Marginal 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. rates are usually thought of as being about income – or perhaps about a specific type of income, like wages. And the structure of them is usually thought of as “if I earn a dollar more, my tax liability will increase.” Naturally, this concept means that taxes have some effect on peoples’ economic decisions.
This idea is a useful one in tax policy, but it can become an even more useful one once you start to relax the definitions a little bit. The basic structure of the idea – “if I change my behavior in this small and measurable way, it will trigger new financial liabilities for me” – appears all over the place in public policy.
One place we can see it is in the current debate over the 30-hour threshold in the Affordable Care Act’s Employer Mandate. Simply put, the IRS rules – and the potential penalty – are applied to “full time” workers, and the number of weekly hours worked to constitute full time status is 30.
You can think of this as following some logic similar to the idea of a 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. . Do something a little bit differently, and your obligations to the IRS change. In this case, increasing an employee’s hours worked from 29 to 30 results in a very big change in your obligations to the IRS. In other words, it still has some characteristics of a tax, but a tax based on hours, not on income. And in fact, it’s based on a very particular hour: the 30th hour. For this reason, the Employer Mandate has attracted criticism for potentially reducing the weekly hours available to part-time workers.
Ben Casselman at FiveThirtyEight investigated whether this was true. He looked into the data in the exact right way, and recently published his results. Casselman structured his analysis well: he focused on that crucial 30th hour, to see if there was any change in hours worked for people who were close to the threshold. Economists call this “thinking at the margin” – looking at the place where the IRS actually affects decision-making most strongly.
In fact, there was a change. We now see fewer workers just above the 30 hour threshold, and more people below, which shows that the liabilities at the IRS at the margin probably do matter to some – but relatively few – workers.
Who might these workers be? Casselman thought at the margin again, and looked at hours specifically for those sectors of the economy where employer-provided insurance wasn’t likely to be already offered. That is, generally, low-wage ones. He found that, compared to mid-wage and high-wage sectors, which fully recovered from the recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. in terms of hours worked, the low-wage sector has actually been regressing.
This suggests that the mid-wage and high-wage sectors, which already have insurance and aren’t affected by the mandate, are in a very different structural situation than the low-wage sector, which is affected more strongly.
Some Republicans are attempting to patch the mandate by changing the definition of “full time” to the 40th hour. This, of course, simply moves the change in tax liability, at the margin, from the 30th hour to the 40th. Ultimately, the shuffles around the problem instead of eliminating it.
The employer mandate instead should simply be eliminated. As I wrote earlier this month:
Policy analysts across the political spectrum think it is an awful cost-benefit proposition. The Urban Institute asks, in all seriousness, why not just eliminate it? The Manhattan Institute names its elimination as a top economic priority for 2015.
The policy is especially questionable given its complexity, given its administrative costs, and given that its purpose appears to flatly contradict the purposes of other parts of the Affordable Care Act. It should go.
FiveThirtyEight’s excellent analysis here only strengthens the case.
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