Their businesses may be small, but their share of Obamacare’s pie isn’t.  In fact, according to a recent Treasury Department report, 20 percent of all Obamacare customers–1.4 million people–was either a small business owner, self-employed or both, in 2014, the first year Affordable Care Act (ACA) plans were available.

The same report, released in January,  also said that workers whose incomes were not primarily from wages were almost three times more likely to buy health insurance coverage from an Obamacare exchange than wage earners in 2014.

That year, almost 28 percent of people who purchased coverage for themselves through one of the government-run marketplaces had income that was not primarily from wages, the report said, the first of its kind to analyze participation by those kinds of workers in Obamacare plans.

Two officials, one at Treasury and the other at Health & Human Services (HHS), wrote in an HHS blog posted January 12, 2017, that “nearly 10 percent of small-business owners and more than 10 percent of gig economy workers got coverage through the marketplace.”

They continued: “The data show that the [ACA’s] marketplaces are playing an especially crucial role in providing health coverage to entrepreneurs and other independent workers.”

The report contains a state-by-state breakdown of the number of small-business owners and independent workers covered by ACA plans. The 10 states with the largest number of small-business owners with marketplace coverage were California, Florida, Texas, New York, Georgia, North Carolina, Pennsylvania, Michigan, Washington and Virginia.

Both House and Senate Republicans want to repeal and replace the ACA with bills that are, according to polls, very unpopular and which the Congressional Budget Office said would cause more than 20 million Americans to lose health coverage by 2026 and increase premiums. (That is the number of people who gained coverage under the ACA in the last six years.)

It is unclear whether the Republican-led effort will succeed; the House passed a bill in May and the Senate delayed a vote on its repeal-and-replace bill on Tuesday. What seems clear though is that Republicans apparently want to turn the clock back to the pre-ACA days, and that could have deleterious consequences for would-be small-business owners and independent workers.

And I’m not just talking about access to affordable coverage, either, although, the aforementioned blog said that prior to the ACA becoming law in 2010, workers without health insurance purchased through a job “often lacked options for affordable coverage.”

The authors of the blog post, Adam Looney, a deputy assistant secretary for tax analysis at Treasury and Kathryn Martin, an acting assistant secretary for planning and evaluation at HHS, said access to affordable health care coverage for entrepreneurs is important to starting new businesses.

They wrote: “Not only did high uninsured rates (prior to ACA) impede access to care and worsen financial security, but the risk of ending up without health insurance coverage prevented some individuals from striking out on their own.”

The phenomenon is known as “job lock.” Experts considered job lock, or individuals’ need to stay in an employment situation in order to maintain health coverage, “a significant impediment to entrepreneurship,” Looney and Martin wrote.

So, imagine you’re an enterprising, entrepreneurial research scientist at a medical school where you have patents on some promising drug therapies. You also have a family, you have some pre-existing medical conditions but you have good employer-subsidized health insurance. Knowing all this, do you strike out on your own and start a new company with questionable access to affordable health care, or do you postpone your startup dream and stay in your job at the medical school?

 

A report last month by Brookings raised some interesting questions about the proposed tax-reform plans of the Trump administration and House Republicans. Both propose large reductions in taxes paid on business income, including taxes paid by owners of pass-through businesses.  Pass-throughs–which include limited partnerships such as real estate, law firms and hedge funds–have their income pass through to their owners to be taxed under the individual income tax. The Trump plan would reduce the corporate rate from 35 to 15 percent and the top rate on income earned from pass-through business from 39.6 to 15 percent.

Here are the main points of the Brookings analysis:

• Most businesses are pass-throughs.  Of the 26 million businesses in 2014, 95 percent were pass-throughs while only 5 percent were C-corporations.
• Almost all businesses are small.  In 2014, almost 99 percent of businesses had $10 million or less in sales and receipts.
• Pass-throughs are not necessarily small business. A small number of large businesses account for the majority of pass-through profits and economic activity.
• Pass-through businesses now earn a majority of business income.  In the early 1980s, C-corporations produced almost all business income. In 2013, only 44 percent of the income of business owners was earned through C-corporations.
• Pass-through businesses pay lower tax rates than C-corporations.  The gap between the lower rate on pass-throughs and the higher rates faced by C-corporations creates a major incentive for businesses to un-incorporate and to organize as pass-throughs.
• The multitude of business types encourages inefficient tax avoidance.  With so many options to choose from when determining how to structure a business and whether to distribute business income as profits, wages or capital gains, business owners have considerable incentive and ability to avoid tax.
• The growth of pass-through businesses has eroded corporate and payroll revenues. If the relative shares of pass-through and C-corporate activity were held at 1980 levels, the average tax rate on business income in 2011 would have produced at least $100 billion in additional revenue in 2011 alone.
• Pass-through income is primarily earned by high-income individuals.  About 70 percent of partnership income accrues to the top 1 percent, compared to less than 50 percent of corporate dividends and 11 percent of wages.
•  Pass-through businesses are responsible for a significant share of the tax gap. About 41 percent of the tax gap from 2008-2010, or $190 billion, was due to pass-throughs underreporting income and thus paying too little income tax.

To my way of thinking, if most of these changes come to pass, the biggest winners will be high-wealth individuals, not small businesses, and government funds for services such as infrastructure,  retirement and healthcare for seniors  will be more scarce.

Brookings’ research noted that the growth of pass-through businesses has eroded the payroll tax base, which funds the Social Security, Disability and Medicare trust funds. In 2011, about 71 percent of pass-through income was subject to Social Security or Medicare taxes; in 1994, the share was greater than 88 percent. Republican healthcare proposals, if passed, would make this chasm even wider.

Individuals in the bottom 80 percent earn virtually no pass-through income.  Moreover, those with higher incomes tend to receive a much greater share of their income from business compared to those with lower incomes, as the top 1 percent earn only about 11 percent of wage and salary income. Thus, any reductions in the tax rate on pass-through businesses, while it might benefit some small businesses, would largely benefit high-income taxpayers.  It’s what economists call “upward redistribution.”

Finally, pass-through businesses already aren’t paying their fair share, and are primarily responsible for the tax gap, according to Brookings. The tax gap measures the amount of tax liability that should be paid but is not. About 41 percent of  the $190 billion tax gap from 2008-10, was due to pass-through businesses underreporting income for income and payroll tax purposes.  Sole proprietors were responsible for about 30 percent of the individual income tax underreporting tax gap.