House Republicans on Thursday got a lot of attention for a report that was critical of the Affordable Care Act. And mostly that was because the report revealed that Obamacare includes a “marriage penalty.”
As you may recall, the Affordable Care Act provides some people with subsidies to buy private insurance, depending on their income and job status. It turns out that, because of the subsidy’s structure, married couples will sometimes receive lower subsidies than if they had remained single. The report, which comes from the House Government Oversight Committee, suggests this will discourage marriage.
It won't -- or, at least, the best evidence we have suggests it won't. There's also a logical explanation for why the subsidies work that way. I’ll get to those soon. For now, though, I want to address one of the report’s other charges, because it echoes a talking point that Republicans have been using in other contexts -- only it's even more misleading than usual in this particular case.
The new health care law's subsidies come in the form of tax credits, which means that you deduct them from your final tax liability. So if, for example, you did your return and calculated that you owe income taxes of $10,000, but you were also eligible for a $3,000 tax credit, you would only have to pay $7,000. In addition, the Affordable Care Act's tax credits are fully refundable: So if you didn't make a lot of money and your tax liability were, say, just $2,000, that $3,000 credit would entitle you to a $1,000 payment -- the leftover credit -- from the government. Technically speaking, your federal income tax liability would be zero. Or less.*
According to a government estimate that the report cites, the net effect of the health care law will be to eliminate all federal income tax liability for between 7.4 and 8.1 million people. The Republicans don't like this and, if you’ve been following politics lately, you know why. They believe that it makes people less sensitive to the cost and size of government.
The most obvious flaw in this argument, both as it applies to the health care law specifically and tax policy in general, is that it ignores the role of payroll taxes. Everybody who gets a paycheck pays those taxes, which finance Medicare and Social Security. That is true now and it will be true after 2014, when Obamacare subsidies start to become available. Also there is the matter of local and state taxes, which many people with zero federal liability still pay.
More important, it's not as if these new tax credits will simply put money into people's pockets. Remember, with few exceptions, the money won't even go to the taxpayer. It will go straight to the insurance company. Or, to put it another way, this isn't the government giving people more cash. It's the government providing a public service -- and using a tax credit to finance it.
Finally – and I hadn’t thought about this until Jonathan Gruber, the MIT economist, shared an analysis pointing this out – the original Bush tax cuts have the same characteristic that Republicans claim to find so problematic. According to Gruber, if you calculate back based on some recent government estimates, the Bush tax cuts took about as many people off the income tax rolls as the Affordable Care Act will.
So what's it going to be, Republicans? Is it really wrong to eliminate federal income taxes for some people? And, if so, are you ready to renounce the Bush tax cuts?
*These are very hypothetical numbers, since the credit would actually be higher for somebody with lower income.