“CBO [the Congressional Budget Office] has just released some new tables that demonstrate the increase in marginal tax rates inherent in the Baucus healthcare reform bill. CBO doesn't directly show the marginal tax rates, but, if I am interpreting the tables correctly, a little bit of arithmetic gets you from CBO numbers to marginal tax rates pretty fast. These figures apply to workers buying their health insurance on the newly created exchanges with the newly offered subsidies.
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 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.”
N. Gregory Mankiw, “Marginal Tax Rates from Health Reform”, Greg Mankiw’s Blog (12 October 2009).
http://gregmankiw.blogspot.com/
N. Gregory Mankiw is professor of economics at Harvard University and a former Chairman of President George W. Bush’s Council of Economic Advisors. His textbook is used in Regent’s Principles of Economics course. He is also a Republican policy advisor.
It is not easy to help the poor through public policy. Almost always, efforts by the government to do so end up burdening the poor and putting obstacles in their way to a better life.
Versions of the health care reform bills now making their way through Congress provide many examples. Professor Mankiw focuses here on one aspect of the Baucus bill which is set to be voted on in the Senate Finance Committee tomorrow.
Here the problem before the policymakers trying to help the poor afford health insurance: Because the cost of health care is expensive and beyond the ability of low-income families to afford full coverage, they propose subsidizing its cost to low-income families, and the poorer the family, the greater the subsidy. There is no problem with a subsidy if the family remains poor. It continues unchanged. However, it does affect their incentive to work and earn more income. If the family earns more income, for example, its subsidy is reduced, and the cut in the subsidy falls faster than the rise in the family’s income until the family’s income has risen to the point where it no longer qualifies for a subsidy. On first appearance, this seem fair since low-income families should be subsidized more than high-income families, and at some point the subsidy should end.
Now we ask the question: If the family’s income rises, what happens to the taxes and fees it must pay to the government. In the case illustrated by Mankiw, if a family earning $54,000 receives a $12,000 increase in pay its health care insurance premium increases by $2,800, or about 23 per cent of his pay raise.
But this is not all. A higher pay check means higher Federal income taxes. A family earning $54,000 a year is in a 25 per cent marginal tax bracket. 25 per cent of the addition $12,000 means $3,000 in extra Federal income tax.
It also means higher Social Security and Medicare contributions of 7.65 per cent (actually, double this figure, since the employee pays the employers share in the form of lower wages, not considered here). This amounts to a deduction of another $918 from the $12,000 pay raise. So far, the government has taxed $6,718 out of the $12,000 raise.
But there are yet more taxes. Here in Virginia we have a state income tax. The additional tax attributable to a pay raise that lifts a family’s income by $12,000 from $54,000 a year to $66,000 a year generates another $788 in tax owed to the state of Virginia.
Even this is not the end of it. Virginia has a general sales tax rate of 5 per cent (4 to the state, 1 to the city). If the family decides to spend the approximately $4,500 left after paying the mandatory health care insurance premium, the Federal income tax, the mandatory Social Security and Medicare contributions, and the state income taxes, another $225 will have to be paid in taxes.
And there is yet more. Embedded in the price of all products purchased are taxes and fees paid by producers, from the corporate income tax to property taxes on commercial property to the import tariffs and duties on goods and services imported into the country. These taxes are either shifted forward to the consumer or backward to the factors employed. A good estimate of these added costs to the consumer is another 5 per cent of their additional consumption expenditures, or another $225.
Given all these deductions for taxes and fees, the actual amount of additional purchasing power to the example family from a $12,000 raise in pay is only about $4,000, or one-third of the supposed increase their increase in income.
In other words, in this example, the government takes two-thirds of any additional income of a family with a modest income of $54,000.
These are confiscatory rates of taxation on families of modest incomes. The rates are even higher, it should be noted, on families with higher incomes.
The burden of taxation in this country has reached the point of oppression, even on the poor. People should object to the health care bill because it will, as illustrated above, increase their already high taxes markedly. More than that, they should insist that government spending and their taxes be reduced.
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