The Affordable Care Act increases marginal tax rates on labor by about six percentage points and is one of the largest taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. 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 taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. 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.Share