Saturday, January 25, 2014

Obamacare and the Disincentive to Work

I suppose it was my fate to be an entrepreneur.  My grandparents owned and operated a hardware store for years, after my grandfather left the navy.  My father owned a few businesses throughout his life.  None of them made him wealthy, but a couple probably could have.  Growing up in this environment, I started my first business as a teen - designing websites.  I later moved to California and graduated from UCSD with a bachelors in economics.  During my time in college, I worked as a private tutor and began a small textile company selling directly to customers.

Over the four years I've been pushing my company, I've rarely paid myself a wage.  Sure, I've enjoyed some company perks - a used truck paid in full and free internet.  However, the benefits have been far less than I could have earned working for corporation.  My years of work have all been based on potential - potential earnings, potential deals, potential values.  Only after four years did all these potentials even begin to turn to tangibles - equipment, assets, revenues, profit.  A brand.  Perhaps it sounds like I'm complaining, but I honestly wouldn't know what to do if I wasn't busy.  I just knew that someday I could reap the rewards of hard work.  Now that the harvest season is approaching, I'm realizing many of my rewards will be accompanied by punishments.

As a small business owner, and non-student, no one is willing to "give" me insurance any longer.  There have been years that I spent without it.  My lack of coverage has never been a issue though.  Even when I was covered by my university, I only used to once for minor physical therapy relating to a car accident.  Frankly, I've been fortunate.  No catastrophes, conditions, health scares, tonsillitis, appendicitis, etc.  I've heard the horror stories about families losing everything due to hospital bills, and medical conditions.  I'd also studied the economics of healthcare in college.  I knew about the market failures and free rider problem caused by young people not buying insurance then relying on emergency care.  These free riders then increase the cost for everyone who voluntarily has insurance.  Though I knew the affordable care act would would affect me directly, I was anxious to see this gap closed.  As people around me cursed wondering "why the government is forcing me to buy something."  I sneered and wondered why they never asked "why does the government make me pay for others' healthcare" when the uninsured wander into an emergency room, where treatment cannot be refused.  I was then, and still am now, in favor of the individual mandate.

So what's my problem?  Where is the disincentive?  Well, as with many government programs, the implementation is flawed.  The government didn't simply pass a law requiring an individual mandate that would keep me out of the emergency room...  They created a program that required everyone (except those 29 and under) to have at least "Bronze" coverage.  While that doesn't sound too bad, the plan may include items which the customer does not want or need.  If it does include services the customer doesn't need, they may be included to use them anyway.  The "I paid for it, I may as well use it." mentality.  This is a different issues though.  As the program was being developed, the government quickly realized they had a problem - insurance would not actually be affordable to everyone, despite the Affordable Care Act's name.  Their solution?  Tax breaks.  Big ones. 

Now is where the disincentive comes into play...  As the coverage deadline looms, I began scouring the website to understand my options.  My wife and I have one young child, and another on the way.  She is currently covered by her employer, and I'm one of the 49 million uninsured.  I quickly entered our ages, insurance status, and annual income (middle 5 figures).  The result?  My children MAY be covered by various government programs, but for my wife and I only, the cost would be $367 a month premium with a $5,000 individual deductible, and a $10,000 family deductible.  That's   $4,400 a year, plus deductible.  If my wife or I were to get sick, in a bad way, our out of pocket expenses would be up to $9,400.  If this were a continuing condition, we'd pay that every year.  If our illness was a fluke, we'd be back to $4,400 the next year.  Those figures all assume our children are NOT covered by our plan. 

Realizing that my wife may change jobs, or that I may go back to school, I then decided to change our income down to $30,000.  Again, our children may be covered by government programs (they clearly would be for a family of 4 making $30,000).  However, things began to get interesting for my wife and I...  We were now eligible for tax credits.  Huge ones.  The government would now pay 100% of our premiums!  You may be asking yourself if we'd be willing to forgo $20,000 in income to save $4,400.  What you should be asking is if someone is willing to make an extra $20,000 only to see that income hit with a tax premium of about 22%!  That 22% is on top of the income taxes paid, that would not almost certainly be higher because they individual is making more money! 

The short answer is no.  No, we wouldn't give up $20,000 in income to save a few thousand.  But again, things get interesting.  I realized long ago that working hard for a W2 only increases your tax burden.  However, incorporating leaves you with a flat tax rate, despite your corporation's earnings.  You may even incorporate in a state that is more favorable to your businesses situation, without having to actually live in that state.  In the eyes of the government, it's not about how much money is coming in.  It's about how it arrives. So, if my revenue (income) comes to me directly, I'll be punished in the form of higher taxes, and higher insurance premiums.  However, if the revenues go to my corporation, they will be taxed at a flat rate.  My corporation does not need insurance, and is not subject to a progressive tax scheme. 

The important thing controlled by my corporation - my salary.  I may raise it very high, and even let my company take a loss.  I may decrease it and become just another member of the working poor.  The government cannot force me to take a "good" job, or to not work a crappy one - with the company I own.  At the end of the day, I still control the assets, while avoiding much of the liability.  I've long wanted to be a member of the upper class.  However, with the government making me choose between supporting them, and supporting my family, I feel it may be a very long time before I have the W2 of a CEO.


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