Another Bogus Attack on Obamacare

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JONATHAN COHN OCTOBER 30, 2011

Another Bogus Attack on Obamacare

Editor's note: On Friday, Jon Cohn wrote about a new House Republican report about the Affordable Care Act -- and why one of its central claims was wrong. Among the sources he cited was Jonathan Gruber, the MIT economist who has advised policy-makers, including some of the ACA's architects. But Gruber found several other flaws in the report. What follows is his analysis.

A new report from the House Committee on Oversight and Government Reform is making headlines because of four claims it makes about the Affordable Care Act (ACA). But some of these claims are wrong-headed. The rest are simply wrong.

Claim #1: The ACA’s tax credits are actually a form of new spending

The report relies heavily on analysis from the Joint Committee on Taxation. And it’s true: JCT calls tax credits a form of spending. But that’s simply a semantic choice. Or, to put it another way, if the Affordable Care Act’s tax credits represent new spending, then so do large tax refunds that were put in place by the Bush tax cuts.

What matters is not the law’s new spending or tax credits– it is the law’s net impact on the deficit. And the Congressional Budget Office has said repeatedly it believes the impact will be negative, more so in the long run. This is an important break with the recent past. The Medicare drug benefit failed to offset spending with either cuts or revenue – and, as a result, increased the deficit. The Bush tax cut included a deficit “time bomb” by squeezing costs into the future, beyond the scored budget window. The ACA does neither of these things. According to the best and official estimates, deficit reduction actually grows over time, reducing the deficit by more than one trillion dollars in the second decade.

Claim #2: the ACA Will Remove Millions from the Tax Rolls

This claim ignores a key fact: Most households will never actually get their hands on the credits, so their existing tax liabilities won’t actually change. In most cases, credits will go straight to insurance companies, to pay for health benefits. So a household that is currently paying taxes will continue to pay taxes. The change here isn’t in tax liability, it’s in the availability and affordability of health insurance. People will get coverage for a lower price than they otherwise would have, not see their tax liability wiped out.

Moreover, the committee’s analysis conveniently ignores the fact that all but the highest wage earners pay significant payroll taxes in the U.S. Consider two of the three examples that the committee provides, on page 10 of their report. One makes $80,000, the other $90,000. Those families will pay payroll taxes much larger than the negative income tax burden shown in the report, even after they’ve received the insurance tax credits. Moreover, in almost all states these individuals will owe state tax as well.

The report also claims that taxpayers who see an income tax refund have a “disincentive to care about the growth of government,” since they’ll no longer be sensitive to the nation’s tax burden. But that doesn’t make a lot of sense. Presumably people care about the size of their refunds, just as they care about the size of their tax liabilities. In fact, you can make a case that low-income people eligible for rebates will be more sensitive to the size and cost of government, since the marginal dollar of tax liability means even more to them. Think of this way: In absolute terms, $1000 in extra tax rebates is worth just as much as $1000 in reduced tax liability. But in relative terms, that $1000 matters a lot more to somebody making $20,000 than somebody making $1 million.

Moreover, the major source of government growth is widely acknowledged to be entitlement programs such as Medicare and Social Security. These are financed by payroll taxes. So if any tax would make individuals sensitive to the growth of government, it is the payroll tax. Again, the committee ignore payroll taxes in their calculations.

One last point, if eliminating income tax liability is a problem, then it’s a problem common to both the Affordable Care Act and the Bush tax cuts. According to the Tax Foundation, a conservative organization, the Bush tax cuts eliminated tax liabilities for 7.8 low and medium-income Americans – or slightly more than the JCT predicts the new health care law will do. Either both have this flaw or neither one does.

Claim #3: The ACA Will Lead to a Large Erosion of Employer-Sponsored Insurance

To make this claim the committee leans on a flawed report from McKinsey that contradicted the projections of CBO and other independent forecasters. McKinsey insiders criticized that study anonymously and the firm itself later said the report was "not intended as a predictive economic analysis."*  The committee also presents some calculations of financial incentives that might lead employers to drop health coverage. But, in so doing, they ignore a major incentive for employers to keep (or start) offering coverage: the free rider penalty.

