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  • Obamacare Takes a Double Shot at the Economy and the American Dream

    In a recent piece for The Wall Street Journal, Daniel Kessler, a senior fellow at the Hoover Institution, describes how the new health care law’s subsidy program to help low- and middle-income Americans purchase health insurance will have severe economic consequences. These will include discouraging work for qualifying individuals and other taxpayers, disrupting America’s labor markets, and reducing economic activity.

    Beginning in 2014, when the new health insurance exchanges will open for individuals and small businesses, subsidies will become available for those whose income falls between 134 percent and 400 percent of the federal poverty level (FPL). For a family of four living in a high-cost area, earning 134 percent of the FPL ($31,389 in 2014 dollars) would qualify them to receive $22,740 in assistance. A similar family earning an income at 400 percent FPL ($93,699) would qualify to receive $14,799 in subsidies.

    The problem is that as income increases, families will experience large reductions in government assistance, which will discourage striving to earn a higher income. According to Kessler, “Economists call large, discontinuous changes in program benefits like this ‘notches.’ Although notches might be administratively convenient, they have terrible incentive effects.” One of these is “a substantial punishment on work effort.” If a member of a family of four living at 400 percent of FPL earns just $1 more, they would receive no subsidy at all, making the family almost $15,000 poorer. This “cliff effect” will have profound implications on the labor market. Heritage analysts Brian Blase and Paul Winfree write, “the subsidy structure creates incentives for individuals to engage in unproductive activities, such as working less and retiring early.” These income “cut-offs,” which already present issues in Medicaid, induce sharp reductions in the labor supply—not good when the economy is already struggling to recover.

    In addition, the Obamacare health insurance subsidies create unfairness through the unequal treatment of equals. Families earning very similar incomes will receive vastly different levels of assistance from the government because of the notches. Moreover, as health policy expert James Capretta explains, two identical families could receive levels of help that differ by several thousand dollars, based on whether they receive employer-sponsored insurance or purchase coverage in the exchanges.

    By creating inequity, disincentives to work, and reducing the labor supply, Obamacare penalizes upward mobility and hinders the ability of the nation’s economy to grow. Kessler concludes, “Either leaving the notch in or smoothing the notch out seems impossibly unattractive…The only fix is to drastically reduce or eliminate the premium subsidies.”

    Instead of an unaffordable and unworkable new entitlement program, Congress should pursue reform that assists all Americans in purchasing coverage in a fair and equitable way—by reforming the tax treatment of health insurance and replacing it with a tax credit. This would require repealing the subsidy program and all other poorly written policies enacted under Obamacare.

    Co-authored by Amanda Rae Kronquist

    Posted in Obamacare [slideshow_deploy]

    13 Responses to Obamacare Takes a Double Shot at the Economy and the American Dream

    1. Kevin H, college par says:

      I remember when all the Conservatives railed against the 1993 Omnibus that no Republican voted for – they all said economy and jobs would get crushed – and the exact opposite happened. Turned out to be the greatest years of growth in US History.

      I also remember all the same lines being used for ARRA, how we'd lose more and more jobs and economy would die – and once again, the Republicans/Conservatives were completely wrong. GDP went from negative to positive growth. The stock markets have sicne doubled. Jobs went from average of 750,000 losses a month to adding 150,000-200,000 a month.

      Why would anyone listen to conservatives on economic matters when history shows they are always on the wrong end?

    2. joelsk44039, North R says:

      "I also remember all the same lines being used for ARRA, how we’d lose more and more jobs and economy would die – and once again, the Republicans/Conservatives were completely wrong. GDP went from negative to positive growth. The stock markets have sicne doubled. Jobs went from average of 750,000 losses a month to adding 150,000-200,000 a month."

      With all of these new "added jobs," why have new applications for unemployment remained in the 400,000 to 450,000 per month range? If you really think that the ARRA has helped the economy (other than making a few sign-painters wealthy — "Another Project Funded by the ARRA…."), you are spinning the data pretty badly.

      The ARRA provided little more than political paybacks to Democrats' constituents, mainly various unions. It's been an unmitigated disaster that we, our children, grandchildren and great grandchildren will all be paying for generations to come.

