Monday, May 13, 2013

PPACA Nightmare: Where $501 of additional income can result in an 872% marginal tax increase

This is seared with us by Linda Gorman at John Goodman's Health Policy Blog

On average, however, the family will be much worse off if the employer offers affordable coverage. To be affordable, the employee’s premium for his own coverage cannot exceed 9.5 percent of his W-2 wages, or $3,135. But the employer can charge any amount for other family members. Assuming the employee must pay the national average family premium ($4,316), the employee will have about $4,000 less take-home pay!

The table below follows Chief Justice Roberts in classifying required insurance premiums as a tax. The base case is a family of four earning $32,499, enrolled in Medicaid. Marginal taxes are calculated as the sum of additional taxes ($54 as federal income tax rises from $699 to $753) plus additional premiums divided by the additional income earned ($501).

Effect of Earning More: $32,499 → $33,000


Premium Payments

(Insurance “Taxes”)

Additional Federal Income Tax

Change in all “Taxes” Divided by Change in Income

Percent Change in Marginal Tax

Get subsidized family coverage in an exchange





Buy family coverage from employer, average subsidy





Go bare, pay 2016 penalty (2.5 percent of income)





Go bare, ignore penalty





If the family manages to increase its earnings by $17,501 to $50,000, roughly the U.S. median income, it will still be better off if its employer does not offer coverage, as it would be able to purchase a subsidized family exchange policy for about $1,000 less than if its employer offered coverage at average subsidy rates.

But a family that goes “bare,” ignoring the penalty/tax, would enjoy an income increase of $16,588 net of federal taxes. It would be able to buy a lot of routine medical care for the $3,385 that Kaiser says it would have to pay for a subsidized exchange policy, and it would still be able to sign up for coverage when it wants other people to bear its medical costs.