Obama’s Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums (Policy Analysis)

House and Senate Democrats have produced

health care legislation whose mandates, subsidies,

tax penalties, and health insurance regulations

would penalize work and reward Americans who

refuse to purchase health insurance. As a result,

the legislation could trap many Americans in low-wage

jobs and cause even higher health-insurance

premiums, government spending, and taxes than

are envisioned in the legislation.

Those mandates and subsidies would impose

effective marginal tax rates on low-wage workers

that would average between 53 and 74 percent—

and even reach as high as 82 percent—over broad

ranges of earned income. By comparison, the

wealthiest Americans would face tax rates no

higher than 47.9 percent.

Over smaller ranges of earned income, the legislation

would impose effective marginal tax

rates that exceed 100 percent. Families of four

would see effective marginal tax rates as high as

174 percent under the Senate bill and 159 percent

under the House bill. Under the Senate bill,

adults starting at $14,560 who earn an additional

$560 would see their total income fall by $200

due to higher taxes and reduced subsidies. Under

the House bill, families of four starting at

$43,670 who earn an additional $1,100 would

see their total income fall by $870.

In addition, middle-income workers could save

as much as $8,000 per year by dropping coverage

and purchasing health insurance only when sick.

Indeed, the legislation effectively removes any

penalty on such behavior by forcing insurers to

sell health insurance to the uninsured at standard

premiums when they fall ill. The legislation would

thus encourage “adverse selection”—an unstable

situation that would drive insurance premiums,

government spending, and taxes even higher.

House and Senate Democrats have produced

health care legislation whose mandates, subsidies,

tax penalties, and health insurance regulations

would penalize work and reward Americans who

refuse to purchase health insurance. As a result,

the legislation could trap many Americans in low-wage

jobs and cause even higher health-insurance

premiums, government spending, and taxes than

are envisioned in the legislation.

Those mandates and subsidies would impose

effective marginal tax rates on low-wage workers

that would average between 53 and 74 percent—

and even reach as high as 82 percent—over broad

ranges of earned income. By comparison, the

wealthiest Americans would face tax rates no

higher than 47.9 percent.

Over smaller ranges of earned income, the legislation

would impose effective marginal tax

rates that exceed 100 percent. Families of four

would see effective marginal tax rates as high as

174 percent under the Senate bill and 159 percent

under the House bill. Under the Senate bill,

adults starting at $14,560 who earn an additional

$560 would see their total income fall by $200

due to higher taxes and reduced subsidies. Under

the House bill, families of four starting at

$43,670 who earn an additional $1,100 would

see their total income fall by $870.

In addition, middle-income workers could save

as much as $8,000 per year by dropping coverage

and purchasing health insurance only when sick.

Indeed, the legislation effectively removes any

penalty on such behavior by forcing insurers to

sell health insurance to the uninsured at standard

premiums when they fall ill. The legislation would

thus encourage “adverse selection”—an unstable

situation that would drive insurance premiums,

government spending, and taxes even higher.

Michael F. Cannon is director of health policy studies at the Cato Institute and coauthor of Healthy Competition: What’s Holding Back Health Care and How to Free It.

Studies from the Cato Institute