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Yes, Incentives Do Matter, and Obamacare’s Incentives Are Terrible

Just as Obamacare created incentives for employers to dump workers, it also created perverse incentives for hard-working people to not work so hard.

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Incentives matter; everything else is conjecture. That lesson was taught to me by Donald Marron, a brilliant economist who I worked for at the Joint Economic Committee. His point was profound, yet simple:  if you want to figure out the end effect of any policy proposal, examine how it will change people’s incentives.

Marron’s theory is especially relevant when it comes to Obamacare, which drastically changed incentives for workers and employers throughout the country. Because of the requirements that companies of a certain size offer health care coverage to full-time employees or face stiff government fines, many employers have started to either drop coverage altogether (the fines are cheaper) or reduce the amount of full-time employees to avoid the mandates.

The following story from SFGate.com shows how Obamacare also warps the incentives for workers:

People whose 2014 income will be a little too high to get subsidized health insurance from Covered California next year should start thinking now about ways to lower it to increase their odds of getting the valuable tax subsidy.“If they can adjust (their income), they should,” says Karen Pollitz, a senior fellow with the Kaiser Family Foundation. “It’s not cheating, it’s allowed.”Under the Affordable Care Act, if your 2014 income is between 138 and 400 percent of poverty level for your household size, you can purchase health insurance on a state-run exchange (such as Covered California) and receive a federal tax subsidy to offset all or part of your premium.For people in their early 60s, “it’s a huge cliff,” going from 401 to 400 percent of poverty, Pollitz says. That’s because insurers can still charge older people more than younger ones.

Because of the clumsy manner in which Obamacare defines who gets subsidies and who doesn’t, there is a huge “cliff effect” at 400% of the federal poverty line (FPL). If you make a penny more, you won’t receive health care subsidies. If you make a penny less, you could receive thousands in subsidies. The result? Rational people who are right around the 400% FPL threshold will choose to work less in order to increase their income after paying for health insurance.

In California, a couple earning $64,000 a year would not qualify for health care subsidies. A bronze plan for them through Kaiser would cost them about $1,300 each month, or $15,600 a year. But if that same family earned just $2,000 less, it would qualify for over $14,000 in annual health care subsidies, dropping their premiums for that same Kaiser plan to less than $100 per month.

The after-insurance income for the couple earning $64,000 is $48,400. The after-insurance income for the couple making $62,000, which is just under the 400% FPL threshold, is $60,800.

It therefore makes no sense for a rational couple on the FPL bubble to work a little harder to earn a little extra money, because Obamacare severely punishes them for their work ethic. That couple ends up significantly worse off for having tried to earn more money. And we’re not talking about an effective marginal tax rate of 40 or 50 or even 90 percent here. If you’re on the FPL bubble, the effective marginal tax rate is in the neighborhood of 10,000 percent. That next dollar you earn could result in you losing over $10,000 in health care benefits.

Just as Obamacare created huge incentives for employers to either dump health plans, dump hours, or dump workers, it also created horribly perverse incentives for otherwise hard-working people to not work so hard. The result? Fewer jobs, lower incomes, and less economic growth.

Incentives matter; everything else is conjecture.