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Home Publications Blogs Beat the Press Casey Mulligan, the ACA, and the Marginal Tax Rate Story

Casey Mulligan, the ACA, and the Marginal Tax Rate Story

Friday, 14 February 2014 09:54

Paul Krugman and Jonathan Gruber have been responding to Casey Mulligan's complaints about how the high implicit marginal tax rates created by the Affordable Care Act will discourage work. They both insist that they are concerned about disincentives, but find them less of an issue than Mulligan. I confess to being less concerned than Krugman and Gruber.

The reason is that many low and moderate income people already faced very high marginal tax rates in the form of the loss of benefits. For the most part, the ACA just shifts the breakpoints a bit and has the disincentives apply to a somewhat different group of people. The most obvious example is the cutoff for Medicaid eligibility. In the states that accepted the expansion, this goes from 100 percent of the poverty line to 135 percent of the poverty line.

That's a cutoff, not a phase out, so the extra dollar of income could be bad news. Except now with the subsidies in the exchanges, families don't end up with zero once they have crossed the threshold.

Anyhow, whenever you make a mean-tested benefit more generous, you can't avoid creating high marginal test rates. (Why do so many conservatives want to create high marginal tax rates by applying means tests for Social Security and Medicare.) The only alternative for reducing the marginal tax rates is to have the benefit go to people further up the income ladder which costs more money. That requires more tax dollars and, you guessed it, raising marginal tax rates.

CEPR had a project a few years back run by Heather Boushey, called Bridging the Gaps. This project looked at the various forms of support for low and moderate income families that existed across states, in addition to federal programs like food stamps and the EITC. I was struck in looking at this work by how often low and moderate income families would face implicit tax rates (in the form of lost benefits) in the range of 60-80 percent. Remarkably, most of them worked.

My take away from this is that high marginal tax rates for moderate income people are a bad thing, but they don't seem to discourage work as much as we might imagine. That is why I have never been terribly concerned about the disincentives that might come from the ACA. There certainly are some kinks that it would be good to iron out (places where the lost subsidy per additional dollar earned is way too high), but in the scheme of things this is a relatively minor concern. It is also one that could be addressed if both parties had an interest in making the system work.



Comments (12)Add Comment
Disingenuous Disincentives
written by Jeffrey Stewart, February 14, 2014 10:36
The idea that ACA disincentives discourage people from working assumes most people have a choice to work or not. This brouhaha is at least partly due to the idealistic neoclassical economic framework (used by the CBO) where people choose to work or not by balancing the marginal reward for working against the desire for leisure.

This isn't so in capitalist reality. By definition working class members own a single commodity, labor power, the capacity for work. One choice is for them to sell labor power, work, earn wages, buy commodities and live. The alternative is not sell labor power, not work, not earn wages, face starvation, exposure and possibly death. Therefore, even if the ACA allows people to quit work, this means they didn't have to work to live anyway, they just needed the health insurance. However, most people don't have the option.

If I'm understanding this correctly
written by Bronwyn Beistle, February 14, 2014 11:08
People are afraid that low- and moderate-income people will be *disincentivized to work*.

Am I reading that right?

The idea that anybody making less than 6 figures is disincentivized to work in this economy is the most rampantly absurd idea I've ever heard.

The American people want jobs at a living wage. Other than preserving Social Security and Medicare, that's what they want most. Every poll since 2009 has shown this, with the intensity of the demand getting higher and higher as time goes on (the last poll I read on this subject showed 77% of Americans saying that if removing regulations and cutting taxes created jobs, the government should do it--and 78% said that if direct creation of jobs through deficit spending-funded infrastructure projects created jobs, the government should do it. In other words, "We The People don't give a damn about your stupid little culture war. Create some jobs, dammit. At a living wage, please."

Does that sound like people who are disincentivized to work?

The people who want low- and moderate-income people NOT to be working are the .01%. That's why they're pushing policies which have lowered workforce participation to, I believe, its lowest level since we started recording it. End of story.
So why is it again the work goes undone?
written by Perplexed, February 14, 2014 12:12
Is there really no discussion or estimation of the likely consequences of these people working fewer hours? Do economists really believe that intelligent people will just except their assumptions that we live in a zero-sum, full-employment economy where this work just goes undone because a few choose to work less hours? Are we really to believe that under-employed and unemployed might not choose to do this work and might face different marginal tax rates that incent them to do so? That the additional taxes and reduced subsidies from their choosing to do the work might offset most of the costs that those choosing more leisure might impose? Where are the calculations of these offsetting impacts and the resulting discussions by our great economic thinkers?
written by ifthethunderdontgetya™³²®©, February 14, 2014 12:26
Why do so many conservatives want to create high marginal tax rates by applying means tests for Social Security and Medicare.

Because they're sociopaths.
ergo----Let's disincentivize the 1%
written by John Parks, February 14, 2014 7:39
I would be more interested in a discussion of disincentives and their effects on government contractors who receive brother-n-law jobs, no bid contracts, automatic payment for cost overruns, and cost-plus contracts.
written by urban legend, February 15, 2014 1:08
I'm with Jeffrey Stewart and Bronwyn on this. There's an other-worldly quality to this discussion that seems to have no grounding whatsoever in reality. Is there any empirical support whatsoever for these conclusions that low-income people will be affected one iota to work or not work because their extra $1000 will have a somewhat bigger tax bite -- but still will leave them with most of that amount as additional discretionary income? These are people who need every bit they can get, not people with the discretion to take work or leave it.

It seems like as soon as someone in the CBO utters the words "marginal tax rates," even good guys like Dean and Paul turn all soft and become neoclassical guild members all of a sudden.
written by watermelonpunch, February 15, 2014 10:15
There's an other-worldly quality to this discussion that seems to have no grounding whatsoever in reality.

Yes, that's a very good description of this hysteria about the incentive for low income people not to work.

It makes no logical sense in the real world.

People need to do the math of someone living at 200% Federal Poverty Level.
written by jamzo, February 15, 2014 10:44
and the high income intellectuals debate:"if this or that is done, it will encourage people not to work"

how strange can it get

income stagflation
redistribution of wealth
interest of middle and working class fall way to corporate interests
and more

and they are worried about people not wanting to work

so what

would horrifying outcome would there be if more people decided not to work

written by Ted Boettner, February 15, 2014 10:51
Medicaid eligiblity varies tremendously across states. For childless adults it's
written by Amused, February 15, 2014 12:09
This article ended with:

It is also one that could be addressed if both parties had an interest in making the system work.

Both parties DO want a working healthcare system. The Republicans do not to work with Obama, not because he is black or because they think he too liberal, but because:

1) He lies to them. He lies to the American people. They know that he just lies. Period.

2) He changes any law passed as he sees fit. Pass a compromise bill and he will sign it. Then he will just refuse to enforce any part of it that he does like.
Sitting pretty
written by Lord, February 15, 2014 2:44
The rich put themselves into that marginal tax rate and ask themselves what they would do and they would want to quit but they can't put themselves into that position of being without money so they can't see that they couldn't. Just as they like to tell themselves they would quit but push come to shove, they would actually want to make up the difference by working more but want no one to know or believe it as it would lead to them being taxed and working more.
written by Green Mountain Bot, February 19, 2014 12:01
"[what] horrifying outcome would there be if more people decided not to work "

Assuming the demand for labor remains constant, a decrease in supply would lead to higher prices for labor. In other words, with fewer people competing for jobs, employers would have to increase wages and benefits to meet demand.

I'll leave it to you to judge why someone might find that to be a bad thing.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.