When the Supreme Court examined Obamacare they concluded the “requirement to buy insurance” was actually unconstitutional. Randy Barnett and Josh Blackman of USA Today say that “instead, the court identified the mandate as a tax.” Leo Linbeck pointed out to me in a letter that not only is it a tax. It’s a regressive tax. He described the life of Julie, a hypothetical middle-class Obamacare enrollee:
Consider Julie, a single, 35-year old non-smoking woman working at a fairly steady job that pays $15.00 per hour. Most everyone would say that Julie is middle class; if she works 40 hours a week for 50 weeks, her gross wages are $30,000, which is also 261% of the federal poverty line.
Now let’s say Julie doesn’t get health insurance from her employer, so she goes onto healthcare.gov to find a policy. She is really wants insurance, but has a limited budget so she goes for the Bronze level policy. This policy, according to the Kaiser Family Foundation’s online subsidy calculator, costs $3,098 per year, or roughly $258 per month. But because she qualifies for a $586 subsidy, her cost is only $2,512 or about $209 per month. Although this is a lot of money to Julie, she is pleased with her decision, and glad to have the help with the cost.
But what Julie may not fully appreciate at this point is that she will now be subject to a marginal tax rate of almost 40%. Here’s why:
Julie’s purchase of the policy locks her into a fixed cost – the premium of $258 per month – for the year. But the subsidy is a function by her actual income for the year. So as her income rises, the subsidy falls.
Let’s say that Julie worked from January to Christmas having only taken one week off (unpaid). She was also planning to take off the week between Christmas and New Years as well, which would have given 50 work weeks as she originally planned.
But her boss approaches her to ask her if she’d be willing to stay around during that last week of the year to help with some pressing projects. As a loyal employee, she agrees to do so, putting in another 40 hours and earning another $600, pushing her her gross wages for the year to $30,600.
Of course, she has to pay taxes on that extra $600: 7.65% for Social Security and Medicare, and 15% in income taxes. But that extra income also drops her insurance subsidy to $490, a decrease of $96. This is effectively another 16% tax on her income – money she now will have to pay when she files her taxes in April.
Taken together, these taxes add up to a marginal rate of 38.65%, nearly the same as the top marginal income tax rate!
Leo concludes saying “Finally, it is worth noting that this hidden tax only hits those with lower incomes. High-income workers don’t receive a subsidy, so they get to keep more of their marginal pay.”