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In selling his health care law to the American people, President Obama made a series of promises – which he subsequently broke. For example, the president repeatedly declared that Obamacare would lower health care costs for the typical family by $2,500. At a time of heightened financial anxiety, many Americans were attracted to a plan that purported to lower costs.

Despite the president’s stump speech promises, Obamacare was never designed to lower health care costs for the average American. Between 2009 and 2014, the average family premium for employer-sponsored coverage rose by nearly $3,500 – from $13,375 to $16,834 – even as deductibles and cost-sharing increased significantly as well. Rather than address excessive costs – Americans’ primary concern with the health care system – Obamacare increases health care spending and decreases consumer choice. Obamacare increases spending through a large expansion of Medicaid and expensive subsidies, in the form of refundable tax credits, to purchase highly regulated, mandate-laden health insurance.

The federal government heavily subsidized health insurance prior to Obamacare, largely by spending hundreds of billions of dollars on Medicare and Medicaid each year and through the tax exclusion for employer-sponsored health insurance. The way the federal government subsidizes health insurance contributes to massive waste in the American health care system. In 2009, the Institute of Medicine estimated that one-third of American health care spending, roughly $800 billion a year, is spent on services that did not improve health or that made people worse off.

Policy experts and economists generally agree that excessive health care spending crowds out wage growth for workers, crowds out other public priorities in government budgets, and may lead to large future tax increases. Because of their flawed design, Obamacare’s subsidies are too expensive, discourage work, create new inequities in the tax code, punish marriage, are unsustainable, and will be nearly impossible to administer properly.

Obamacare’s Subsidies Are Expensive

Obamacare’s two large spending items – the exchange subsidies and Medicaid expansion – considerably increase government spending. CBO has projected that these two items will increase budget deficits by a total of $1.86 trillion over the next decade. One reason the subsidies are so expensive is that Obamacare’s many coverage and benefit mandates raised the price of insurance. CBO estimates that about 87 percent of the budgetary cost of Obamacare’s subsidies will result from new spending, with the rest coming from a decline in tax revenue. 

Subsidies and Medicaid expansion cost $1.86 trillion

Cumulative effect on the deficit by fiscal year

Obamacare’s Subsidies Discourage Work

The amount of Obamacare’s subsidies declines as income increases. So the subsidies add to the effective marginal tax rate faced by people who qualify for them. The subsidy phase-out increases the marginal tax rate faced by a typical worker by 15 percent, meaning that an additional $1,000 in household income reduces the amount of the subsidy by about $150. Since the subsidy completely expires for households earning more than 400 percent of the federal poverty level (FPL), the penalty for earning income above that amount is extremely large. For example, a family of four headed by a 50-year old couple would lose more than $3,300 worth of subsidies as household income passes 400 percent of the FPL. A family of four headed by a 60-year old couple would lose approximately $9,000 worth of subsidies. In addition to the increased marginal tax rate resulting from the subsidy phase-out, workers (and their families) who work for employers that offer coverage only qualify for Obamacare’s subsidies if they work part-time.

When the financial return from working declines, people tend to work less. CBO projects Obamacare will reduce employment by an amount equal to 2.0 million full-time workers in 2017, and about 2.5 million full-time workers in 2024. Most of the decline results from workers either leaving the labor force or reducing their hours because Obamacare significantly increases millions of people’s marginal tax rates, estimated by University of Chicago economist Casey Mulligan to be the third largest effective marginal tax increase since World War II.

According to Dr. Mulligan, Obamacare’s higher tax rates will reduce hours worked by three percent and wages and national output by two percent. A three percent decline in hours worked translates into roughly 4 million fewer full-time equivalent workers. Dr. Mulligan estimates that Obamacare’s overall impact on employment “will arguably be larger than that of any single piece of legislation since World War II” and that Obamacare will push more women than men into part-time work.

Obamacare’s Subsidies Create New Inequities in Tax Code

Government policy should treat similar people as similarly as possible. So otherwise identical households with the exception of how health insurance is purchased should pay the same amount in taxes. Because of the tax exclusion for employer-sponsored insurance, tax policy has historically discriminated against people who don’t get health insurance at work.

Rather than sensibly address this inequity in the tax code, Obamacare’s subsidies result in additional government discrimination. Many low-income workers can now get a much greater tax benefit if their employers drop coverage and allow them to get the subsidies in the Obamacare exchanges. The benefit of subsidized exchange coverage is especially pronounced for older people.

Since households earning less than 250 percent of the FPL stand to gain substantially more from the Obamacare subsides relative to the tax exclusion, many businesses that employ predominantly lower-income and lower middle class workers are likely to stop offering workplace coverage. Employers can drop coverage, increase wages, move employees to subsidized coverage, and score it as a win-win for the business and the employees, with taxpayers handed a large bill.

Shortly after Obamacare passed, former CBO director Douglas Holtz-Eakin warned that the basic economics of Obamacare made this outcome plausible. He estimated strong incentives to drop coverage are in place for as many as 35 million Americans and that would increase the cost of Obamacare’s subsidies more than threefold.

