CASEY MULLIGAN, a professor of economics at the
University of Chicago, received his Ph.D. in economics from the
University of Chicago in 1993. He has been a visiting professor at
Harvard University and Clemson University, and is affiliated with the
National Bureau of Economic Research, the George J. Stigler Center for
the Study of the Economy and the State, and the Population Research
Center. He has written for the Chicago Tribune, the Chicago Sun-Times, the New York Times, and the Wall Street Journal, and is the author of three books, including Side Effects: The Economic Consequences of the Health Reform.
The following is adapted from a speech by Casey Mulligan delivered on October 24,
2014, at a Hillsdale College Free Market Forum in Indianapolis, Indiana.
The topic of my talk today is the economic side effects of the
Affordable Care Act (ACA), sometimes referred to as Obamacare. Since
most of the economy has to do with labor and work, that’s where I’ll
start. But, first a caveat. I’m an economist, and I’m going to talk
about some parts of this complex law that have an impact on the labor
market. Other parts of it relate to health and medicine, and because I’m
not a doctor or a biologist, I’m not going to speak to those parts.
From an economic or labor-market perspective, I’m going to explain how
the costs of the ACA outweigh its benefits. But I can’t measure or
estimate its effects on health care. I leave that to others.
The key economic concept required to understand the labor market
effects of the ACA is what economists call “tax distortions.” Tax
distortions are changes in behavior on the part of businesses or
households for the purpose of reducing their taxes or increasing their
subsidies. We call them distortions because they don’t occur for real
business or real personal reasons. They occur because of the tax code. A
prime example of a tax policy that creates distortions is the ethanol
subsidy—technically it is a credit, not a subsidy—whereby gasoline
refiners are subsidized on the basis of how many gallons of gas they
produce with ethanol. Because of this subsidy, businesses change the
type of gas they produce and deliver, people change the type of gas they
use—which affects engines—and corn is used for ethanol instead of as
feed or food. Nor do the distortions stop there. Arguably, food prices
are increased due to the reallocation of corn to different uses—and when
food prices are higher, restaurants and households do things
differently. There are distortions economy-wide, all for the chasing of a
subsidy.
To be clear, just because taxes cause distortions doesn’t mean that
we should never have taxes. It just means that in order to get the full
picture when it comes to policies like an ethanol subsidy or laws such
as the ACA, we need to take into account the tax distortions in order to
ensure that the benefits we are seeking exceed the costs.
The Employer Mandate/Penalty/Tax
So what are the tax distortions that emanate from the ACA? Here let
me simply focus on two aspects of the law: the employer mandate or
employer penalty—the requirement that employers of a certain size either
provide health insurance for full-time employees or pay a penalty for
not doing so; and the exchanges—sometimes they’re called
marketplaces—where people can purchase health insurance separate from
their employer. The mandate or penalty is intended, of course, to
encourage employers to provide health insurance. And the exchanges are
where the major government assistance is provided, since those who
purchase insurance in an exchange typically receive a tax credit. As
I’ll explain, taken together, the penalty on employers and the subsidies
in the exchanges add up to a tax on full-time employment—a tax that you
pay if you work full time but not if you work part time or don’t work
at all. And the problem with that, of course, is that by taxing
full-time work—which is the same as subsidizing part-time work and
unemployment—you get less of the former and more of the latter two.
How does this full-time employment tax work with regard to the
employer mandate? As I mentioned, the penalty applies only in the case
of full-time employees and only to employers that don’t offer health
coverage, and it applies only in those months during which those
full-time employees are on the payroll. If an employee cuts back to
part-time work, the employer no longer has to pay the penalty. The
dollar amount of the penalty doesn’t depend on whether the employee is
rich, poor, or middle class—if he works full time, the employer must
either provide insurance or pay the penalty. And the penalty is indexed
to health insurance costs, so every year those costs increase more than
the economy and more than wages, the penalty will increase more than the
economy and more than wages.
The current penalty is usually described as $2,000 per year per
full-time employee. But it’s really more than that, because the penalty,
unlike wages, is not deductible from business taxes. So in terms of a
salary equivalent, the penalty is closer to $3,000 a head. Needless to
say, this penalty reduces competition in the labor market: It
discourages employers from competing for full-time employees—which, if
you’re an employee, is a bad deal. Also there are a lot of employers who
are not going to pay the penalty because they don’t meet the size
threshold of 50 or more employees, and employees are going to suffer
because these small employers won’t want to become large employers and
therefore subject to the penalty.
Furthermore, this mandate or penalty—and by this time it should be
clear that we can think of it as a tax on having a full-time
employee—disproportionately harms low-skill workers. Think about it this
way: How many hours does a worker have to work each week to produce the
$3,000-per-year of value to justify keeping his job or being hired? For
a minimum-wage worker, that comes to eight hours a week, all year
round—one day of work a week for the government due to the ACA alone.
Higher-skilled employees can obviously produce $3,000 worth of value in
less time, so the penalty will have less of an impact on them.