    3. DanJ says:

      If anybody doesn't believe that the "notches" or "cliff effects" don't affect taxpayer decision making consider this very real example -

      I was speaking with a couple who are over 65 and receiving Social Security. Social Security Benefits are usually not taxable but there is a point where if you have too much other income your SS benefits become taxable. At a certain point they are 85% taxable. This couple has a small business that pushes their income into that bubble resulting in about a 50%+ tax rate on every dollar (including SE tax). They are considering not working so hard since so much of their effort results in large checks for the government.

      What wasn't mentioned and is probably more likely is that they will be less likely to report all of thier income.

      This is one taxpayer changing their habits and compliance in response to bad policies. Multiply that by several million and you get an idea of just how bad this kind of legislation is.

    4. Bruce Haughey, Sunny says:

      Kevin H, When will you give the 1993 Omnibus a rest. It was the "Contract with America" legislation that lead to growth in the mid 90s. This was a republican action. If you are calling ARRA a success then you are more misled than I thought. We would have been much better and in less debt without it. Republicans were right to vote against it. Please try to get some rest, you need it.

    5. Cincinnati OH says:

      In most instances this would be considered just another example of an unintended consequence. In the case of Obama, Harry and Nancy I believe that their intent was to take the United States as far to possible to a socialistic state. This is the delayed fuse, allowing them to clear the building before the explosion.

    6. Brad, Detroit, MI says:

      Bruce and joelsk,

      Don't waste your time trying to convince Kevin H that he is wrong. He is so drunk on the Obama Kool-Aid, he may never recover.

      By the way – everytime I saw those moronic road signs I wanted to crash my car into them. Why do we need to advertise more government failures ? Calling bad legislation cool names like "American Recovery and Reinvestment Act" does not make it work any better. Just call a turd, a turd and be done with it.

    7. Pingback: Obamacare Takes a Double Shot at the Economy and the American Dream | The Foundry | Cogito Ergo Blog

    8. Mike Chapman, Plano says:

      Not only does Healthcare Reform act as a disincentive to work, it also subsidizes unhealthy lifestyles.

      Fully two thirds of our nation's healthcare expenses are a result of "lifestyle" diseases that could have been prevented through self-control measures such as diet, exercise, and early detection.

      Tax the fat and the lazy so that they modify their behavior, and ration their care if they don't, so that there's more lower cost healthcare to spread around for those who do.

    9. Leon Lundquist, Dura says:

      Amanda and Kathryn, thanks for pointing out one of the ten thousand reasons that Socialism doesn't work. This going off the cliff disincentive is the same for all the Socialist Programs. "When does one dollar equal minus fourteen thousand dollars?" Answer, in Obamacare-land. You tell me what it is about Capital these Progressives hate so much! (Well! They don't hate their own Capital so much! But they sure hate mine!) This is the same game as with the Income Tax! "Don't you dare accumulate Capital!"

      These Commie Infiltrators are Intent that Americans have no chance whatsoever to become upwardly mobile! (Unless They pick you up for special treatment, like Obama getting into Harvard without good grades.) "We decide who wins and who loses!" Isn't that great? We don't have to worry about success anymore! Wow! The freedom from worrying about success! Yeah! Anyway you look at it you lose!

    10. Kevin H, college par says:

      Anyone who calls ARRA a failure has no economic sense. Absolutely none. Or you just refuse to look at any economic indicator out there, from manufactoring, to job numbers, to stock market, to household wealth, and on and on.

      It seems people forget than 1/3rd of ARRA was tax breaks. I'm sure you all hated those tax breaks, right?

      Please detail how ARRA was a failure. I hear it all the time from those who eat up the nonsense from Plains and Becks, but how was it a failure? I look forward to your response. Before you respond, you may want to look at the right side of this page – http://economix.blogs.nytimes.com/ – the econmic indicators – and then see how much of a failure it has been. Look at all the leading indicators and where they were when Obama took over and where they are now. I know anytime the stock market doubles, i consider than a huge failure. Or anytime you go from negative GDP growth to positive, that's a failure, right?

