Where's the ACA tax?

James Kwak at Baseline Scenario explains the "tax" impact of ACA:

So the new Republican argument (which Mitt Romney was against before he was in favor of it) is that the individual mandate is an oppressive tax on the middle class. Cute, isn’t it, adopting John Roberts’s argument?

First of all, there’s the little matter that the word “tax” in legal doctrine means something different from the word “tax” in ordinary English. And there’s nothing wrong with that. Plenty of words have precise legal meanings that would be foreign to ordinary English speakers, like “negligent,” “reckless,” “material,” and so on, and billions of dollars turn on those precise legal meanings. But that’s not going to sway many people, so let’s go to the numbers.


If you get health insurance through your employer, the individual mandate doesn’t apply to you. There’s no chance you’ll pay the penalty, so the amount of the “tax” is exactly zero.

If you get health insurance from the government (primarily Medicare or Medicaid), the same thing applies. Your tax: zero.

If you already buy health insurance in the individual market, you can continue buying insurance the same way. The main change is that prices will probably come down (or at least grow more slowly) because of transparent competition in the insurance exchanges. (Curious? Check out what we have in Massachusetts, thanks to RomneyCare.) Your tax: zero.

All right, that covers more than eighty percent of you. What if you’re among the roughly 50 million Americans who are currently uninsured?

The typical uninsured household is a family of three that makes between $25,000 and $50,000 per year, probably around $35,000 (see Table 8). If you are a single parent with two children under eighteen, your penalty for not buying insurance is $1,390.

But: Because your household income is less than 200 percent of the applicable federal poverty level, you also receive a premium credit. At most, you will have to pay 6.3 percent of your income on health insurance, or $2,205. (In addition, you get a 13 percent reduction in the amount of cost sharing under your plan.) So you get to buy a family plan, which would ordinarily cost around $12,000, for just $2,205. That’s a benefit of $10,000.
So here you have a law that offers you $10,000 to buy health insurance (or, put another way, gives you a discount of more than 80 percent), but says that if you decline to buy it you’ll have to pay a penalty of $1,390. You can call that $1,390 a tax if you want, but the real question is: does the law make you better off than you were before? Unless most uninsured families like being uninsured, it’s pretty clear that it does make them better off.
(For a broader analysis of who is subject to the individual mandate, see the simulations by Jonathan Gruber. The answer: almost no one.)

In short: Very few people are even theoretically subject to the tax, and most of them are made much better off by the law, since they are transfer beneficiaries.

How can this be? How can a law make everyone better off? Well, it doesn’t. There is a tax-and-transfer element to the Affordable Care Act. The main people who are paying more are the rich (because of a Medicare payroll tax surcharge) and those with good health plans (because of the excise tax on “Cadillac plans”). In addition, the new spending is financed in part by reductions in Medicare spending; those reductions may or may not result in reduced availability of care for Medicare beneficiaries.

The Affordable Care Act is not painless, and there are definitely taxes involved. But the individual mandate “tax” is not one of them.