There is some hope in the latest report on unemployment that our battered economy may be showing some tentative signs of recovery as the rate of job loss continues to slow.
But with consumer confidence still low, unemployment hovering at 10 percent, and over 7 million jobs lost since the beginning of this recession, it should be clear that any potential recovery is still fragile.
This being the case, Congress and the administration should focus like a laser beam on policies that encourage economic growth and put Americans back to work.
Instead, this administration and Congress have taken up crucial months with a proposed revamping of our entire health care system that would cost $2.5 trillion over the first 10 years of full implementation, paid for by a host of new taxes and employer mandates that pose a grave risk to a sustained rebound of our nation’s economy.
Not only that, but the Democratic health care bills include some positively perverse incentives that would discourage hiring, work, savings—and even marriage. Higher taxes, more employer mandates, and disincentives to job creation, productivity, and family formation are hardly the prescription for growth that our economy so desperately needs right now.
Both the House and Senate bills would, for instance, increase the already-existing penalty on work faced by many low-income families who receive tax and in-kind benefits from government welfare programs.
The health insurance subsidies in the legislation for individuals and families in poverty would tack on an additional 12% to 20% to marginal tax rates, which already approach 40% – 50% for families receiving a variety of benefits for those with low incomes.
This would result in marginal tax rates of 50% – 60% for most affected families. If working more hours or obtaining a better paying job results in more than half of those additional earnings being taken away as a result of taxes and reductions in benefits, the incentive to work harder or to invest in an education is greatly reduced.
This is not the only work disincentive in the bill. It is very common for teenagers and college students to obtain jobs so that they can have some spending money of their own or help with their educational expenses.
The Senate bill penalizes the families of these younger workers by including their wages in benefit eligibility calculations. For many low- to moderate-income families, the inclusion of a teen or college student’s wages could mean a significant increase in their cost of health insurance, or could even result in them losing thousands of dollars of health insurance subsidies altogether.
More harmful to the economy, potentially, are the incentives directed at employers. Both the House and Senate bills include temporary subsidies to small businesses to encourage them to offer employer-sponsored health insurance.
As the number of employees increases, or as salaries increase, the amount of the credit provided to the business decreases. The structure of this subsidy not only discourages employers from hiring new employees, but it also discourages them from increasing employees’ salaries.
Ironically, the incentives in the bill would even work to encourage employers to drop health insurance coverage for individual employees—or to eliminate insurance coverage altogether.
The Senate bill would cap employee contributions to insurance premiums at 9.8% of their income. If an employer offered a policy that required employees to pay more than this, the employee would be eligible to purchase insurance through the new “health care exchange,” and the employer would have to pay a fine.
Since in many cases that fine is considerably less than the additional insurance costs the employer would incur if they retained coverage, many businesses concerned about their bottom line will be enticed to stop providing any health insurance coverage.
Furthermore, employers who offer Flexible Spending Accounts (FSAs) will be encouraged to stop providing these tax-free medical spending accounts for their employees. Under the Senate Democrats’ bill, FSA contributions will be included in the total cost of employees’ health insurance benefits for the purpose of calculating the proposed tax on “high cost” health plans.
Adding an FSA contribution could push the total cost of health benefits above the “high cost” threshold for many workers, which would result in the employer being liable for a portion of the 40% high cost plans tax. As more and more plans become subject to the high cost plans tax, it will be in employers’ best interest to eliminate FSA offerings altogether.
The proposed legislation would also create new marriage penalties across the income spectrum. These penalties can be so large in some cases that couples would have to forgo marriage in order to avoid thousands of dollars in new taxes.
The penalties are significant for low- and moderate-income families who often have limited savings. Given the already significant marriage penalties in low-income benefit programs, it seems ironic that the government would create yet another program that penalizes low-income individuals for getting married.
That the Democratic health care legislation would set the U.S. on the path to a single-payer, government-run health insurance system of the sort found in Europe and Canada is bad enough.
But even more troubling is the fact that these proposals would create a series of perverse incentives ultimately harmful to workers, businesses, and the entire economy. The Senate must reject this poorly conceived, ruinously-expensive scheme and get back to the business of helping our economy recover.
Sen. Sam Brownback of Kansas is the Ranking Republican on the Joint Economic Committee.
