By John C. Goodman
Originally posted at Forbes, April 2016
Have you ever thought about how many laws and regulations, how many taxes, how many mandated benefits and how eligibility for so many social insurance programs are dependent on whether or not a worker is an “employee”?
Under the Affordable Care Act (Obamacare), for example, thousands of dollars in government subsidies can ride on that one distinction. Take someone making $10 to $15 an hour. Roughly speaking, employers are required to provide affordable health insurance with no help from government, other than the break that was available under pre-Obamacare tax policy. Say the insurance costs $5,000 for an adult. The tax break is worth about $750. So net of that, the employer and the employee have to find $4,250 to pay for this mandated benefit.
How will they do that? By reducing wages? Reducing other benefits? As I previously reported, many employers in the fast food industry are offering their employees a Bronze plan with a $6,600 deductible in return for an employee premium equal to 9.5 percent of wages. If employees want to cover their spouses and children, they have to pay 100 percent of the premium (which could amount to an additional $5,000 to $10,000) and the family deductible climbs to $13, 200.
You really can’t blame the employers. This is the minimum offer the law allows and if they don’t make it, they will be subject to fines. However, to young healthy families, insurance with those deductibles is little better than no insurance at all. As a result, almost all the employees are turning the offer down. So the cost of the Obamacare mandate is almost zero!
Problem Solved? Not quite. Having turned down what the law considers “affordable,” the employee and his family are now ineligible for health insurance subsidies in the exchange. And without proof of qualified insurance, the family will be subject to personal fines next April 15th.
It won’t take people in this situation very long to discover there is another very tempting solution: avoid being categorized as an “employee.” If workers happen to be “part-time,” or “independent contractors” or “self-employed,” they can go into the exchange and obtain insurance for about 1/20th of its actual cost.
For higher income people, the incentives are all reversed. Take someone earning about $40 an hour. This person gets no subsidy in the exchange. That’s right. None. And if he doesn’t buy insurance (at Obamacare) inflated rates, he faces personal fines next April. But if he counts as an “employee,” he and his employer can buy insurance with pre-tax dollars – an opportunity worth about 40 percent of the cost of the insurance. For a $20,000 family plan, that’s a subsidy worth $8,000.
Let’s pause and list a few of the ways in which all this is very bad public policy. For starters, the policies I just described are arbitrary and unfair. They lavish generous subsidies on some people while imposing harsh economic penalties on others – even when both groups have roughly the same income. Second, even though the main purpose of the health reform was to insure the uninsured, the law in many ways encourages a great many people to be uninsured – the fine is often much less than the cost of very unattractive insurance. Third, current policy encourages everyone to game the system: Stay uninsured when healthy and then rearrange your work relationships if you get sick.
But the most important problem is that Obamacare is conditioning thousands of dollars in subsidies and penalties on a completely outmoded idea of work.
Labor law, employee benefits law, our tax law and virtually all our social insurance programs were designed a half century ago or longer. At that time, the concept of employment seemed well defined. If a woman worked on a loom in a textile factory she was an employee. If she sewed clothes in her home and sold the product to a textile company she was an independent contractor or self-employed.
But what if the loom can be operated by a computer and what if the computer happens to be in the woman’s home? Then what? That is the world into which we are entering.
The distinction between “employee’ and “non-employee” is becoming increasingly muddied. And because the subsidies and penalties under Obamacare are so large, people in every industry and every walk of life will test the boundaries of those distinctions. I predict that Obamacare will engender thousands of lawsuits over this issue alone.
Fortunately, there is a better way. In subsequent posts, I will argue that all our laws, regulations, taxes and social insurance institutions need to conform to a reality of modern life: increasingly there is less and less difference between working for yourself and working for someone else. We all work for other people. Sometimes those people are called employers. Sometimes they are called customers.
Who cares what they are called?
For health care there is a simple way out of the mess described above. It is called a universal health tax credit. People would get the same help from government regardless of where they obtain their health insurance –at work, in the marketplace or in an exchange.