This section of the ACA charges firms of more than 50 employees a large $2,000–$3,000 charge, per worker, if their employees receive subsidies on the health insurance exchange. This provides a strong countervailing financial incentive to firms to offer insurance. If you plug that penalty into the committee’s calculations, which appear in Table 1 on page 14 of the report, the results look very different. In up to half of the cases that the report documents, employers suffer more if they fail to offer insurance than if they do.

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The most neutral arbiter of this issue, the Congressional Budget Office, believes the law will lead to only a very small drop in employer-sponsored insurance. Their estimate is sensible for four reasons:

a) More than half of employees covered by health insurance are in firms with more than 100 employees, and past evidence suggests that such firms are not price sensitive in their decisions whether to offer insurance.

b) Firms are a mix of higher and lower income employees, but they must charge all employees the same for insurance. As a result, even incentives to drop insurance for low income employees will be offset by the interests of higher income employees who still want the employer to offer insurance.

c) The mandate that individuals purchase insurance (or pay a fee to the government) will increase enrollment in employer insurance. Today, a large share of the uninsured (perhaps one-quarter) are offered and eligible for ESI but do not enroll. These individuals will now enroll in large numbers due to the mandate.

d) The additional offset to employer erosion from the “free rider” penalty noted above

The claims of employer insurance erosion also ignore the best case study we have: what happened in Massachusetts, after that state in 2006 implemented a similar coverage scheme. According to estimates from the Current Population Survey, the share of the Massachusetts population with employer-sponsored insurance rose by 0.6 percent from 2006–2009, while over the same period the share of the national population with employer-sponsored insurance fell by 4 percent. Some of this rise is due to increased enrollment in employer-sponsored insurance by those endeavoring to meet the requirements of the mandate, but some has actually been through higher rates of employer insurance offering. The rate of employer-provided insurance offering in Massachusetts rose from 70 percent in 2005 to 76 percent in 2009, while it remained flat at 60 percent nationally. This is despite the fact that Massachusetts had a much smaller penalty on employers that didn’t offer insurance (only $300/year).

Claim #4: The ACA Imposes a New “Marriage Penalty”

The report highlights the fact that two single adults who live together without getting married can in many cases receive a higher subsidy than if they are married. But, as the committee notes, this arises because the U.S. poverty line calculations assumes that two individuals living together can live more economically than separately residing adults. This assumption happens to be correct. As a result, any system which “fixed” this marriage penalty would have two fundamental flaws:

First, it would impose a “singles penalty”. If married couples received subsidies which were twice those received by singles, then they would end up much better off than singles living alone, because of the economies of living together. In order to equalize the situation for the minority of singles who live with a partner, any fix would be massively unfair to the majority of singles who live without a partner.

Second, the committee ignores the fact that, to the extent that affordability problems remain under the ACA, it is singles who face the largest affordability problems. As I have shown in analysis for the Commonwealth Fund, while affordability is in general good for all groups under the ACA, it is worst for singles. So any fixes that reward married couples over singles would only serve to make that disparity worse

Moreover, why do we care if there is a “marriage penalty”? The majority claims on page 18 that such penalties are “bound to influence behavior”. But in fact the existing evidence shows that such financial incentives do not have an important effect on marriage rates.

*Editor's Note: This item originally stated that McKinsey "repudiated" its report on employer responses to ACA. As Megan McArdle rightly points out, it did not. It stood by the methodology, although it also said the report was not a predictive economic analysis. We've corrected that wording and apologize for the error.

Jonathan Gruber is a professor of economics at MIT and member of the Massachusetts Health Connector Authority Board. He has served as a paid technical consultant to the Department of Health and Human Services and continues to advise policy-makers about health care reform.
 

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posted in: jonathan cohn, books, jon cohn, jonathan gruber, massachusetts, medicare, mit

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