ACA and Productivity

If you drive a car, I'll tax the street
If you try to sit, I'll tax your seat
If you get too cold, I'll tax the heat
If you take a walk, I'll tax your feet
--The Beatles

U of C prof Casey Mulligan discusses effects of the Affordable Care Act (ACA) on economic productivity. The ACA creates 'tax distortions' in the labor market. Tax distortions are changes in behavior for the purpose of decreasing taxes or increasing subsidies.

The employer mandate creates a tax distortion because employers are prone to hire less full-time employees in order to avoid buying health insurance as mandated by the ACA or paying associated penalties. The ACA essentially amounts a tax on having full-time employees. Employers will hire either part-time employees or seek to find ways to get by with less workers (e.g., implement more automation).

Subsidized health insurance exchanges also creates a tax distortion because workers may choose to work less in order to qualify for discounts (subsidies) offer by the exchanges. Stated differently, working less hours might actually improve some people's financial condition by providing health insurance subsidies that more than compensate for income gained by working more hours.

This is what economist sometimes call a perverse incentive. The ACA raises marginal tax rates that anchors marginal workers in poverty in what essentially amounts to a welfare trap.

The Supreme Court concluded that the ACA amounts to a tax. ECON 101 tells us that when you tax a behavior, you will will get less of it. The ACA taxes work, so we will get less of it.

The ACA represents a drag on productivity.