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Perverse Incentives Arising from the Tax Provisions of Healthcare Reform: Why Further Reforms are Needed to Prevent Avoidable Costs to Low- and Moderate-Income Workers

54 Pages Posted: 27 May 2012 Last revised: 3 Jan 2013

David Gamage

Indiana University Maurer School of Law

Date Written: July 22, 2012

Abstract

Called “Obamacare” by some, the Affordable Care Act (or “ACA”) is the most extensive reform to the American healthcare system since the creation of Medicare and Medicaid in 1965. The ACA promises many improvements to American health care. While recognizing the importance of these improvements, this Article focuses on how the ACA’s tax provisions will create avoidable costs for low- and moderate-income workers.

This Article argues that – once key tax-related provisions of the ACA come into effect in 2014 – the ACA will create perverse incentives with respect to a number of important decisions affecting low- and moderate-income Americans, including: the ACA will deter low- and moderate-income taxpayers from accepting jobs with employers that offer “affordable” health insurance; the ACA will discourage many low- and moderate-income taxpayers from attempting to increase their household incomes; the ACA will penalize many low- and moderate-income taxpayers who choose to marry and will incentivize many low- and moderate-income taxpayers to divorce; the ACA will dissuade employers from hiring low- and moderate-income taxpayers and will encourage employers to reduce the salaries paid to some low- and moderate-income employees; the ACA will prompt employers to shift some low- and moderate-income employees from full-time positions to part-time positions; the ACA will tempt employers to implement a number of other costly strategies for circumventing the ACA’s employer mandates and penalties; the ACA will induce employers to stop offering “affordable” health insurance to at least some low- and moderate-income employees, and – if this occurs to a significant enough degree – the budgetary cost of the ACA may greatly exceed the official projections issued by the Congressional Budget Office.

We ought perhaps to accept these perverse incentives were they a necessary cost of achieving the ACA’s many positive goals. But the ACA could have been drafted to attain its desirable ends without creating most of the perverse incentives analyzed by this Article. Moreover, there is still hope of enacting further reforms so as to preserve the ACA’s positive features while mitigating or eliminating these perverse incentives. Ideally, these further reforms would be enacted at the federal level. However, if the federal government fails to act, this Article explains how state governments might pass legislation to mitigate the ACA’s perverse incentives.

Keywords: tax, health, healthcare, affordable care act, Obamacare, effective taxes, tax credit, individual mandate, adverse selection, tax penalties, tax administration, social welfare

JEL Classification: D39, D30, H20, H24, H29, H31, H51, I00, I10, I11, I18, K34

Suggested Citation

Gamage, David, Perverse Incentives Arising from the Tax Provisions of Healthcare Reform: Why Further Reforms are Needed to Prevent Avoidable Costs to Low- and Moderate-Income Workers (July 22, 2012). 65 Tax Law Review 669 (2012); UC Berkeley Public Law Research Paper No. 2067138. Available at SSRN: https://ssrn.com/abstract=2067138

David Gamage (Contact Author)

Indiana University Maurer School of Law ( email )

211 S. Indiana Avenue
Bloomington, IN 47405
United States

HOME PAGE: http://www.law.indiana.edu/about/people/bio.php?name=gamage-david

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