Obamacare and a Fix for the IRS Iteration

TL;DR

This paper analyzes IRS guidance for calculating Obamacare premium tax credits, identifies issues with the current iterative method leading to divergence, and proposes a bisection procedure that guarantees correct calculations in simplified models.

Contribution

It introduces a bisection-based calculation method for premium tax credits, improving accuracy over the existing iterative approach and addressing divergence issues.

Findings

IRS iteration can diverge, leading to incorrect credits

Bisection procedure guarantees correct credits in simple models

Method can be generalized to real-world scenarios with some limitations

Abstract

We model the quantities appearing in Internal Revenue Service (IRS) tax guidance for calculating the health insurance premium tax credit created by the Patient Protection and Affordable Care Act, also called Obamacare. We ask the question of whether there is a procedure, computable by hand, which can calculate the appropriate premium tax credit for any household with self-employment income. We motivate current IRS tax guidance, which has had self-employed taxpayers use a fixed point iteration to calculate their premium tax credits since 2014. Then, we give an example showing that the IRS iteration can lead to a divergent sequence of iterates. As a consequence, IRS guidance does not calculate appropriate premium tax credits for tax returns in certain income intervals, adversely affecting eligible beneficiaries. A bisection procedure for calculating premium tax credits is proposed. We prove that this procedure calculates appropriate premium tax credits for a model of simple tax returns. This is generalized to the case where premium tax credits are received in advance, which is the most common one in applications. We outline the problem of calculating appropriate premium tax credits for models of general tax returns. While the bisection procedure will work with the tax code in its current configuration, it could fail, eg, in states which have not expanded Medicaid, if a new deduction with certain properties were to arise.