The two most serious defects of ObamaCare were never discussed at the Health Care Summit or in the President’s speech this afternoon. I blame the Republicans for that. As a result, things have gotten worse for the GOP. President Obama is now offering to make minor concessions on the issues the Republicans did bring up and call the whole effort a “bipartisan compromise.” (More on that below.)
Okay, what is the single worst feature of ObamaCare that no one ever talks about? It is something that would completely disrupt American labor markets. Take a look at the chart below. It shows why no employer anywhere is going to be able to (a) provide health insurance to employees and (b) employ workers who earn $30,000. The reason: Any competitor employing similar workers and not providing health insurance would have a huge, insurmountable cost advantage.
In 2016, ObamaCare will require almost everyone to have insurance that costs an estimated $15,000 for a family (House version). For a $30,000-a-year worker, there are additional limits on out-of-pocket costs. If the employer is providing the insurance, the total tax subsidy from the federal government will be about $2,295. However, if the employee were not getting insurance from the employer, he would qualify for the better insurance (less out-of-pocket exposure) in a new health insurance exchange — with a federal subsidy that would be $17,105 higher! Think of this as an enormous federal government gift to the employer and the employee. With competition in the labor market, we would expect the worker’s wage to eventually rise by the full amount the employer was spending on health insurance. (Higher wages replace insurance in the compensation package.) But along the way, the employer and employee combined will have $17,105 more than they had before. (Calculations by Steve Entin.)
Of course, in the various versions of ObamaCare there are financial penalties for employers who do not provide insurance. But in all versions, the penalties are mild compared to the potential gains of moving worker insurance from the employer to the exchange for average- and below-average-wage workers. Moreover, as I explained in my analysis of the Senate version of ObamaCare, industrial reorganization can minimize those costs. High-paid workers with employer-paid insurance will cluster in some firms, while average- and below-average-wage workers will cluster in others. Overall, ObamaCare will create irresistible economic pressure to restructure the entire labor market. Anytime there is a way for employers to cut their labor costs by 50%, they will exploit it. Along the way, however, millions of workers will be dislocated and the unemployment rate will soar. We will be left with industrial organization dictated not by economics, but by a subsidy system that can only be called bizarre.
Lest you think there is some rational reason (say, equity or fairness) for all of this, take a look at the next chart — which compares the subsidy available to a $90,000-a-year employee getting insurance in the exchange with that available to a $30,000-a-year worker getting insurance at work. In this case, a worker with three times as much income gets almost twice as much help from the government!
What Republicans should have said at the Summit: You can’t have rational health reform unless you subsidize all insurance equally — regardless of where it is obtained.
Now for the second biggest problem with ObamaCare: high marginal tax rates for middle-income families. Take a look at the next two graphs (from IRET) and remember why both political parties came together during the Reagan years to reduce tax rates. ObamaCare (House version) would create marginal tax rates in excess of 60% for workers earning as little as $25,000! This is caused by the steep withdrawal of health insurance subsidies (in the exchange) as income rises.
Michael Schuyler, who produced these diagrams, describes them as follows:
The charts actually understate the spikiness of the marginal rate “skyline.” They are drawn as though the subsidy smoothly phases out between the pairs of incomes for which CBO provides subsidy estimates. In practice, the phase-out would have “cliffs,” in which a few dollars of added income would cut the subsidy by hundreds or thousands of dollars, resulting in stratospheric marginal tax rates in the immediate vicinity of the cliffs.
As is well known by economists and policymakers alike, when people get to keep only one-third of each extra dollar they earn, they react in all kinds of ways that are harmful to the economy. They will choose more leisure and less work; they will substitute untaxed fringe benefits for taxable wages; they will disguise consumption as a business expense; and they will substitute unreported (and, therefore, untaxed) income for reported income.
What Republicans should have said at the Summit: Health reform is no bargain if it imposes on the middle class the same marginal tax rates that high-income earners faced during the years of stagflation.
Since the Republicans chose instead to focus on matters of far less seriousness, Obama is now responding by making trivial compromises with respect to those issues. In yesterday’s letter to Congress, here is what he proposed:
- To reduce fraud, waste and abuse, use random government undercover investigations of health care providers, as proposed by Sen. Coburn.
- Establish medical malpractice demonstration projects, as proposed in the Coburn bill and the Ryan bill.
- Explore ways to increase Medicaid reimbursements to doctors, as proposed by Sen. Grassley.
- Expand Health Savings Accounts by offering them in the exchange, as proposed by Sen. Barrasso.
I don’t know about you, but I think the debate was going much better when the Republicans weren’t saying anything at all.