Another perverse feature of Obamacare’s design is that it creates a tax advantage for legal aliens relative to U.S. citizens. Legal aliens are the only group of people residing in households with income less than 100 percent of the FPL who are eligible for Obamacare’s subsidies.

Obamacare’s Subsidies Punish Marriage

In addition to punishing work, Obamacare’s perverse subsidy design punishes marriage. Any married couple that earns more than $62,040 – 400 percent of the FPL in 2014 – does not qualify for the subsidy. However, for a single person, 400 percent of the poverty line equals $45,960. The result of linking the tax credit to the FPL is that two people who make between $62,040 and $91,920 in 2014 will not benefit from the subsidies if they decide to marry, but both may qualify for the subsidies if they remain unmarried. While the subsidy design makes marriage less attractive for younger couples, the size of the marriage penalty grows as people age, resulting in relatively large financial incentives for older couples to divorce. For example, Obamacare’s marriage penalty for two 30-year olds each earning $25,000 is $1,270. The penalty for two 50-year olds each earning $35,000 is $2,396.

Another way Obamacare punishes marriage is through the so-called family glitch. In order to have employers and workers, rather than taxpayers, bear more of the cost of Obamacare’s mandate-laden health insurance, the law prevents people with an offer of affordable, adequate coverage at work from obtaining an exchange subsidy. Obamacare defined affordability as an out-of-pocket premium payment of less than 9.5 percent of household income. When CBO and the Joint Committee on Taxation scored this aspect of the law, they used individual coverage as the reference point for affordable coverage.

IRS adopted this reference point in its subsidy regulations. So if employees have an offer of affordable coverage for an individual plan, no one in their household can qualify for a subsidy, even if family coverage is unaffordable. As a result, couples will have a financial incentive to remain unmarried or divorce in order for some members of the household to qualify for a subsidy.

JCT estimates that married couples will receive only 23 percent of Obamacare’s subsidies. Nearly half of subsidy recipients will be single people without any dependent children, and most of the other beneficiaries will be single parents.

Obamacare’s Subsidies Shrink the Tax Base

JCT estimates that in 2016 about 14 million tax filers will claim an exchange subsidy, and only about 1.7 million of these filers will have positive income tax liability as a result. According to JCT, in 2016 roughly 6.2 million filers will move from positive to negative income tax liability because of the subsidies. Obamacare’s subsidies move the tax code in the opposite direction recommended by President Obama’s deficit commission, which included the following as one of its guiding principles: “The tax code is rife with inefficiencies, loopholes, incentives, tax earmarks, and baffling complexity. We need to lower tax rates, broaden the base, simplify the tax code, and bring down the deficit.”

Obamacare’s Subsidies Are Enormously Complicated to Administer

The IRS is largely responsible for administering Obamacare’s complicated subsidy scheme. The president has requested that the IRS receive nearly half a billion dollars in fiscal year 2015 to implement Obamacare. The vast majority of people receiving subsidies will elect to receive them in advance of the tax filing season. When signing up for coverage during open enrollment, people estimate the amount of their yearly household income in addition to listing other factors, such as marital status and household size, which affect the subsidy amount. Treasury then sends checks to the insurance company selected by the enrollee on his or her behalf. When the enrollee files an income tax return, the amount of the advanced subsidy sent to the insurance company will be reconciled with the correct amount.

Although the Treasury was cutting checks to the insurer, the IRS will go after the taxpayer for any overpayment, largely by reducing tax refunds it otherwise owed people. This problem will be compounded since, as Health Affairs noted recently, “[m]any subsidized enrollees will probably not recall ‘receiving’ advance tax credits, since the advance credits simply offset … premiums.”

Two new IRS forms, Form 1095-A and Form 8962, deal with reconciling the subsidy amount paid during the year with the lawful amount. Form 1095-A provides information about the type of plan the person purchased, as well as the amount of the advanced subsidy received. A pair of supporters of the law, writing on the Health Affairs blog on August 4, acknowledged concerns about Form 1095-A: “[F]or tax filers accustomed to handling one or more W-2s and perhaps their bank’s 1099, the new 1095s with over a dozen data fields will be mystifying. Some tax filers will receive multiple 1095s from Marketplaces, employers and insurers.”

Three weeks ago, IRS put out draft instructions for IRS Form 8962, which must be filed by everyone who claims an Obamacare subsidy. The instructions total 15 pages and are filled with complicated and dense terminology and worksheets. Because of the convoluted structure of Obamacare’s subsidy scheme, the instructions have to explain how tax filers should allocate the subsidies under certain conditions and how they should correctly calculate subsidies if household size changes during the year.

One prominent Obamacare supporter wrote in a September 21 Health Affairs blog post, “It is difficult to overstate how complicated the [forms’] instructions are. … Many of the mostly low income Americans who will be completing these forms … have been accustomed to filling very simple tax forms like the 1040-EZ (which cannot be used by an individual claiming a tax credit) or perhaps not to filing taxes at all. They are likely to be confused, frustrated, even angry, and certainly bewildered, completing these forms.”