The inconvenient financial realities of healthcare reform

As Cato's Michael Cannon details in a policy analysis published today, the healthcare reform bills currently under consideration in Congress contain provisions that would "penalize work and reward Americans who refuse to purchased health insurance." Not only do they promise to be a fiscal disaster, but they will also do significant harm to the incentives of low- and middle-income single workers and families. A must read for all who want to understand what these bills really entail. Excerpts:

... mandates and subsidies would impose effective marginal tax rates on low-wage workers that would average between 53 and 74 percent— and even reach as high as 82 percent—over broad ranges of earned income. By comparison, the wealthiest Americans would face tax rates no higher than 47.9 percent.

Over smaller ranges of earned income, the legislation would impose effective marginal tax rates that exceed 100 percent. Families of four would see effective marginal tax rates as high as 174 percent under the Senate bill and 159 percent under the House bill. Under the Senate bill, adults starting at $14,560 who earn an additional $560 would see their total income fall by $200 due to higher taxes and reduced subsidies. Under the House bill, families of four starting at $43,670 who earn an additional $1,100 would see their total income fall by $870.

In addition, middle-income workers could save as much as $8,000 per year by dropping coverage and purchasing health insurance only when sick. Indeed, the legislation effectively removes any penalty on such behavior by forcing insurers to sell health insurance to the uninsured at standard premiums when they fall ill. The legislation would thus encourage "adverse selection"—an unstable situation that would drive insurance premiums, government spending, and taxes even higher.

Conclusion: The health care bills that President Barack Obama is shepherding through Congress contain new taxes and new government subsidies, both of which would touch low- and middle- income Americans. The complexity of those tax-and-subsidy schemes makes it difficult for voters to discern whether they would be a net beneficiary or a net payer.

... low- and middle-income exchange participants would face often alarmingly high effective marginal tax rates. Even if such workers would receive subsidies under the House or Senate bill, they nevertheless would keep less of every additional dollar of income than they do today. Many would see their tax bills rise even as their real incomes fell. Those perverse incentives would set a low-wage trap for millions of Americans, discouraging them from climbing the economic ladder and encouraging them to remain dependent on taxpayers. Meanwhile, the legislation’s insurance regulations would encourage Americans not to purchase coverage—the opposite of the legislation’s intended effect.

In my view, the healthcare reform under consideration is so reckless and over the top that I can't believe it will ever see the light of day.