How Obamacare Destroys Upward Mobility for the Middle Class
They passed the bill...now we're finding out what's in it
One of the dirty little secrets about Obamacare I’ve not heard reported in liberal or conservative media involves the enormous financial disincentive to upward mobility for middle class families resulting from the large tax credits required to fund the mandated benefits under Obamacare.
Under Obamacare, individuals and families who are not covered under employer-sponsored health plans, Medicare or Medicaid are eligible to purchase insurance through exchanges in their home states. Insurance subsidies are provided through tax credits paid directly to insurers for individuals who earn less than 300% of the Federal poverty level or families earning less than 400% of poverty. (In 2013, the Federal poverty level in the 48 contiguous states and the District of Columbia is $11,490 for an individual and $23,550 for a family of four).
The percentage of income individuals and families are required to pay for health insurance increases as income rises to a maximum of 9.5% at the income thresholds at which tax credits completely disappear. Because federal taxes as a percentage of income also increase as income rises, middle-class individuals will be shocked under Obamacare when they discover how little money they’ll get to keep when their income increases.
I’ll share three hypothetical illustrations to make my point…
Sharon is a 28 year old, single, self-employed cosmetologist earning $28,000/year. She’s tired of living in an apartment and seeks to save money to purchase a home. She moonlights ten hours/week and earns an extra $7,000 over the course of a year, bringing her income to $35,000. While earning $28,000, she can expect to pay $2,192 for the minimum required health plan (7.83% of her income), supplemented by a $1,088 tax credit to pay the balance of the cost of her insurance. When her income increases to $35,000, she’ll pay 30.3% of the extra $7,000 in Federal taxes…she’s in the 15% income tax bracket, and since she’s self-employed, she’ll pay 15.3% in FICA (Social Security plus Medicare) tax. Her insurance cost jumps to $3,281/year, and her tax credit to subsidize insurance disappears because her income is now at 305% of the Federal poverty level. As a result, Federal taxes combined with her increased contribution to her health insurance will wipe out 45.8% of her extra income…higher than the 43.4% rate singles will pay on every extra dollar they earn over $400,000 this year following elimination of the Bush tax cuts and the new 3.8% Obamacare income tax surcharge for singles earning over $200,000.
Luis is a 40 year old manager of a fast food restaurant…married to his 40 year old stay at home wife, with two kids, making $42,000/year. He’s offered a position managing a mom and pop restaurant paying $54,000/year that he hopes will allow his family to move into a community with a better school system. In his current job, he pays $2,228/year (5.3% of income) for a family policy through the health insurance exchange, subsidized by a $9,320 tax credit. In his new job, he’ll be required to pay $3.956/year (7.33% of income) for the same coverage, subsidized by a $7,591 tax credit. James will pay 22.65% of his $13,000 pay increase in Federal income and employment taxes (15% income tax bracket, plus 7.65 FICA tax), along with an additional $1,728 (14.4% of his raise) for insurance. All told, Luis will lose 37.05% of the pay increase his family hoped to use to help his kids access a better education.
Finally, Tim is a 50 year-old married psychologist with a 20 year old daughter in college and a 17 year-old high school senior, earning $80,000/year working in a small group practice that doesn’t offer insurance. Tim’s 50 year-old wife (Betsy) starts a tutoring business to help with tuition payments that generates an extra $15,000, bringing the family income to $95,000/year. Before Betsy launched her business, Tim paid $7,600 (9.5% of income) for the minimum required family plan, supported by a $7,014 tax credit. Because Betsy is self-employed, her income when added to her husband’s will face a 40.3% tax rate (25% Federal income tax bracket plus 15.3% FICA). The same insurance plan that cost the family $7,600 now costs $14,614/year, because the family’s income exceeds 400% of poverty, the threshold when tax credits to support the cost of insurance disappear completely. The combination of federal taxes on Betsy’s income (40.3%) and the loss of their health insurance tax credit (46.8% of $15,000) wipes out 87.06% of Betsy’s additional income, before state and city taxes.
Insurance subsidies drop precipitously at 200% and 300% of poverty level for singles, and at 200%, 300% and 400% of families. While employers struggle with an enormous disincentive for hiring full-time employees under Obamacare, families need to pay great care at the end of the year to not make money to avoid losing thousands in tax credits for health insurance. Let’s look at our last example…Let’s say Tim was making $90,000/year, and instead of Betsy starting her tutoring business, Tim adds a couple of hours to his schedule at the end of the day and makes an extra $5,000. Tim loses the entire $6,064 tax credit he was receiving to subsidize his insurance because his family’s income now exceeds 400% of poverty, AND he has to pay 32.65% in Federal taxes (25% income tax, 7.65% FICA) on the extra $5,000. Tim is out $7,696.50 as a result of earning an extra $5,000. That works out to a marginal Federal tax rate of 153.9% on his additional income.
Why work harder under a system with such enormous disincentives to work? What opportunity do middle class families have to get ahead when every extra dollar they earn is effectively taxed at rates higher than those imposed by the President and his party on the “rich”?
Illustrations were developed through the use of the Health Insurance Subsidy Calculator provided by the Kaiser Family Health Foundation. In each illustration, costs of a “Silver” plan were used for comparison.