Premium Tax Credit

The premium tax credit (PTC) is a new credit related to Obamacare.  Individuals who purchased heath insurance through the Marketplace were giving the choice to, “get it now” or “get it later”.  If they chose to receive the credit now, their estimated credit was paid directly to the insurance company and used to reduce the amount of the monthly premium.  However, the Marketplace calculated the amount of the credit based on the individuals household size and income information provided by the taxpayer and did not require any form of verification.  Taxpayers will be required to file Form 8962 to reconcile their tax credit and the advance payment that they received.  Any overpayment may have to be repaid along with penalties.

As I see it this tax credit is similar to both a price ceiling and a price floor.  Taxpayer’s who purchase health coverage and are eligible for the PTC and are entitled to no more but no less than their eligible amount. 

A price ceiling is a maximum amount that can be charged for a good or service.  When price ceilings are set below the equilibrium price consumers will demand more of the good than what the suppliers are willing to supply creating a shortage.  The PTC, like many tax credits, can be viewed as a price ceiling in that the government has placed a maximum amount on the credit that the taxpayer is entitled to.  However, the PTC also creates a price floor in that the taxpayer is entitled to receive the unused portion of the credit as a refund on their tax return.  A price floor is just the opposite of a price ceiling in that it is minimum amount that can be charged for a good or service and has the opposite effect on the demand curve creating a surplus. 


Dave Tufte said...

Susie: 100/100.

This one has stretched me more than any other one this semester. I'm kinda' tangentially aware of this program and its implications, but that's all.

I don't think that a price ceiling or price floor is the right way to approach this. For those, the government is enforcing a price and letting buyers and sellers sort it out on their own. In this case, the government is offering a subsidy if (and only if) you go through with the purchase. I think that's more like introducing a new shift variable for demand.

That will lead to higher Q and higher P. But it will also be a situation where we label the subsidy as doing one thing (helping consumers) when the incidence of the subsidy (who it actually helps) is determined by the elasticities of demand and supply. Consumers would be helped the most when their demand is inelastic, so that the tax is more incident on the (hopefully) more elastic suppliers.

I don't know much about those elasticities. The thing is, I don't know that anyone does, because it's been so long since most people actually bought healthcare on the open market. The evidence from things like Lasik or breast augmentation is that demand is pretty elastic, which makes me thing the credits are window dressing to make proponents feel good about Obamacare without actually helping people much.

I'm interested to see how all this pans out. One thing I will give the government credit for is not designing a tax credit that is going to get them into trouble. To me, this means that they may have low-balled the size of the credit so that they can make people feel better at refund time. This would be the flip-side of withdrawing too much money from each paycheck, an then surprising taxpayers with a refund each spring. It's good marketing.

Pedro said...

Though I do not have a lot of information on this topic, I did have a couple of months when Obamacare was my only option for healthcare. When I was given the options I knew how much my credit was and how much coverage I could get with out having to spend any money. To me the credit expands the my budget and gives me the ability to purchase more that what I could have on the open market. For example when we did our homework on budgets the budget line shifted to the right because of the ability to purchase more. At least that is how I would see it.

Dr. Tufte said...

Pedro: 41/50 (you mean "without" not "with out", "... expands the my budget ..." has an extra word in it, I think you meant "than" not "that".

I think what you've outlined here is the appeal of Obamacare to most people: it shifts their household's budget to the right. This is correct.

In economics, there are a lot of well-founded criticisms of Obamacare (and other national health system) that don't deny this effect, but do note that it has to be tied to other effects. Combined, it's not clear what we get net benefits from systems like this.

For example, to shift your household's budget constraint to the right, someone's had to be shifted to the left (since no one really argues that Obamacare will increase the amount of income nationally). How should those people feel about this. Heck, how should you and I feel about taking from one person to give to another?

That was more of macroeconomic point. A more microeconomic point is that your budget constraint is being shifted to the right by the provision of a product at low cost that you may not have been that interested in buying. In your case, you wanted it, so getting it cheap was good. But what if you didn't really want to buy Obamacare? That's a little like offering cheap liquor to everyone across the state, and then claiming that Mormons who choose to teetotal are better off because their budget constraint has been shifted out.

Economists sometimes make non-economists unhappy by pointing out analogies like that.