Under the Affordable Care Act, premium subsidies—tax credits in ObamaCare designed to defray the cost of purchasing health insurance—will go to some seven million tax filers and flow to households earning as much as $94,000 a year. The credits are both advanceable and refundable, meaning the IRS will pay them first and verify the claims for them later, what some call "pay and chase."This speaks to something that puzzles me deeply about advocates of big government (i.e., Progressives and Liberals). Anyone who experiences the joys of “service” at the DMV, or at the U.S. Post Office surely must at least have doubts about the efficiency and efficacy of government-run enterprises. Anyone who has ever been in the U.S. military can regale you with endless tales of waste and mismanagement. I was once part of a large working party on a Navy ship that had the job of taking a brand-new, never-used spare computer and throwing it over the side of the ship in a deep part of the Pacific. Why would we do such a stupid thing? Because the budgetary rules determined next year's funding level by this year's spending. One way to spend a bunch of money: throw an expensive (roughly $300k) computer over the side! That's your government bureaucracy at work.
Refundable tax credits are essentially a form of spending through the tax code, something the IRS has struggled to administer for years with other programs. That's why it's not far-fetched to say that these premium credits will go to a lot of people inappropriately, and that we can expect to see a lot of erroneous and fraudulent payments.
Look at the Earned Income Tax Credit. Whether you like this refundable credit or not, the Treasury Department's inspector general for tax administration reported in April that improper payments account for 21% to 25% of total EITC payments in 2012. Take the percentage of improper EITC payments and apply it to the approximate $1 trillion we'll spend on ObamaCare premium credits in the decade beginning 2014. The math shows that we could see between $210 billion and $250 billion distributed to those who shouldn't get it—because the IRS has no system in place to verify reported household income.
Put all the potential fraud and improper payments with these credits on top of the already soaring budget for the premium subsidies and we're headed for a disaster.
I think the solution is more radical than what Senator Hatch proposes, though: the entire income tax system should be rethought from scratch, with an emphasis on simplicity and transparency. Little Estonia is an inspiring example with its flat tax...