Marginal Tax Rates from Health Reform
According to CBO, a family of four making $54,000 would pay $4,800 for health insurance. The rest of the premium would come from government subsidies. If the family's income rises to $66,000, the subsidy falls, and the cost of health insurance rises to $7,600. In other words, earning an additional $12,000 requires the family to pay an additional $2,800. The implicit marginal tax rate is $2,800/$12,000, or 23 percent.
Similarly, a single person earning $26,500 would pay $2,300 for health insurance, but if his income rises to $32,400, his premium rises to $3,700. This yields an implicit marginal rate rate of 24 percent.
You get somewhat different numbers at other income levels. Typically, however, the implicit marginal tax rates are around 20 percent. Those figures for marginal tax rates are, of course, added on top of those already imposed by existing income and payroll taxes.
CBO addressed this issue in a policy brief back in July. They wrote:
This passage seems to have anticipated the basic structure of the Baucus bill.
Subsidies for health insurance coverage can affect people’s decisions about whether and how much to work. A subsidy can be provided through the transfer system (possibly as a voucher) or through the tax system (as an exclusion from income, a tax deduction, or a tax credit). A subsidy represents an increase in income, and some recipients may respond by working fewer hours (and thus offsetting part of the increase in subsidy income with a reduction in wage income).
To limit costs, subsidies are typically phased out as a beneficiary’s income rises. Over the phase-out range, a worker receives less compensation for each additional hour worked, because each dollar earned reduces the subsidy. That effect, known as an “implicit tax,” can lead people to work fewer hours than they otherwise would, in the same way that income and payroll tax rates do. Most empirical studies conclude that increases in marginal tax rates generally reduce the number of hours worked, particularly among secondary earners (typically, the spouse of the main earner in a family). Higher tax rates also reduce people’s incentive to raise their income in other ways,such as working harder in the hope of winning raises; accepting new positions or responsibilities with higher compensation; or investing in their future earning capacity through education, training, or other means....
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.
I should note that CBO does not fully incorporate the effects of these higher marginal tax rates in their cost estimates. If taxpayers respond to these new incentives by, say, working less, GDP and tax revenue from income and payroll taxes will decline. By the conventions of budget scoring, CBO ignores these macroeconomic changes. By contrast, households facing increases in marginal tax rates of 20 percentage points will not ignore them. This means that the healthcare reform bill will likely have a more adverse budgetary impact than CBO estimates.