CBO: Obamacare is a tax on work, may cut full-time workforce by 2.5 million

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Article Highlights

  • CBO clearly states that Obamacare amounts to an implicit tax on work and workers.

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  • Obamacare is going to make certain wages sticky as more workers try and stay under certain income ranges.

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  • CBO says botched Obamacare rollout will result in 6 mil signing up for coverage, 1 mil fewer than projected.

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By my read, the report released today by the Congressional Budget Office is the first time that CBO explicitly acknowledges the impact of Obamacare on the wage-labor relationship and incentives for full-time work.

In its new budget outlook, CBO very clearly states that Obamacare amounts to an implicit tax on work and workers that will reduce employment by as much as 2.5 million jobs over the next ten years.

Here’s how the CBO arrives at its new conclusion:

As workers transition from part time work (without benefits) to full time work (with health benefits) many workers will actually lose income in the form of the subsidies that they will have to forgo (and the additional fact that lower wage workers, who are in lower tax brackets, won’t benefit as much from the implicit subsidy they will get from the special tax treatment of health benefits bought at work). CBO seems to focus mostly on people who are out of the labor force for a period of time and transitioning back to full time work, which suggest its estimates may be low.

CBO states, in reference to these impacts, that the “exchange subsidies effectively constitute a tax on labor supply for a broad range of workers.” CBO focuses mostly on those transitioning to full time work (with benefits). But the same disincentives apply to workers on Obamacare who are already employed full time, and looking to grow their income.

Translation? The old employer sponsored system forced people to stay in jobs they didn’t like because they needed the health insurance coverage. The new Obamacare system will force people to stay out of jobs they do want because they need to maximize their subsidies. And this is social progress?

The congressional actuaries go on to state that forgoing Obamacare subsidies and returning to full time work with health benefits (for lower wage and middle class workers) amounts to an average, implicit tax of about 15% paid by each worker. CBO does note that these considerations only affect a segment of the workforce – specifically the middle class and working class who earn annual incomes that put them below 400% of the Federal poverty level (about $95,000 for a family of four). But that represents a large portion of the labor market.

These disincentives can’t be easily fixed — they are baked into the structure of the Obamacare subsidies. A refundable tax credit, similar to the one offered in some conservative plans, sidesteps some of these effects.

Also significant are some related points that CBO doesn’t tackle in its report. Principal among them is the fact that Obamacare is going to make certain wages sticky as more workers try and stay under certain income ranges in order to maximize their subsidies.

The net effective tax rate on an incremental $1,000 in income could easily exceed 50% as workers are forced to forgo some of their subsidies for the additional income when they straddle certain wage bands. Obamacare implicitly assumes that people won’t grow their take home pay, but will instead remain fixed in certain income bands. So it imagines that workers won’t face these tradeoffs. That’s not true, and it’s certainly not consistent with peoples’ aspirations.

These are some of the unfortunate effects of the law that have long concerned conservatives but were dismissed by Obamacare’s proponents. Now CBO is being forced to acknowledge how Obamacare collides with some seemingly obvious economic principles. Among some of the CBO’s other findings:

CBO is estimating that the law will reduce labor force compensation by 1 percent from 2017 to 2024, twice the reduction it previously had projected.

CBO also said the botched ObamaCare rollout will result in 6 million people signing up for coverage through the insurance exchanges this year, 1 million fewer than projected last year. That estimate conflicts with whisper number circulating in Washington, which put the figure between 4 to 5 million enrollments by March 31, 2014.

You can follow Dr. Scott Gottlieb on Twitter @ScottGottliebMD. For more from the AEI health policy team, follow @AEIHealth.

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