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What Is The Obamacare Cliff? (And Why You Should Be Very Worried About It)

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Posted at Right Wisconsin

Several outlets have begun to figure out that the middle class faces the very real prospect of going over the Obamacare cliff if they make even $1 over the income limits.
 
How nasty is the cliff?
 
Some families could lose thousands of dollars of disposable income by working harder. The system for providing tax subsidies for individuals and families in the exchanges creates the perverse incentive of dropping all subsidies the moment a taxpayer hits 400% of the poverty level. At that moment, middle class consumers will have to pay 100% of the bloated premiums offered by the exchanges.
 
As CNBC notes
 
Working more could ultimately mean thousands of dollars less for you under a quirk in the new health-care law going into effect this fall. This could prompt some people to cut back on their hours to avoid losing money.
 
"Working more can actually leave you worse off," the price-comparison site ValuePenguin.com notes in a new analysis. The subsidies vanish altogether for a single person making more than $45,960; $62,040 for a couple; and 94,200 for a family of four. 
 
That analysis is not the first to illustrates how Obamacare could punish middle class effort. The Kaiser subsidy calculator illustrates how the subsides for individuals and families gradually decline with higher income and then vanish altogether over the cliff.
 
Here is what I wrote in A Nation of Moochers:
 
Under the new health care bill, a middle class couple in their forties who gets a raise from $93,000 to $94,000 in 2014 could see their net income fall drastically as they lose more than $8,800 in federal subsidies for their health insurance. By getting the small raise, more than quarter of their net income will go to pay premiums.  They will, of course, also be paying federal and state taxes to subsidize other people’s coverage….
 
The "reform’ bill passed in 2010 created a new system in which taxpayers get to subsidize hundreds of billions of dollars of other people's health care: other people who are by definition neither elderly nor poor, since they were already covered by taxpayer funded health programs like Medicare and Medicaid. Beyond its effect on the nation’s health care system (which is beyond the scope of this book), the legislation extends government subsidies and incentives deep into the middle class, with results that may only be realized in coming years.
 
Because the new health care law includes powerful incentives for employers to drop their health coverage, many employees may find themselves pushed into the new insurance exchanges. And for many of them, the initial shift may seem like a good deal. Starting in 2014, a 46 year old head of a family of four who makes $40,000 a year, for example, will get a government (read taxpayer) subsidy of $16,032 a year to buy a government-approved policy. But, like other credits, the health insurance subsidy phases out as income rises, then drops off a cliff. 
 
This is how it will work for the family of four headed by a 46 year old policy holder, according to the Kaiser Family Foundation’s Subsidy calculator:  
 
Family Number One:
Annual income (in 2014 dollars): $30,000
Unsubsidized health insurance premium: $0 (Covered under Medicaid)
Actual out of pocket premium: $0 (Medicaid)
Government tax credit: Medicaid
 
Family Number Two:
Annual income (in 2014 dollars): $44,000
Unsubsidized health insurance premium: $17,766
Actual out of pocket premium: $2,526
Government tax credit: $15,240
 
Family Number Three:
Annual income (in 2014 dollars): $64,000
Unsubsidized health insurance premium: $17,766
Actual out of pocket premium: $5,583
Government tax credit: $12,183
 
Family Number Four:
Annual income (in 2014 dollars): $84,000
Unsubsidized health insurance premium: $17,766
Actual out of pocket premium: $7,980
Government tax credit: $9,786
 
Now we approach the "cliff."
 
Family Five has an annual 2014 income of $93,000 -- 397 percent of the poverty line – and this is the way it looks:
Unsubsidized health insurance premium: $17,766
Actual out of pocket premium: $8,835
Government tax credit: $8,931
 
If that family increases its annual income by just $1,000 -- to 401 percent of poverty -- this is how the numbers change: 
 
Annual income (in 2014 dollars): $94,000
Unsubsidized health insurance premium: $17,766
Actual out of pocket premium: $17,766
Government tax credit: $0
 
In other words, that additional $1,000 in income costs the family more than $8,900 in after tax income… a marginal tax of more than 890 percent. Instead  of paying $8,800 or so for their health insurance premium, the tab becomes $17,766....
 
As The American Enterprise Institute’s Scott Gottlieb points out, the new system will mean that after taxes, a family making $100,000 a year will be "spending almost a quarter of their net income for health insurance."  They will not be able to refuse to buy the policy, nor will substantially cheaper policies be available. (Some may choose to go without insurance at all, opting to pay Obamacare’s fine instead.) Meanwhile, many of their neighbors will be paying little or nothing, because the "richer" families will be paying for them as well.
 
How will this change the middle class, besides imposing vast new costs on them? It hardly seems far-fetched to suggest that many families will choose to forgo, even actively avoid, extra income, the better to get in on the growing largesse of the taxpayers. In order not to forgo government aid more Americans may avoid marriage, second jobs, even promotions and overtime, thus dampening the creation and expansion of small business. For many members of the middle class, the sucker’s principle comes into play: why make more money when the government is handing out even more?
 

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