Wednesday, May 25, 2011

Obamacare’s Taxing Problem: What Happens When the Tax Tap Runs Dry?

The Heritage Foundation recently released an interesting analysis of the impact of the health care law’s refundable insurance subsidies on income taxes, which noted that the subsidies could reduce income tax liabilities to zero for many more Americans.  These effects would be particularly acute for older individuals and families with children, who under the law will receive higher subsidies to reflect their higher insurance premiums.  For instance, a 50-year old married couple with two dependent children will not face federal income tax liability until earning nearly $95,000.  For a 60-year old couple, those thresholds are even higher, thanks to the larger insurance subsidies.  Moreover, as the Congressional Budget Office has previously noted, “the phaseout of the subsidies as income rises will effectively increase marginal tax rates, which will also discourage work;” CBO’s best estimates are that 800,000 fewer jobs will exist.  In other words, under the health care law’s perverse incentives, individuals will have a strong incentive not to work and instead to live off of federal largesse.

The potential for individuals to abuse the system by obtaining federal subsidies was most recently illustrated in a Treasury Inspector General report, discussed at this week’s Ways and Means Committee hearing on tax oversight.  The report found serious flaws in the administration of the refundable homebuyer tax credit created in the “stimulus” program:

  • Over $7 million was paid to 1,084 prisoners who purchased homes while incarcerated;
  • Taxpayers under age 18 claimed homebuyer credits (even though they cannot legally sign home contracts);
  • Almost $100 million was paid to 13,448 taxpayers who claimed the credit even though they admitted they hadn’t bought a home yet, and instead listed a future purchase date on their tax form; and
  • 41 IRS employees made questionable claims for the homebuyer credit after a previous Inspector General report identified 87 IRS employees engaging in questionable conduct regarding the credit.

The problems above raise clear concerns about the IRS’ ability to implement the health insurance subsidies included in Obamacare.  But there is an important – and troubling – broader point here as well:  If half of all Americans already don’t pay income taxes and can instead obtain “free” subsidies and refundable tax credits from the government, what incentive do individuals have NOT to claim benefits that they may or may not need or deserve?  And what happens when the federal government, by so vastly expanding the welfare state under Obamacare, runs out of individuals who are willing to pay taxes so someone else can obtain “free,” and possibly fraudulent, taxpayer-funded benefits?