      Bruce – go back and look at history. it was absolutely the 1993 Omnibus that balanced the budget for 4 straight years. Not one single republican voted for it. None. Please go read about the 1993 Omnibus and it's effects – and stop buying the crud they are shoveling about the Contract with America.

      You all probably think the Ryan plan is a good idea. However, it raised teh debt limit multi-trillions of dollars and only reduces deficit 155b over 10 years. That's a fiscal joke.

      Not my fault you can't understand basic economics.

    11. Kevin H, college par says:

      The Federal Budget of 1993 is one of the greatest and most important stories in modern U.S. political history. The story can be found easily with Google but let me summarize it here anyway. (The budget planned for four years, so dollar figures following need to be divided by 4 to get annual averages.)

      At the time of Clinton's election, the federal debt had grown to alarming proportions. Clinton's 1993 budget cut spending by $250 billion, perhaps the largest spending cut in all of history. (This was offset by such things as interest on the ever-mounting debt, and $150 billion in new investments.) The 1993 budget achieved a further $250 billion in deficit reduction by raising taxes; the most controversial tax hike was that of the maximum marginal income tax rate (the rate payed by Bill Gates, George Soros, etc.) which was increased from 31% to 39.6%. As high as this might seem, 39% was still less than the rate during most of the Reagan Administration, and certainly less than under Eisenhower, when the rate was 91%.

      What were the results of the 1993 budget? The deficit did fall: from $255 billion annually when Clinton took office, to almost nothing in 1997; and by Clinton's last year there was a surplus of $236 billion. Moreover, from 1993 to 2000 U.S. employment fell from over 7% to 4%; constant-dollar GDP rose by 33% over the same period; and of course stock prices soared.

      Contrary to right-wing dogma, U.S. entrepreneurs kept on entrepreneuring (and at an unprecedented rate) despite the 39.6% income tax. The 1993 Budget led directly to one of the most prosperous periods in American history. At the beginning of Clinton's term, the federal debt was seen as a most important problem; by the end of the term the U.S. Treasury was redeeming its bonds at an unprecedented rate and there was concern that this would cause trouble! (Many contracts were tied to the price of Treasury debt instruments which were disappearing.)

      Now who should get credit for the 1993 Budget? Let us review voting on the Omnibus Budget Reconciliation Bill of 1993.

      This Bill passed in the U.S. House of Representatives by a vote of 218 to 217. Every single Republican in the House voted against the Bill. The Bill went to the U.S. Senate where the vote was 50-50. Every single Republican Senator voted against the Bill. The Vice President ascended the dais of the Senate chamber and broke the tie; William Jefferson Clinton signed the Bill into Law; the biggest spending cuts in U.S. history were passed; and this budget ushered in an era of prosperity almost unmatched in modern U.S. history. Let me repeat: Not even one single Republican Congressman voted for this Budget. Republicans natter about spending cuts, but on the biggest cut ever, every single Republican stood up and said "Nay". Of course they would: Raising taxes on the rich (to a level still less than they were under Reagan!) was "class warfare" and would doom America!

      It is said that this was the very first time in all of history that major legislation passed without one single vote from the "opposition" party. Republicans led by Newt Gingrich appeared on TV, predicted a recession, and declared that the Democrats must accept complete responsibility for the consequences of their Budget. As we now know this Budget was central in rejuvenating America's economy; and America never came remotely close to recession throughout the entire Clinton double term. The Democrats should be proud to accept "complete responsibility" for this.

    12. Pingback: The Cliff Effect: Obamacare Takes a Double Shot at the Economy and the American Dream

    13. Chris, Seattle says:


      Did George H.W. Bush raise taxes before Clinton came into office?

      Did the Republicans lead the charge on welfare reform in the mid 90's to fix that bloated Federal Program and cut spending and demanding more accountability than sitting on the government dole in perpetuity?

      Did Bill Clinton materially cut defense spending after inheriting the "peace dividend" from Reagan and H.W. Bush?

      If you have any sense, you should answer "yes" to all of those and that will help you realize why our budget was in much better shape in the Clinton years.

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