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Is “Obamacare” Just A Tax?

July 7, 2012
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Why do people say that healthcare reform—or, Obamacare, if you want to get partisan—is a tax, or even ‘nothing but a tax’? What are they talking about? And even if it is a tax, why are they so outraged? Don’t taxes change all the time? Is a new one that big a deal?

Ok, define a tax.

A tax is money taken from you by the government to support its services. Taxes pay for fire departments, highways and most other government programs.

Does this fit that definition?

It’s hard to even research this issue, given the amount of partisan rhetoric clogging up the internet. If you google “is obamacare a tax” (well, actually, if you just start to google “is obama…” the first suggestions you’ll get are “is obama gay” and “is obama a muslim,” but let’s not think about that too much), you’ll get tons of name-calling and extreme positions from both sides.

Basically, the answer is: yes, there are taxes involved. The Affordable Care Act includes a 0.9 percent increase of the Medicare payroll tax on income that’s over $200,000 for individuals and $250,000 for couples. It also creates what’s known as an excise tax–an excise tax works like a sales tax, in that it’s usually calculated as a percentage of business done–on manufacturers of certain kinds of medical equipment, as well as indoor tanning facilities. There are also the taxes imposed on insurers, like the tax on what are called “Cadillac” health plans. Cadillac plans are health plans with very high premium costs and low deductibles. Insurers will be taxed on these plans, but some worry that this tax will affect individuals too, due to insurers or employers ditching the Cadillac plans and offering plans with lower premiums, but higher deductibles.

The new system will cost more than the existing one–the Congressional Budget Office and the Joint Committee on Taxation estimated it will cost just under $1.1 trillion in the next ten years–so taxes need to be introduced to pay for it.

But that’s not what everyone’s so upset about

Well, maybe some people are–like people who own indoor tanning salons. But mostly the uproar is over the individual mandate. The individual mandate requires you to purchase at least minimum, essential health care coverage for yourself.

And if you don’t? If you don’t buy it, you get charged a penalty. The penalty will be $95 in 2014, and phase up to $325 in 2015, eventually reaching $695.  At least, it’s called a penalty in the law itself, but part of the Supreme Court’s recent decision was that the penalty is the same thing as a tax. There are exemptions for low-income people and religious groups, among others. Part of Chief Justice Roberts’ justification for agreeing that the tax was a tax, and not a penalty, was that a CBO study expects four million people per year will pay the IRS the fee rather than buy health insurance. “We would expect Congress to be troubled by that prospect if such conduct were unlawful,” Roberts wrote. “That Congress apparently regards such extensive failure to comply with the mandate as tolerable suggests that Congress did not think it was creating four million outlaws.  It suggests instead that the shared responsibility payment merely imposes a tax citizens may lawfully choose to pay in lieu of buying health insurance.”

That does sound like a pretty good fit with the definition of tax.

Ok, if it is a new tax, why do we care?

Well, for one thing, people keep saying: “It’s a tax!” But, even if they forget to say it, they mean: “it’s a tax increase” or “it creates a new tax.” There’s no way that it makes sense to call a health insurance overhaul “a tax.” It’s a widespread system that includes raises in taxes and expansions in benefits.

The part that has people so hot and bothered about this tax is that some see it as an overstep of Congressional authority. Can Congress tax you when you don’t do something? If you don’t purchase health insurance? The Supreme Court recently ruled it was not an overreach, but for lots of Americans, the jury’s still out.

But the flip side of a tax is a benefit. Universal healthcare will have benefits. So if benefits and taxes are inexorably interlinked, you must pay in some way to get those benefits. In this case, you pay for health insurance, or you pay for not paying for it (in the form of the tax/penalty). There’s a whole sub-argument about whether it will end up being cheaper to just pay the penalty, rather than buying the minimum required insurance… but it’s basically too early to tell how much minimal health care plans will cost under this new system, so there’s no reliable way to run that cost-benefit analysis. However, it’s important to remember that under this system, you get some benefits and you pay some money either way. You can either pay for them upfront (and get more of them), or you can pay for them as a tax and get less.