Fraser Forum

Bill Clinton is right about ‘crazy’ Obamacare

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I recently recommended the United States follow Canada’s lead and allow EpiPens to be made available over-the-counter, which would lower both price and cost. There’s another problem Americans have, thanks to the way health care is financed, which Canadians do not suffer.

Bill Clinton explained this on the campaign trail:

“So you've got this crazy system where all of a sudden 25 million more people have health care and then the people who are out there busting it, sometimes 60 hours a week, wind up with their premiums doubled and their coverage cut in half. It's the craziest thing in the world.”

Clinton refers to the high marginal income tax rates Obamacare imposes on people through the design of its tax credits to buy health insurance, which get clawed back in a very unfair way.

For example, if a four-person household’s 2015 income were $23,850, the family’s maximum annual premium would be $479, so it would benefit from a tax credit paid to its health insurer of $9,146. If the family’s income rose to $31,720, its maximum annual premium would be $638, so its tax credit would go down to $8,987. The household income has increased by $7,870, and its tax credit has dropped by $159. Effectively, the household has experienced an income tax rate of 2.01 per cent ($159 divided by $7,870).

However, when household income increases by one dollar from $31,720 to $31,721, the household is liable to pay 3.02 per cent of household income ($958) for the same plan. For an increase of one dollar of income, the household net premium increases by $320 (from $638 to $958), resulting in a net loss of $319 and an effective marginal income tax of 32,000 per cent!

This perverse effect riddles Obamacare’s tax credits all the way up to about $80,000 of household income. It may be the most important reason for the stagnation of work among American hourly employees.

Canada does not impose this burden on workers who would like to increase their incomes. On the other hand, Canada imposes complete government control over people’s access to medically necessary care.

There’s a solution that avoids both problems—a universal refundable tax credit that individuals can use to fund their medical spending, either directly or by paying for insurance.

A second-best solution would be a tax credit that shrinks at a constant amount for every dollar increase in income (which would effectively be a flat rate of income tax). Both countries should investigate such a reform, which would replace current government spending.


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