Illinois continues to struggle with its budget. The state’s most recent stopgap budget expired on December 31, 2016. To perhaps break up the political logjam, Illinois senators of both political parties have begun...
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- Obamacare Increases Marginal Tax Rate on Labor by Six Per...
Obamacare Increases Marginal Tax Rate on Labor by Six Percentage Points
The Affordable Care Act increases marginal tax rates on labor by about six percentage points and is one of the largest tax increases in the last 70 years according to economist Casey Mulligan:
“During a period that included more than a dozen tax increases, the ACA is arguably the largest as a single piece of legislation, adding about six percentage points to the marginal tax rate faced, on average, by workers in the economy. The only way to cite larger marginal tax increases would be to combine multiple coincident laws, such as the Revenue Acts of 1950 and 1951 and the new payroll tax rate that went into effect in 1950. Even with these adjustments, the ACA is still the third largest marginal tax rate hike during the seventy years.”
He makes the historical comparison in the chart below.
In the case of the Affordable Care act, Mulligan is talking about implicit marginal tax rates, or “the extra taxes paid, and subsidies forgone, as the result of working.” This means that the taxes and subsidies included in the Affordable Care Act increase the tax rate on an additional dollar of income by six percentage points.
Mulligan warns that we shouldn’t be surprised that “as we implement a new law that taxes jobs and incomes, we are ending up with fewer jobs and less income.”
In response, Greg Mankiw did some rough math to illustrate what the six percentage point tax increase might do to the economy:
“Given that labor income was already taxed by income and payroll taxes, that figure indicates the return to working fell by about 10 percent. If we apply a plausible aggregate labor supply elasticity of 0.5, this in turn suggests a decline in labor supply of about 5 percent. In the long run, as the capital stock adjusts, a fall in labor supply leads to a proportionate fall in output.”
Mankiw says that Mulligan emailed him and shared that he believes the effect will be about a two percent drop in the size of the economy.
In an economy where the labor force participation rate sits near the levels of the late 1970s at near 63 percent, policies that cut the return to work by 10 percent and decrease the size of the economy by any amount are the last types of policies that workers need.
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