Marginal Labor Income Tax Rates under the ACA

I was a discussant of Casey Mulligan’s paper Average Marginal Labor Income Tax Rates Under the ACA at the UNC Tax Symposium hosted in Chapel Hill, NC by Doug Shackelford this past Saturday. His figure 3 summarizes changes in the marginal tax rate of labor income over the past 7 years, accounting for both explicit and implicit taxes for someone with median wages. For example, in 2014, there is an increase in the marginal rate due to a reduction in work incentive that occurs for someone with median wages because premium subsidies are based on a income-linked sliding schedule-an implicit tax on earning more because you lose insurance subsidy as you earn more income. The paper also identifies increased implicit incentives to work more, for example, the fact that exchange subsidies cannot flow to those below 100% of poverty.

ScreenHunter_01 Jan. 21 16.15

All of the impact is not due to the ACA; it is the cumulative effect of all explicit and implicit taxes on labor income. For example, the increase from 2012 to 2013 was due to the ending of the payroll tax holiday. The increase from 2013 to 2014 is the onset of the ACA subsidies that increase the marginal tax on labor income as noted above. The step up in 2015 shows the incremental impact of the employer shared responsibility penalty, aka employer mandate, that was delayed in 2014. The dashed red line shows what the effective marginal rate would be if the emergency unemployment compensation was allowed to expire at the end of 2013, which is precisely what has happened, so the dashed 2014 line is what exists today, with an increase next year if the employer mandate goes into effect (I predict the employer mandate penalty never takes effect, just like in Massachusetts).

Here are the slides UNCtaxconference.1.18.14 that I showed at the conference that contain some suggestions (such as evaluating the effective tax rate at different income levels), criticisms (not accounting for the loss of the tax subsidy one forgoes when exiting ESI for exchange subsidies) and the broader policy framing that I think the paper deserves. On the whole I think this paper that makes a heroic effort to provide tangible estimates of the intuition that is obvious if you have a subsidy the declines with increasing income, or which drops to zero with small changes in income (going from 400% of poverty to 401%). The equally obvious solution if your goal is to minimize the marginal tax rate of labor income is to provide a more uniform subsidy, but pressure to reduce the cost of the subsidy is what lead to the structure in the first place, so there is a tradeoff at work.

Of all the suggestions I made to Casey the one I most wish he would follow would be to analyze the impact on marginal labor income tax rates of different means of financing the ACA. For example, do away with employer mandate and finance it via a VAT or sales tax? A straight payroll tax? Capping of the tax exclusion of ESI and moving over time to end it? Etc. It would be fascinating to see the mix of alternatives that could finance the existing subsidy structure, not as a means of his saying he supported that structure, but to demonstrate the impact of the different options on the effective tax rate on labor income, which Casey cares deeply about. Finally, a flatter subsidy could be evaluated that would help to demonstrate the tradeoff between increased cost of a subsidy, and the impact on labor income tax rates.

Such a paper would be extremely valuable.

cross posted at freeforall

Author: Don Taylor

Don Taylor is an Associate Professor of Public Policy at Duke University, where his teaching and research focuses on health policy, with a focus on Medicare generally, and on hospice and palliative care, specifically. He increasingly works at the intersection of health policy and the federal budget. Past research topics have included health workforce and the economics of smoking. He began blogging in June 2009 and wrote columns on health reform for the Raleigh, (N.C.) News and Observer. He blogged at The Incidental Economist from March 2011 to March 2012. He is the author of a book, Balancing the Budget is a Progressive Priority that will be published by Springer in May 2012.

7 thoughts on “Marginal Labor Income Tax Rates under the ACA”

  1. Such a paper would be extremely valuable.

    Yes, if it were credible. And I’m not sure what shreds Mulligan has left given the kinds of claims he’s made on the NYT’s Economix blog:, e.g.,

    Perhaps he distinguishes between his formal research and the snake oil he palms off on the rubes (though given the state of economics, there is a legitimate question of who, economists or non-economists, are actually the rubes).

    1. Even though his is the first post and mine is the second, I think that Marcel wins the thread.

    2. “Perhaps he distinguishes between his formal research and the snake oil he palms off on the rubes (though given the state of economics, there is a legitimate question of who, economists or non-economists, are actually the rubes).”

      I don’t think that I’ve seen any hints that the economics profession has *ever* treated even proven liars and frauds as such, if they were considered to be ‘in’ the profession. Which is a big problem in judging such people; their profession has very, very low standards.

  2. I’m somewhat suspicious that so-called marginal rates tell us quite as much as we might imagine.

    First of all, aren’t some of theses changes properly categorized as discontinuous constant jumps in taxes, rather than as changes in the marginal rate? If my rate is 15%, say, at $X of income, and then I lose a $500 subsidy when I go to $X+delta, that seems qualitatively different than saying my marginal rate has increased in the usual sense. Indeed, the marginal rate may well go back to 15% immediately. It’s the loss - effectively a pay cut - that matters.

    Maybe that’s academic, or even wrong, but it seems to me that it matters. The assumption that a higher marginal rate is a disincentive rests in part, I think, on an implicit assumption that those rates are increasing in income. Then the longer term offers no prospect of a cut in marginal rates, or a return to previous ones. But in these kinds of cases it does. Does the worker who faces the loss of a $500 subsidy not even consider the prospect that increased earnings in the future may far outweigh that loss?

    Another way to think about this is that the wage incentive is after-tax income over some future time period, and to ask what that time period really is, and how future income is discounted, rather than assuming it is extremely short. Maybe long-run considerations matter.

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