Diary

Get Rich or Don’t Kill Yourself Trying

Senator Max Baucus may have just earned himself a new nickname – “The Prestidigitator.” The recent CBO scoring of his new proposed Health Care Mandate seems to suggest he pulled the rabbit out of the hat. Presto! We can now afford to spend $900Bn we do not have on health insurance for people who can’t afford it.

Yet this ability to balance the cash flow diagram doesn’t really address what the Baucus Bill would cost us as a society. To understand the unintended yet malicious impact of Congress passing this Baucus bill, ask yourself a simple question. “Why did I get up this morning?”

For most of us, that sort of question elicits both a simple, practical answer and hopefully, one that involves a certain level of long-term ambition and drive. My simple answer involves a wife and child who wouldn’t eat if I didn’t work. My long-term answer has gone from making it and succeeding to paying off the mortgages and notes that come attached to the material rewards of success.

I’m truly fortunate to have gotten this far before Senator Baucus proposed perpetually yanking up the ladder. Because that is exactly what the Baucus Bill does to people who are just starting out and trying to support children and make it to Bonus Land at the same time. The Baucus Bill ultimately pays for itself by imposing an unintentional 70% marginal tax on success. (HT: The New Atlantis)

In fairness to Max Baucus and President Obama, this isn’t what they intended to do. The goal of this bill has always been to help poor, working people, who can’t afford insurance, by subsidizing the cost until they could. In the process of feeding the Good Intention Fairy and insuring the poor, President Obama and Senator Baucus have stirred up an iniquitous hornet’s nest of unintended consequences. Their goals may have been genuinely altruistic, but Mr. Logic just doesn’t have the time or the pity to care.

The CBO estimates that an adequate family health plan costs approximately $14.5K per year. A poverty line income for a family of four is $22,050. Thus, this family of four would have to spend 2/3 of their nominal salaries to purchase adequate insurance.

Senator Baucus has proposed subsidizing approximately $13,000. The proposal also subsidizes co-pays, deductibles and basically forks over $3,500 more per year to erase all the nasty lawyer clauses that trip people up on insurance contracts. This reduces the cost of buying health insurance to about 4% of their income and allows them to get on with their lives.

As families do better and win more bread, the subsidy disappears. This seems logical at first blush. Jesus told us to clothe the poor, not deck them out. People, who can pay, should pay. Yet this is where the Law of Unintended Consequences raises its serpent-like head.

Baucus proposes only $9,072 in total subsidies to the same family of four at an income at twice the poverty line. Thus, the hypothetical salary family doubled its salary from $22K to $44K. They now pay $7,400 more for health care than they did while still in poverty. This impacts their economic behavior and their purchasing power, in precisely the same manner that a $7,400 Middle Class Tax Hike would.

In fact, the family went from spending 4% of their assets on health care to spending 18% of their assets on health care. The relative cost growth is 450%.

According to James C. Capretta, the EITC also declines at 21% per dollar as the family moves from Poverty Line to 200% of Poverty Line. Income taxes go up and so does the payroll tax. He thus estimates the total package of declining aid as a 70% marginal tax against every dollar earned.

Thus, the salary differential in 2009 between poverty line and twice the poverty line may have been $22K, but the actual wealth gained was worth less than $7K per year. Why again, should these workers get up in the morning?

This leaves us requiring another magic trick for “The Prestidigitator.” We are watching in real time a government that features a right hand that literally ignores what the left hand is doing. We’ve has $800Bn in stimulus gimmicks such as Cash For Clunkers, The Austin Frisbee Golf Course, and The New Homebuyer Tax Credit, aimed at making the consumer spend, spend and spend!

On the other hand, we have a program of subsidized living that penalizes the very set of activities that would make consumers walk around with more money to spend on homes, cars and quaint accouterments for a jolly eighteen holes of Frisbee golf in Austin, Texas. If the average guy at the poverty line wakes up and realizes he will work three hours; two of them for free, if he tries to better himself, that snooze button is going to be awful tempting.

These disincentives rapidly disappear for people above twice the poverty line. The Federal subsidies are no longer operative, and the cost of a $16,500 package of health-related goods gets more manageable. It’s down to 20% of income at four times poverty line and 15% at five. People at these income levels have a tendency to vote and participate in political activism. They also have financial power enough to weather the stupid disincentives that arise as the unintended consequence of federally mandated charity.

So this leaves that person wondering why he should leave a cozy, warm bed and say “good morning” to all his charming and efficient co-workers two options. He can get rich, or not kill himself trying. If an entire generation of young workers chooses Plan B, the future of the American economy is grim. Stimulus Plans don’t work too well on the sleeping or for the living dead.