The President has said he would not allow taxes to be raised on anyone with less than $250,000 of income.

Today for the first time we see the legislative language for and a summary of the health care reform bill that House Democrats intend to try to pass before the August recess. The following is based on an initial quick scan of the bill and studying a few key sections. I have been wondering how the drafters were going to solve the problem I am about to describe. As best I can tell, they didn’t solve it.

As expected, the House bill would mandate that individuals and families have or buy health insurance.

But what if they don’t buy it?

Then Section 401 kicks in. Any individual (or family) that does not have health insurance would have to pay a new tax, roughly equal to the smaller of 2.5% of your income or the cost of a health insurance plan.

[ Technical note: From the legislative language, it appears the tax = min( 2.5% * (modified AGI X personal exemption), average premium cost). In the examples below, for simplicity I assume modified AGI = AGI. ]

I assume the bill authors would respond, “But why wouldn’t you want insurance? After all, we’re subsidizing it for everyone up to 400% of the poverty line.”

That is true. But if you’re a single person with income of $44,000 or higher, then you’re above 400% of the poverty line. You would not be subsidized, but would face the punitive tax if you didn’t get health insurance. This bill leaves an important gap between the subsidies and the cost of health insurance. CBO says that for about eight million people, that gap is too big to close, and they would get stuck paying higher taxes and still without health insurance.

Example 1:

Bob is single and earns $50K per year. He earns more than four times the federal poverty level, so he does not qualify for subsidies under the House bill.

Bob works for a five-person small business that does not provide him with health insurance. His $50K wage is average for this company, which therefore does not qualify for the new small business tax credits.

This company is small enough that they do not have to pay the IRS any fee for not providing Bob with health insurance. (See the table on page 184.)

With only $50K of income, Bob cannot afford to buy health insurance. Under the House bill, he would then have to pay about $1,150 per year in higher taxes to the government. That’s 2.5% of (his income minus a $3,650 personal exemption).

I went shopping for Bob on He is 50 years old and a non-smoker, living where I do in Virginia. The cheapest bare bones policy he can get is $1,620 per year. Most plans are in the $3K – $5K range. That $470 difference between the tax and the cheapest premium is more than Bob can afford on a $50K pre-tax annual wage.

To summarize, under the House bill:

  • Bob is a single 50-year old non-smoking small business employee who makes $50K per year before taxes and does not have health insurance.
  • Bob cannot afford a $1,600 bare bones health insurance policy, much less a $3K — $5K policy.
  • Bob would get no subsidies under this bill, and his employer would face no penalty for not providing him with health insurance.
  • Bob would end up without health insurance and would have to pay $1,150 more in taxes.

Example 2:

Freddy and Kelsey are married with two kids. They earn $90K per year. They earn more than four times the federal poverty level, and therefore do not qualify for subsidies under the House bill.

Freddy and Kelsey own and run a small tourist shop in Orlando, Florida. They are the only two employees. Their wages exceed the amounts that would qualify them for small business tax credits under the House bill.

Because their business is so small, the House bill would impose no financial penalty for not complying with the employer mandate. Even if they did, the tax penalty would come out of their own bottom line, since the two of them are the business.

Freddy and Kelsey are both 40 years old. They have a 15-year old son and a 12-year old daughter. None of them smoke.

Shopping on eHealthInsurance, the cheapest plan I could find for them is a high-deductible PPO plan with a $6,000 annual deductible. That would cost them more than $3,800 per year. And it’s a bare-bones plan.

They can’t afford that. Maybe they are recovering from a hurricane, or dealing with the real estate collapse in Florida. They are also saving for their kids’ college, which is only a few years away. Even with $90K of income, money is tight for a family of four.

If they cannot afford the (at least) $3,800 in health insurance premiums, then the House bill would make them pay more than $2,050 in higher taxes.

To summarize, under the House bill:

  • Freddy and Kelsey are a 40-year old couple with two kids. They own and run a small tourist shop in Orlando, Florida.
  • They are the only employees, and earn a combined $90K per year.
  • They cannot afford even an inexpensive health insurance plan, and so the House bill would make them pay $2,050 in higher taxes.

These two examples show the difficulty of making an individual mandate work. To get people to comply with the mandate, you have to impose a significant tax penalty on those who don’t comply. This will change the calculation for many who were previously uninsured – they will buy health insurance, because the delta between the cost of having insurance and the tax penalty cost of not having it has shrunk, so they might as well buy it.

The bigger this gap, the fewer people will switch. And for those who do not or cannot comply with the mandate, they end up in the worst of all worlds – uninsured and paying higher taxes.

From CBO’s new tables, it appears that about eight million U.S. citizens would fall into this category. I expect that very few of these people would have more than $250,000 of income, the no-tax-increase line defined by the President.

I expect the House Democrats will emphasize that their bill would result in 97 percent of U.S. citizens having coverage. Those other three percent, however, really get shafted, and that’s about eight million people.

If the President were to sign such a bill into law, I cannot figure out how his team could reconcile this consequence with his pledge not to raise taxes on the middle class.

But without the tax penalty, the mandate isn’t effective, and the number of resulting uninsured goes way up.

The House bill drafters have made a hard policy choice. It is important that Members of Congress and the public understand the benefits and the costs of the approach they have chosen.


Thanks to a friend for pointing this out: We know the President understands this point. Here is then-Senator Obama in a debate with then-Senator Clinton on February 21, 2008, opposing her proposal for a universal individual mandate to purchase health insurance (emphasis added):

SENATOR OBAMA: Number one, understand that when Senator Clinton says a mandate, it’s not a mandate on government to provide health insurance, it’s a mandate on individuals to purchase it. And Senator Clinton is right; we have to find out what works.

Now, Massachusetts has a mandate right now. They have exempted 20 percent of the uninsured because they have concluded that that 20 percent can’t afford it.

In some cases, there are people who are paying fines and still can’t afford it, so now they’re worse off than they were. They don’t have health insurance and they’re paying a fine.


In order for you to force people to get health insurance, you’ve got to have a very harsh penalty, and Senator Clinton has said that we won’t go after their wages. Now, this is a substantive difference. But understand that both of us seek to get universal health care. I have a substantive difference with Senator Clinton on how to get there.

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