Tax distortions are changes in behavior on the part of businesses or households for the purpose of reducing their taxes or increasing their subsidies. We call them distortions because they don’t occur for real business or real personal reasons. They occur because of the tax code.A good analyst will have to consider whether a tax is intended as a corrective tax, where private incentives don't reflect all benefits or all costs, but even in such cases, even the most well-intentioned of nudges will generate distortions. In the case of the health insurance reforms, Professor Mulligan argues that the nudges are not well-designed.
The mandate or penalty is intended, of course, to encourage employers to provide health insurance. And the exchanges are where the major government assistance is provided, since those who purchase insurance in an exchange typically receive a tax credit. As I’ll explain, taken together, the penalty on employers and the subsidies in the exchanges add up to a tax on full-time employment—a tax that you pay if you work full time but not if you work part time or don’t work at all. And the problem with that, of course, is that by taxing full-time work—which is the same as subsidizing part-time work and unemployment—you get less of the former and more of the latter two.Yes, and fewer corporations can designate relatively low-salaried employees as managers and schedule overtime, which will only get you more of the latter two.
In the old days, working part time meant you earned less, and your family had less to spend than if you worked full time. Under this new system, on the other hand, if you have a family of four and make $26 an hour, dropping to part time can actually improve your financial condition by qualifying you for well over $1,000 per month in subsidies through the health care exchanges—an amount that exceeds what you would make by working the extra eleven hours per week. This is an economically perverse situation.Perhaps the law is best understood as a ploy to make universal Medicare look good, although Soviet comrades supposedly had universal Medicare.