Subsidized Health Insurance Exchanges
What of the tax distortions that come from the subsidized health insurance exchanges or marketplaces? To begin to think about this, imagine paying full price for your health care. How does full price work? Well, you pay the full price. The health care provider doesn’t look at your tax return and adjust the bill accordingly. So we would never call paying full price for health care an income tax of any kind. Or imagine there is a discount on the full price—for instance, 30 percent off for everybody, regardless of income. In that case it’s still not an income tax. No matter how much you earn, you pay the same price. But what if the discount (or subsidy) is tied to your employment situation? Not to your income, but to your employment situation. That’s how the exchanges work. If you have a full-time job with an employer that offers coverage—which is the case for most employees in our economy—you don’t get the subsidy offered through the exchanges. If you want to get the subsidy, you need to become a part-time worker or spend time off the job. In other words, this discount, too, is a tax on full-time employment. Of course, no politician ever calls it a tax. But when you are in a group of people that doesn’t receive a subsidy that people in another group receive, that’s a tax.
So far I have oversimplified things, because there isn’t just one
subsidy for everybody in the exchanges. The subsidy depends on your
income. So there’s also an income tax built in. The more you earn, the
less of a discount you get. Indeed, if you earn enough, the discount
disappears. The folks analyzing this law in Washington made the mistake
of focusing only on the income-tax aspect of the subsidy. There will be
only eight million people in the exchanges, they figured, so eight
million people now have a new income tax. That’s no big deal, they
thought. They were oblivious to the fact that they were implementing a
full-time employment tax on the majority of American workers. In all of
the economic analyses of the ACA, there was no mention of this full-time
employment tax—despite the fact that it’s the single biggest tax in the
law.
In describing the size of this tax, again I find it useful to think
in terms of how many hours per week somebody has to work to create
enough value to replace the government subsidy he is losing because of
his full-time status. There are a number of full-time workers who may
have to work ten, 20, or even 30 hours a week to create the value they
would get for free if they worked part time or didn’t work under the
ACA. In the old days, working part time meant you earned less, and your
family had less to spend than if you worked full time. Under this new
system, on the other hand, if you have a family of four and make $26 an
hour, dropping to part time can actually improve your financial
condition by qualifying you for well over $1,000 per month in subsidies
through the health care exchanges—an amount that exceeds what you would
make by working the extra eleven hours per week. This is an economically
perverse situation.
We have decades of research showing that when you tax something, you
get less of it. So if you tax labor, you get less labor. By that I mean
on average—I don’t mean that every worker responds to every labor tax.
That’s obviously not the case. But on average, if you tax labor you get
less labor. As a result of the ACA, then, we are going to have fewer
people working and less value created overall.
Nor will the loss of productivity end there. As with the ethanol
example, there will be more and more tax distortions from the ACA as it
continues to roll out. Businesses will change the way they do business,
whether it’s by bending over backwards to stay below 50 employees or by
having more part-time employees and fewer full-time employees—not
because these policies create value or satisfy customers, but because
they avoid penalties or enhance subsidies. The Chicago Cubs baseball
team changed over to more part-time employees this past summer, and as a
result there was a day when the grounds crew couldn’t handle the
weather—reducing the value of the game for the fans in general.
Incentives and disincentives in the tax code ripple through the economy
in unimaginable ways.
This has not been well understood. Some analysts, for instance, have
argued that not many employers, relatively speaking, are going to end up
paying the penalty, so the harm of the penalty will be limited. And
that’s just wrong. Adam Smith pointed out in The Wealth of Nations
that if there’s a type of employment that’s evidently either more
advantageous or less advantageous than other types of employment, so
many people would crowd into it in the former case, or desert it in the
latter case, that its advantages would soon return to the level of the
other types. In terms of the ACA, whereas only some workers will
experience the penalty directly, it will be felt across the economy
because workers will move out of the penalized businesses—and customers
will do the same, since those penalties are passed on to them in the
form of higher costs. We’ll all experience it. Economists and
politicians who looked at this law made the mistake of basing their
analyses on models in which nothing matters except what happens directly
to the individual worker and his employer. That is not how economics
works.
*****
In summary, the ACA has three major taxes in it. Two are taxes on
full-time employment and the other is a tax on income. They may be
implicit, they may be hidden, politicians may not call them taxes, but
that’s what they are. Their economic impact on workers varies widely,
affecting low-skill workers the most. They create all kinds of
productivity problems and will have visible and permanent effects on the
economy. I have estimated that employment will be three percent less
over the long term because of the ACA, and that national income—or GDP,
if you like to think of it that way—will be two percent less. If you
look at the productivity costs alone—forgetting the fact that there will
be a number of people not working anymore—they come to $6,000 per
person who gets health insurance because of the law. And I’m not
beginning to count the payments needed for health care providers.
In conclusion, I can make you this promise: If you like your weak economy, you can keep your weak economy.
Reprinted by permission from Imprimis, a publication of Hillsdale College.
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