Taxing the Uninsured

June 29, 2012

As the nation, or at the very least this entire think tank, sat waiting for the Supreme Court decision on the Patient Protection and Affordable Care Act (PPACA), i.e. “Obamacare”, the news arrived that the individual mandate would be upheld as a legitimate policy under the tax powers of the federal government. While we object to the Court’s reasoning, short of a total repeal by Congress this new tax hike will hit families beginning January 1, 2014. What are the parameters of this new tax? What are the implications on the whole and at the margin?

The PPACA “tax” for not purchasing health insurance is a little complicated.  It is the greater of:

  • A flat amount of $695 per adult taxpayer plus $347.50 per dependent under 18.  This is the fully phased in amount in 2016, which is adjusted for inflation thereafter.  In 2014 it is $95 per adult plus $47.50 per dependent.  In 2015 it is $325 per adult plus $162.50 per dependent.  The flat amount per family cannot exceed three times that for a single individual.
  • 2.5 percent of income over the filing threshold for federal income taxes.  The threshold for 2011 was $9,500 for most single filers, $19,000 for most married filers, and $12,200 for heads of household, and it is indexed to inflation. 

The total tax cannot exceed the national average premium for bronze-level-qualified health plans offered through exchanges.  The CBO estimates that in 2016 this would be about $4,750 for single policies and $12,250 for family policies.

A number of people are exempt, including:

  1. Those earning less than the filing threshold for federal income taxes.
  2. Those with certain hardships, determined by the Secretary of Health and Human Services.
  3. Members of certain religious organizations.
  4. Members of certain Indian tribes.
  5. Americans living abroad.
  6. Inmates.

One part of the law that the Court struck down was the requirement that states provide Medicaid coverage for all those making less than 133 percent of the poverty level.  This means a much larger number of poor people will be subject to the tax.

The table below shows how this would work for various family arrangements and income levels, using the fully phased in numbers for 2016. 

First, we can see that this is a big tax.  Most of the uninsured will end up paying at least $1,000.

Second, this is most certainly a big tax on the poor, as well as on all income groups.  A single filer earning $25,000 will pay $695, which is 2.78 percent of his income.  A family of four earning $25,000 will pay $2,085, which is 8.34 percent of their income.

Third, higher income families generally pay a higher amount, but actually a smaller percent of their income, making this a regressive tax.  While a family of four earning $25,000 will pay 8.34 percent of income, the same family earning $100,000 will pay 2.09 percent of income.

If this is a tax, it is a horribly complex, unfair, and onerous tax.  As such it will likely have the effect of forcing the majority of the uninsured to buy insurance, just as the insurance companies intended.  The quality of the new insurance market that arises is another matter. 

But many people will choose to remain uninsured and pay the tax, perhaps out of serious concerns about the effectiveness of modern medicine.  As a result, the tax will produce a number of unintended consequences and detrimental effects.  For instance, suddenly a lot of low income taxpayers will have the incentive to get under the filing threshold.  For a family of four, that threshold is $19,000, meaning that earning even $1 above that will incur a tax of $2,085.  The incentives are not great for high income earners either, as it amounts to an additional income tax of 2 to 4 percent, causing many to reduce their earnings or start thinking of sunny Singapore.

Lastly, opposite of its stated purpose, this tax, along with the rest of Obamacare, will likely increase healthcare costs.  It is a simple matter of supply and demand.  Forcing people to consume means increased demand, and with no commensurate increase in supply the price must go up. 

 

Tax/Penalty for Being Uninsured, by Income and Family Size

 

 

 

Family Type

 Income of $25,000

Income of $50,000

Income of $100,000

Income of $500,000

Tax in $

Tax as % of Income

Tax in $

Tax as % of Income

Tax in $

Tax as % of Income

Tax in $

Tax as % of Income

Single

$695.00

2.78%

$1,012.50

2.03%

$2,262.50

2.26%

$4,750.00

0.95%

Single with One Dependent

$1,042.50

4.17%

$1,042.50

2.09%

$2,195.00

2.20%

$12,195.00

2.44%

Single with Two or more Dependents

$1,390.00

5.56%

$1,390.00

2.78%

$2,195.00

2.20%

$12,195.00

2.44%

Married Couple

$1,390.00

5.56%

$1,390.00

2.78%

$2,025.00

2.03%

$12,025.00

2.41%

Married with One Dependent

$1,737.50

6.95%

$1,737.50

3.48%

$2,025.00

2.03%

$12,025.00

2.41%

Married with Two or more Dependents

$2,085.00

8.34%

$2,085.00

4.17%

$2,085.00

2.09%

$12,025.00

2.41%

 

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