With unemployment rapidly approaching 10 percent, one would think it would be a priority for Congress to make it easier for businesses to hire workers. But the health-care bill unveiled by House Democrats on Tuesday goes in exactly the opposite direction, actually making it more expensive to hire workers.
The bill would require all but the very smallest businesses to provide health insurance to their workers. Employers would have to pay 72.5 percent of the premium for individual coverage and 65 percent for family coverage. Those businesses that don’t comply would be assessed a penalty or tax equal to 8 percent of their payroll.
Such a mandate is simply a disguised tax on employment. And while it might be politically appealing to claim that business will bear the new tax burden, nearly all economists see it quite differently.
Business owners care about the total cost of hiring a worker, not how that cost is apportioned between wages, taxes, health insurance or retirement benefits (or for that matter, a free parking space). Mandating insurance or assessing a new tax penalty simply increases the cost of hiring that worker.
Employers will therefore seek ways to offset the added cost by raising prices (the most unlikely solution in a competitive market), lowering wages, reducing future wage increases, reducing other benefits (such as pensions), cutting back on hiring, laying off current workers, shifting workers from full-time to part-time or outsourcing.
Most economists believe that the largest portion of those offset costs would come in the form of job loss, since workers are likely to resist wage reductions.
In addition, minimum-wage laws provide a floor for how far employers could reduce wages. As Larry Summers, now head of the White House’s National Economic Council, once wrote, the minimum-wage means that “wages cannot fall to offset employers’ cost of providing a mandated benefit, so it is likely to create unemployment.”
In a study for the National Federation of Independent Business, Michael Chow and Bruce Phillips estimate that as many as 1.6 million jobs could be lost in the first five years after an employer mandate was imposed, of which two-thirds would be from small businesses with fewer than 500 employees, 55 percent from companies with fewer than 100 employees, and 28.9 percent from companies with just 20 employees or fewer.
Low-skilled and low-wage workers would be particularly at risk. Roughly 43 percent of uninsured workers are working within three dollars of the minimum wage. The mandated-insurance costs will represent a proportionately significant increase in the cost of employing those workers. The most likely outcome will be greater unemployment for workers whose lack of skills does not justify the increased cost.
If that wasn’t enough, the House plan funds health-care reform with a huge income-tax surcharge, starting at 1 percent for individual filers with income above $280,000 and increasing to 5.4 percent for those with incomes of $1 million.
Combined with President Obama’s plan to allow President Bush’s tax cuts to expire, and high New York state and city taxes, the new surtax would mean New Yorkers would face a top marginal tax rate of 58.6 percent. That would have a devastating impact on investment and job creation.
Many of those forced to pay the new surtax would not be wealthy individuals but small businesses that file as sole proprietorships and subchapter S corporations whose owners pay the individual rate. In fact, nearly 60 percent of those affected by the surtax have at least some small-business income.
Whatever one thinks of the dubious merits of this health-care bill overall, basic economics, not to mention common sense, suggests that it shouldn’t be financed at the expense of jobs.
Michael Tanner is a senior fellow with the Cato Institute.