Defender Capital

On Tuesday March 23, 2010, President Barack Obama signed into law a major change to the U.S. healthcare policy that will impact every American and effect one-sixth of the economy.

There are potentially negative long-term outcomes in many areas from the tax and deficit impacts of the legislation. Let’s address the part of legislation that imposes a new 3.8% tax on investment income. This lowers the after-tax return on investments. It also adds a 0.9% tax on wages for those earning more than $250,000, set to take effect in 2013. The macroeconomic impact that may be most significant is the potential to increase the deficit despite the tax hikes.

Two important facts are necessary to understand the concern over the deficit impact of the legislation:

The average cost of a family health insurance policy offered by employers was $13,375 in 2009, according to the Kaiser Family Foundation and the Health Research & Educational Trust. On average, employees pay about 20% of premiums with the employer making up the rest (an average of $10,700 per employee).
The legislation establishes new insurance exchanges for the purchase of health insurance by those who do not have insurance offered through their employer.

Under the exchange, the cost of a policy would be subsidized by the taxpayers for individuals and families with incomes up to 400% of the poverty level. This means that a family of four with the national average income of about $70,000 (at 317% of the poverty level of about $22,000) would have their spending capped at 9.5% of income which would be about $6,650. The other half of the cost of the insurance would be picked up by taxpayers.

The Congressional Budget Office, the agency that tabulated the budget impact of the legislation, estimates that about 25 million people would take advantage of the exchange to obtain subsidized health insurance by2019. However, if employers that currently offer health insurance drop their coverage in order to save $8,700 per employee ($10,700 less the $2,000 penalty for employers with more than 50 employees that do not provide coverage) and shift that cost to the taxpayer, the number of people getting subsidized health insurance could surge well beyond the budgeted 25 million. After all, there are 127 million people with incomes between 150% and 400% of the federal poverty level. If a large percentage of these 127 million people were shifted to the exchange, with a typical annual subsidy around $5,000 - $6,000, the annual cost of the legislation would soar and significantly worsen the budget deficit.

While all of the potential effects of the health care legislation are unknown, it could contribute to higher interest rates as fears of the rising deficit combine with rebounding economic activity and excess money provided by the Federal Reserve. Stay tuned, as this is just the beginning.