Obama's Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums

Cato Policy Analysis Series, No. 656

16 Pages Posted: 30 Jan 2010

Date Written: January 13, 2010

Abstract

House and Senate Democrats have produced health care legislation whose mandates, subsidies, tax penalties, and health insurance regulations would penalize work and reward Americans who refuse to purchase health insurance. As a result, the legislation could trap many Americans in low-wage jobs and cause even higher health-insurance premiums, government spending, and taxes than are envisioned in the legislation.

Those mandates and subsidies would impose effective marginal tax rates on low-wage workers that would average between 53 and 74 percent - and even reach as high as 82 percent - over broad ranges of earned income. By comparison, the wealthiest Americans would face tax rates no higher than 47.9 percent.

Over smaller ranges of earned income, the legislation would impose effective marginal tax rates that exceed 100 percent. Families of four would see effective marginal tax rates as high as 174 percent under the Senate bill and 159 percent under the House bill. Under the Senate bill, adults starting at $14,560 who earn an additional $560 would see their total income fall by $200 due to higher taxes and reduced subsidies. Under the House bill, families of four starting at $43,670 who earn an additional $1,100 would see their total income fall by $870.

In addition, middle-income workers could save as much as $8,000 per year by dropping coverage and purchasing health insurance only when sick. Indeed, the legislation effectively removes any penalty on such behavior by forcing insurers to sell health insurance to the uninsured at standard premiums when they fall ill. The legislation would thus encourage "adverse selection" - an unstable situation that would drive insurance premiums, government spending, and taxes even higher.

Suggested Citation

Cannon, Michael F., Obama's Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums (January 13, 2010). Cato Policy Analysis Series, No. 656, Available at SSRN: https://ssrn.com/abstract=1543986 or http://dx.doi.org/10.2139/ssrn.1543986

Michael F. Cannon (Contact Author)

Cato Institute ( email )

1000 Massachusetts Avenue, N.W.
Washington, DC 20001-5403
United States
202-218-4632 (Phone)
202-842-3490 (Fax)

HOME PAGE: http://www.cato.org/people/cannon.html

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
50
Abstract Views
538
PlumX Metrics