Obamacare’s Shaky Funding Sources

October 16, 2013

Charles Blahous, a senior research fellow at the Mercatus Center and a public trustee for the Social Security and Medicare Programs, had an excellent Op-ed in Real Clear Markets last week on the perilous financing of the Affordable Care Act.

Although there are many great excerpts from the piece that remind us the shaky ground on which Obamacare’s funding rests, an especially informative section is about the unearned income Medicare contribution and “Cadillac Tax:”

“Finally, there are the ACA's most dubious financing sources. These include a new 3.8 percent "unearned income Medicare contribution" (UIMC) and a new tax on "Cadillac" health insurance plans. The income thresholds for the UIMC are not indexed for inflation, so under law most workers would eventually be subject to the tax-over 80 percent of workers within 75 years, according to the Medicare trustees.”

Due to the fact that the income threshold for the new Medicare tax on unearned income will remain static and incomes will continue to rise, more and more people will eventually be hit by this tax. It will no longer be a tax just on the rich.

The same can be said about the “Cadillac Tax.” As of today, the premium threshold is pretty high and truly is a tax on very generous healthcare plans. However, as healthcare quality and inflation increases, more and more typical healthcare plans will be hit by this tax in the future.

This is of course by design. Without this “bracket creep,” Obamacare would not receive enough funding in the later years. It is a way to automatically raise taxes in the future.

However, there is a big problem with relying on future revenue due to bracket creep.

Allowing the two taxes to hit more and more people is necessary to fund the program. As Blahous pointed out, taxes without inflation indexes are typically adjusted frequently. The AMT is a good precedent for regular bracket readjustment to prevent increasing the middle class’s taxes. So, as more and more people get hit by these, there will be political pressure to adjust the bracket, reducing needed revenues for the program.

A program that requires a lot of revenue like Obamacare should not be funded by such politically vulnerable revenue sources.

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