Exploring the effective marginal tax created by the Affordable Care Act

The Patient Protection and Affordable Care Act uses a refundable tax credit to subsidize purchase of health insurance through an Exchange by individuals with household incomes between 100 and 400% of the federal poverty level. 26 U.S.C. § 36B. It likewise requires insurers offering health insurance through an Exchange to offer purchasers with household incomes between 100 and 250% of FPL a contract providing heightened “actuarial value” for the price of a “silver policy.”  42 U.S.C. § 18071 (“reduced cost-sharing”).

The interactive graphic available via CDF here provides a framework for study of the effect of these provisions on the effective marginal tax rates of low- and middle income individuals. It shows that the Affordable Care Act typically adds 20-30% to these effective marginal tax rates. Because of discontinuities in the subsidization structure that occur as the taxpayer crosses various multiples of the federal poverty level, however, the effective marginal tax rate will sometimes go from 50% up to well over 100%, particular for those with incomes about 3.5 federal poverty level ($40,000 single individual; $82,000 family of 4). The estimates made here are even higher than those recently computed by the Congressional Budget Office since that organization de-emphasized issues created by discontinuities.  When combined with other federal income-based subsidies for those of low to moderate income such as SNAP (food stamps), the earned income tax credit, housing assistance, and, now the Pay As You Earn student loan program, the Affordable Care Act creates considerable disincentives to earn taxable income.

How did this come about? Harvard Law School has asked me to speak briefly on a topic related to health law at my upcoming 30th reunion. So, I thought I would update an article I did a few years back that attempted to project the tax implications of various subsidies provided by the Affordable Care Act designed to induce the purchase of health insurance.  A lot has happened since 2010 when the work on the article was done. We have a lot better idea about how the premium subsidies and the cost-sharing reductions are going to work.  We have somewhat better estimates of what premiums for the basic “metal tiers” are going to be.  And I’ve been joined by a few other academics and the Congressional Budget Office in thinking this topic is important.  These other sources, by the way, mostly confirm what I found back in 2010.

And why should you care?  You may like the Affordable Care Act or, more likely, some of the impulses behind the Affordable Care Act. But regardless of one’s political stance, one should not be blind to the significant problems that law creates. Particularly when you couple the effect of the Affordable Care Act with other federal programs intended to assist the poor, the effective marginal tax rates on the poor can become extremely high.  When you add in state and local programs, the rates get even higher. This is troubling because it creates a situation in which dependency is rational and in which government induces atrophy of the the sort of self-reliance that may become important when federal funds dry up.

Anyway, here’s the CDF.
[WolframCDF source=”http://mathlaw.org/wp-content/uploads/2013/04/The-Effect-of-Premium-Subsidies-and-Cost-Sharing-Reductions-on-Effective-Marginal-Tax-Rates-v2-.cdf” CDFwidth=”601″ CDFheight=”5000″ altimage=””]