Obamacare & Bracket Creep

| by davidpakmanshow
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                A David Pakman Show viewer recently called to my attention a articles suggesting the Affordable Care Act’s – also known as Obamacare – income subsidy brackets could create an incentive for people to work less, choosing to earn less money. Citing specific articles making this claim isn’t important – the idea isn’t unique, and has been suggested about more programs that Obamacare.

The concept is simple. Obamacare provides subsidies towards an individual or family’s health insurance premiums, in order to ensure that health insurance will be affordable. The subsidies are largest for individuals and families at or below the federal poverty level (FPL). Subsidies are available to individuals and families earning up to 400%, or four times, the FPL. The subsidies are calibrated so that, no matter your income, you will not have to pay more than 9.5% of your income on health insurance. Logically, the amount of the subsidy decreases as the income level increases. Eventually, it drops to zero when the income level surpasses 400% of the FPL.

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The argument made from opponents of Obamacare is as follows: Since subsidies are not available to those earning more than 400% of the FPL, it’s possible that someone earning close to 400% of the FPL, given the opportunity to increase their income above 400% of the FPL, would actually be better of turning that down that additional income. The subsidy they would lose by earning more money is more than the extra income itself.

Let’s illustrate this with an example, comprised of completely hypothetical numbers. Imagine the FPL is $15,000 and a family monthly health insurance premium costs $750 per month, or $9000 per year. Our example family makes $59,950 per year. Since $59,950 per year comes in just below 400% of the FPL, or $60,000, they qualify for a government subsidy. Their $9000 per year premium represents 15% of the yearly salary, so the government would subsidize the health insurance down to 9.5% of yearly income, or $5700. Bottom line, the government subsidy in this particular case is $3300.

Given the option for a reasonable salary increase of $2500, the yearly salary would increase to $62,450. Unfortunately, this puts the family above 400% of the FPL, so they lose the government subsidy. In exchange for earning $2500 more per year, their health insurance cost will increase by the $3300 government subsidy they lose.

Before addressing the scenario specifically, let’s contextualize it. Many of the same individuals expressing the above concern with Obamacare were the ones arguing that it was Communism during the early discussion of the bill in Congress, and during the court appeal process, claiming that the Affordable Care Act was unconstitutional. Their concerns with Obamacare were and continue to be anything that hasn’t yet been proven wrong or thrown out by the legal system.

Putting this aside for a moment, let’s assume the argument about a disincentive to work is being made in good faith, and not as an attempt at political posturing. First and foremost, the scenario outlined above is very uncommon, and will only affect a very small percentage of those who work. Those who earn well below 400% the FPL will have their subsidy down to 9.5% of their income, and won’t have the option to increase their salary beyond four times FPL. Those who earn more than a small amount above 400% of the FPL would certainly not consider deliberately reducing their income significantly because it would not be outweighed by the government subsidy they would qualify for.

Further, this scenario, known to many as “bracket creep,” is not even remotely unique to Obamacare. The scenario has applied to healthcare in Massachusetts for many years. The Massachusetts health insurance safety net is similar in many ways to Obamacare, and government subsidies based on income are one common aspect to the two programs. Identical bracket creep scenarios can and do apply to food stamps, WIC, and many other social programs.

To take the idea a step further, the entire American graduated income tax system creates the same dilemmas. It is less all-or-nothing by virtue of the fact that as income increases, the marginal tax rate increases, meaning it only applies to income made from a certain dollar amount and up, by as Ayn Rand’s John Galt is used by some to make the point, individuals must decide whether it is a good investment of time to continue working as the tax rate on their income from additional work increases.

The above scenario outlined by Obamacare detractors is real, in the sense that it is possible. However, it won’t apply to most people, and is not even remotely unique to health insurance. Don’t be tricked by misdirection and lack of logic.

David Pakman, host of the internationally syndicated political talk radio and television program, "The David Pakman Show," writes a monthly column. He can be reached at www.davidpakman.com.