While economic growth remains sluggish, the last thing the United States needs is another weight holding it back. Unfortunately, the new health care subsidy program created under Obamacare for low- and middle-income Americans does precisely that.
In recent research, Heritage’s Paul Winfree lays out exactly how the Obamacare subsidies will negatively impact the economy. According to Winfree, “tax subsidies are available for certain households who purchase federally approved coverage in the newly created state health insurance exchanges…unless they are eligible for Medicare or Medicaid or they can receive coverage through their employer that meets standards established in Obamacare.”
One effect of the program will be to create a disincentive for individuals to work and earn more. Winfree argues that “because the subsidy for certain households is so large, the threat of losing the tax subsidy will act as a powerful disincentive for individuals to earn additional income.… These types of subsidies reduce work and productivity.” The increase in the marginal tax rate caused by the cutoff for the subsidy is significant enough to discourage people from earning even an extra dollar in income.
The cost of the subsidies is also problematic. Winfree writes that the Congressional Budget Office “estimates that the subsidies will add $100 billion to the deficit by 2018, growing more expensive thereafter.” The federal government already faces a fiscal crisis and cannot afford to take on more debt.
Finally, additional debt burden will fall on the shoulders of a shrinking tax base. The subsidies will cause more than half of all households to no longer pay any income taxes, with many receiving a refund. Winfree explains that the “household receiving the tax subsidies will still face payroll taxes…to be earmarked for Social Security and Medicare.” However, the subsidies remove them from the federal income tax rolls that “fund the military, federal agencies, and state programs like Medicaid. The Obamacare subsidies substantially shrink the tax base that pays for these programs and thus desensitizes many more voters to the cost of government.”
The conclusion of Winfree’s research is that “growth-focused tax policy should be moving in exactly the opposite direction by expanding the tax base and lowering marginal rates.… The design of tax subsidies to purchase health insurance should not include harmful cutoff points that discourage work and productivity.” To learn more about the effects of the Obamacare tax subsides on the economy, check out Winfree’s report.