Obamacare Taxes and Why They May Be Problematic

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The Affordable Care Act was designed to fill the last gap in insurance coverage left by the expansion of employer-sponsored health insurance amidst the wage freeze of the World War II, and the legislation passed in 1965 as part of President Lyndon Johnson’s “Great Society,” a set of domestic programs that brought health insurance to the poor, older Americans, and the disabled.

In the gap are the 48 million uninsured Americans who were excluded or priced out by the traditional system. Obamacare — as the healthcare reform is known colloquially — made numerous tweaks to the insurance industry under the banner of fair coverage, including requiring insurers to provide a standard set of benefits, prohibiting insurers from excluding those with pre-existing conditions, and limiting the extent to which insurers vary premiums based on age. More importantly, individual exchanges were created to allow consumers to comparison-shop for health insurance policies in online marketplaces, which were designed to give individual customers collective bargaining power that will foster competition and drive down prices. Plus, eligible Americans are now able to qualify for subsidies for insurance policies.

To fund the tax credits that will be distributed to subsidize the cost of health insurance for those Americans earning between 138 percent and 400 percent of the federal poverty level — an income bracket that may include as many 17 million individuals — the federal government is boosting tax revenues by $1 trillion over the next ten years. New tax revenues are also needed to fund the optional state-based expansion of Medicaid. These tax increases were one pillar of the Republican party’s original argument against the passage of the healthcare reform. While the GOP’s stance is framed in the usual anti-big-government drapings, there is very real concern for how the new taxes, subsidized healthcare, and mandated insurance coverage will impact the economy and the American workforce.

New tariffs include the 10 percent tax on indoor tanning services; the elimination of the tax deduction for employers providing Medicare prescription drug coverage; a doubling of the penalty for using tax-free health savings accounts for non-qualified medical expenses; a $2,500 cap on the amount employers can contribute to tax-free flexible spending accounts; a ban on the use of funds from employer sponsored health spending accounts for the purchase of over-the-counter medications; a 0.9 percent Medicare surtax to wages over $200,000 for individuals and $250,000 for married couples — plus a 3.8 percent Medicare tax on the investment income of those individuals; an increased cutoff for the deduction of itemized medical expenses; and, beginning in 2018, high-value health plans costing more than $10,200 for individuals, or $27,500 for families, will be assessed a 40 percent excise tax known as the “Cadillac tax.”

Plus, less noticeable to the average Americans are the new taxes levied on medical device manufacturers, charitable hospitals that do not comply with the requirements of the healthcare reform, name brand drugs, and health insurers. Annual compensation for executives of insurance companies will also be limited at $500,000.

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