“If you like your weak economy, you can keep your weak economy”

The tax tail is wagging the economic dog: Effects of Obamacare on Economic Productivity

From a talk given October 24, 2014 at Hillsdale College by University of Chicago Professor of Economics, Casey Mulligan:

The key economic concept required to understand the labor market effects of the ACA is what economists call “tax distortions.” Tax distortions are changes in behavior on the part of businesses or households for the purpose of reducing their taxes or increasing their subsidies. We call them distortions because they don’t occur for real business or real personal reasons. They occur because of the tax code. A prime example of a tax policy that creates distortions is the ethanol subsidy—technically it is a credit, not a subsidy—whereby gasoline refiners are subsidized on the basis of how many gallons of gas they produce with ethanol. Because of this subsidy, businesses change the type of gas they produce and deliver, people change the type of gas they use—which affects engines—and corn is used for ethanol instead of as feed or food. Nor do the distortions stop there. Arguably, food prices are increased due to the reallocation of corn to different uses—and when food prices are higher, restaurants and households do things differently. There are distortions economy-wide, all for the chasing of a subsidy.

To be clear, just because taxes cause distortions doesn’t mean that we should never have taxes. It just means that in order to get the full picture when it comes to policies like an ethanol subsidy or laws such as the ACA, we need to take into account the tax distortions in order to ensure that the benefits we are seeking exceed the costs.

The tax distortions that are imposed on the American economy arise from the employer mandate and the employer penalty, according to professor Mulligan. These are meant, so the proponents of Obamacare tell us, to encourage employers to provide health insurance to their workers. Taken together they become a tax on full-time employment because employers can avoid the mandate and the penalty by switching to part-time employees and/or staying below 50 full-time employees. As Professor Mulligan points out, there are mountains of research over decades proving that when something is taxed there will be less of it. We are already seeing less full-time employment and an expansion of part-time employment. It affects the whole economy, not just employers or those who work.

As a result of the ACA, then, we are going to have fewer people working and less value created overall.

Nor will the loss of productivity end there. As with the ethanol example, there will be more and more tax distortions from the ACA as it continues to roll out. Businesses will change the way they do business, whether it’s by bending over backwards to stay below 50 employees or by having more part-time employees and fewer full-time employees—not because these policies create value or satisfy customers, but because they avoid penalties or enhance subsidies. The Chicago Cubs baseball team changed over to more part-time employees this past summer, and as a result there was a day when the grounds crew couldn’t handle the weather—reducing the value of the game for the fans in general. Incentives and disincentives in the tax code ripple through the economy in unimaginable ways.

So, according to professor Muilligan, the employer mandate and the employer penalty add up to a tax on full-time employment. There is also another tax, and it’s an income tax. It’s called a subsidy, but it’s a tax.

So, when does a subsidy become a tax?

When it’s tied to your income, or the lack thereof:

If you have a full-time job with an employer that offers coverage—which is the case for most employees in our economy—you don’t get the subsidy offered through the exchanges. If you want to get the subsidy, you need to become a part-time worker or spend time off the job. In other words, this discount, too, is a tax on full-time employment. Of course, no politician ever calls it a tax. But when you are in a group of people that doesn’t receive a subsidy that people in another group receive, that’s a tax.

It’s also a regressive tax, i.e., it affects low-skilled workers the most. Professor Mulligan demonstrates that the employer penalty of $2,000 per worker is really about $3,000 because the employer cannot expense it for his own tax purposes. Thus, a worker will have to produce $3,000 of value per year to his employer to justify keeping his job or getting hired. Professor Mulligan estimates that a minimum-wage worker will have to work about 8 hours a week to produce this value to his employer. That’s one day a week year round that a minimum-wage worker will work for the government just because of Obamacare alone. A high-skiller worker will have the productivity to make that penalty up for his employer with less work in less time than the minimum-wage worker.

This is a scenario that seems to play out in everything Obama does. It seems to always hurt the very ones Obama claims to care about, the little people, a lot more than the highly compensated people.

Professor Mulligan demonstrates that there will be huge productivity costs to the economy because of Obamacare, and concludes, “I can make you this promise: If you like your weak economy, you can keep your weak economy.”

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