On Tuesday, the Congressional Budget Office released a new study finding that the Affordable Care Act, aka Obamacare, will cause "a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about 2.5 million in 2024."
That doesn't mean that Obamacare will cause 2.5 million employees to be laid off, but rather that the law will encourage the equivalent of 2.5 million full-time workers to drop out of the workforce. Here's how it will work (or rather, discourage work): Obamacare offers Medicaid to people earning up to 138 percent of the federal poverty line in states that opted into the program, and it provides subsidies to people earning above that amount, up to 400 percent of the federal poverty line. As your income increases, the subsidy decreases.
CBO explains that "the phaseout effectively raises people’s marginal tax rates (the tax rates applying to their last dollar of income), thus discouraging work."
For some people, CBO notes, the incentive to reduce their hours or quit their jobs will be especially strong: "People whose income exceeds 400 percent of the FPL are ineligible for premium subsidies, and for some people those subsidies will drop abruptly to zero when income crosses that threshold."
The Obamacare subsidy cliff is so steep that if you earn just $1 above the threshold, you could end up paying anywhere from a few thousand dollars to $20,000 more for insurance, depending on your age.
Take the case of a couple of 55-year-olds living in St. Croix County, Wisconsin, where the median household income is a little over $68,000.
Let's say that they earn $62,040 in 2014. They would pay $211 per month for the cheapest Obamacare plan available on healthcare.gov:
But if they earn $62,041--just one dollar more--they would pay $1,342 per month. That's an extra $13,572 per year for the same bare-bones insurance plan:
The cost of crossing the threshold of subsidy eligibility will vary based on age. For a couple in their 30s, according to healthcare.gov, it might only cost you a little over $4,000. For a couple of 64-year-olds, who are a year away from qualifying for Medicare, falling over the subsidy cliff could cost more than $20,000.
Any tax credit that phases out will discourage work. The child tax credit, for example, is gradually reduced by $50 for each $1,000 above the cap (currently $110,000 for a couple). In effect, that imposes up to a 5 percent marginal tax hike on income earned above $110,000. But Obamcare's effective marginal tax hike is 100 percent or more on the first $4,000 to $25,000 a couple makes above the income eligibility threshold, depending on age.
Whether or not it's a good thing to encourage workers to cut their hours or quit their jobs is a matter of debate among Obamacare's supporters and opponents. Liberals point out that some people will gladly choose to work less now that they have greater economic security. But for Americans teetering on the edge of Obamacare's subsidy cliff, the decision to work more in order to earn less isn't much of a free choice at all.