxes imposed here are uncannily akin to the regression rates of sales and social security taxes. Take a look at the scatter chart below:
The penalty-tax will be phased in incrementally from 2014 to 2016. The minimum penalty-tax in 2016 will be $695 per person and up to 300 percent of that per family. After 2016, these amounts will automatically increase at the rate of inflation. (This constitutes yet another reason the minimum wage must immediately be indexed to inflation.)
The $695 per-person penalty-tax only applies to those making between $9,500 and ~$37,000 per year. Individuals making less than ~$9,500 are exempted and those earning more than ~$37,000 will pay a penalty-tax calculated by the following formula: 2.5 percent of any household income above the level at which one is required to file a tax return. That level is currently set at $9,500 per person and $19,000 per couple. The penalty on any income above this threshold is 2.5 percent. The IRS will collect the “fine” here, a fact that no doubt proves this is a tax, not a penalty. (The IRS isn’t in the business of levying “penalties,” right?)
Although the Affordable Health Care Act creates a number of exemptions for low-income earners making less than $9,500/year, members of Native American tribes, certain religious groups currently exempt from Social Security taxes, and hardship cases determined by the department of health and human services, the Congressional Budget Office (CBO) nonetheless estimates that about 26 million Americans will still be left uncovered in 2016. The Affordable Health Care Act not only constructs a captive consumer market redounding unilaterally to the benefit private insurers, but it also manages surreptitiously to levy a disproportionately burdensome tax on individuals making $9500-$37,000 annually. Whereas the politicians lie, the numbers here certainly do not.