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.
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