Health Care Reform Tax on Low Income Earners
James Capretta does a back of the envelope calculation on the Baucus health care reform bill and concludes that it would be like having a 70% marginal tax rate on the low income.
According to CBO, family coverage in 2016 is likely to cost about $14,400 under the so-called “silver option” in the health-care reform plan sponsored by Senate Finance Committee Chairman Max Baucus. In the Baucus plan, a family of four at the poverty line (about $24,000 in 2016) would have pay to about $1,400 toward coverage, with the federal government paying the other $13,000 on their behalf. In addition, the government would also provide $3,500 to reduce the family’s deductible and co-payment costs for health services. Thus, the new entitlement provided by the Baucus bill would be worth a whopping $16,500 for a family at the poverty line.
As incomes rise, however, the Baucus bill cuts the value of the entitlement. A family with an income at twice the poverty line, or $48,000 in 2016, would get $9,072 in federal assistance for coverage — still a substantial sum. But it’s $7,400 less than the family would get if they earned half as much. The Baucus plan thus imposes an implicit marginal tax rate of about 30 percent ($7,400/$24,000) on wages earned by families in this income range.
And that would come on top of the high implicit taxes already built into current law. Low-wage families with children also get the Earned Income Tax Credit (EITC). The EITC boosts incomes for those with the very lowest wages, but it is also phased-out as incomes rise. Past a certain threshold (about $21,400 in 2016), the EITC is reduced by $0.21 for every additional $1 earned. Throw in the individual income tax rate (15 percent) and payroll taxes (7.65 percent), and the effective, implicit tax rate for workers between 100 and 200 percent of the federal poverty line would quickly approach 70 percent — not even counting food stamps and housing vouchers.
That is a substantial marginal tax rate, and would serve as a disincentive towards working towards getting higher paying jobs. I also agree it would be a good idea if the CBO were to do a much more thorough analysis of this bill to verify these calculations.
Update: Via Greg Mankiw I see that the CBO has released some analysis on incomes, premiums, and so forth under the Baucus bill, and for the upper incomes there are marginal tax increases, not sure about low income earners. Also, if you are single you will get hit pretty hard even when your income goes from $26,500 to $32,400, the implicit marginal tax rate on that income due to the change in premiums is 24%. Then add on for payroll taxes, income taxes and so forth.
There is also this CBO policy brief that discusses the issue,
New subsidies might be created to cover the costs of private health insurance, and they could be gradually reduced over a specified income range in a variety of ways—with different implications for marginal tax rates and work incentives. Those subsidies could be gradually reduced at a uniform rate, causing implicit marginal tax rates to rise by the same amount for all recipients in the phase-out range. For example, a proposal might provide families whose income was at the federal poverty level (roughly $23,000 for a family of four in 2013, the year in which many proposals would take effect) with fully subsidized health insurance valued at $15,000. That subsidy might be gradually reduced as income increased, and families whose income was above 400 percent of the poverty level ($92,000) might be ineligible for any subsidy. In that case, marginal tax rates would go up by about 22 percentage points for all families whose income was between 100 percent and 400 percent of the poverty level.
A 22% marginal tax rate on households with income between 100% to 400% of the poverty level could reduce incentives for those households to decision on how much to work. If taking on a new job means less leisure time as well as a higher marginal tax rate a person might decide not to take the job even if the pay is higher.
And as Greg Mankiw points out, if people respond to these implicit changes in the marginal tax rates by working less, then it is possible that in the future GDP is lower and that payroll taxes are also lower. Thus exacerbating our already serious problems with Social Security and Medicare.