Belmont Club

The Two Size World

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 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.”

The invisible walls of the Obamacare world are marked with subtle limits, not so much to keep interlopers out, but to keep the inmates in. The question is whether that world of hidden handcuffs will be the only universe we can live in.

Freedom means choices and in public policy the choices are surprisingly few. Long before the Obamacare exchanges were formally launched, Leo (as many readers on Belmont will recall) saw the need to do more than just passively say “yes” or “no” to the proposals coming out of Washington. In Breitbart he argues that both parties have too many political problems to actually solve the problem. And yet they are the only choices we are offered.

Democrats are dividing into two camps: those who want to stand by the President’s signature achievement until the bitter end, and those who are running from Obamacare, trying to save their political careers.

At the same time, Republicans are just trying to stay out of the way. Having voted against the bill, regained control of the House in its wake, and attempted to repeal the ACA multiple times, they are enjoying their moment of vindication. They rightfully fear that any attempt to “fix” Obamacare will allow Democrats and the media to portray them as “co-owning” any problems that occur downstream. And there will be more problems. …

So what can be done? Well, it might help to ask, “If you had to come up with the ideal plan going forward, what would it look like?” It might have the following elements:

It would empower state and local governments to address the problems created by Obamacare (something they’re already doing in response to the website problems) while Washington, DC attempted to sort out the mess.

It would not require the repeal and replacement of Obamacare all at once (something that is politically unfeasible) but would allow health care regulations to be gradually adapted and changed on a state-by-state basis to meet the particular conditions in each state.

It would make a serious impact on the long-term federal liabilities of the health care system (liabilities that didn’t go away under ACA).

It would support insurance markets that are overseen by knowledgeable regulators who have decades of experience and are, in many cases, directly accountable to voters.

It would already have received strong support from elected officials of both parties.

It would accommodate a wide variety of health care policy solutions, from single-payer to health savings accounts to accountable care organizations, and would provide the funding to support any of them.

It would be something that can be put in place quickly to help mitigate the damage currently being done by Obamacare.

Believe it or not, such an ideal plan already exists, and its legislation has already passed in 11 state legislatures and been signed into law in eight of those states. It’s called the Health Care Compact.

The Healthcare Compact was an attempt to reintroduce more choice into the mix by moving the action to local levels.

Leo highlights a generic structural problem inherent in the choice of public policy. As the scope of regulation increases at the Federal level, ordinary lives must increasingly fit themselves into two sizes: either R or D. It would be as if you went into a department store only to find two sizes of everything. Two sizes of shoes, two of shirts, two of underwear. That is the public policy world. Yes or No to Obamacare. Yes or No to the administration’s nominees in the Senate. Yes or No to the debt limit.

For Obama or against him.

The singular characteristic of the Health Care Compact that Leo proposes is that it is none of the above. That makes it in the conventional wisdom of Washington an exercise in insanity. But it is the binary partisan world created that is insane. It’s sanity is defined by convention. Binary Washington is reasonable because they say so.

One of the themes that runs through Linbeck’s writing is the notion that the public policy details are less significant than the question of “who decides”. The debate is a priori restricted to an extremely small menu of choices put forward by the gatekeepers. And the point is not to choose between the gatekeeper’s offerings but to gain the right to pick the best thing out there.

The challenges facing the Health Care Compact initiative are less ones of merit than of process. They are problems of standing in the public policy arena. In this respect the obstacles facing the Health Care Compact are identical to any idea not invented by the apparatchiks of either party. For the country as a whole, and not just Chicago, the starting point of any proposal is “who sent you?”

And so things are ordered. The truthfulness and merits of a proposal are now less important than who proposes it. It’s a two size fits all world and no wonder that the hypothetical “Julie” is squeezed in the middle. After all, nobody sent her.

One of the central puzzles of the early 21st century is why, as connectivity proliferates and social media explodes, we have fewer rather than more choices.

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