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The Massive Labor Reallocation Under Obamacare Part II: Marginal Taxes

Last week, we dove in the massive sea of the unseen implications of the Patient Protection and Affordable Care Act (Obamacare) for the labor market. Discussed was the growing concern that the paperwork burden of complying with the numerous regulations will waste literally hundreds of millions of man-hours as companies and agencies shift resources to push pencils. Continuing along this thread of new revelations regarding the impact of Obamacare outside of its primary realm of the healthcare market, a major report issued by the National Bureau of Economic Research last month projects that the controversial law will fundamentally alter the incentive structure that defines modern employment in the United States.

The report, entitled Average Marginal Labor Income Tax Rates Under The Affordable Care Act, focuses on the important concept of marginal costs, specifically new marginal costs of both employing someone and being employed. While many of those concerned with Obamacare’s impact focus on average costs and nominal figures, it is important to consider marginal costs in the age of anemic  economic growth and a floundering labor market. For those unfamiliar with economics or finance, a marginal cost is the total cost of producing a single unit above current levels. For example, the marginal cost to a factory that produces 100 widgets is equivalent to how much it would cost to produce 101 widgets. For clarity, the marginal cost of employment would be the cost to a business to hire one additional worker. In sum, these are the costs of economic growth.

Getting back to the study and the effect of Obamacare, it’s important to remember that the law survived its legal challenge in the Supreme Court because it was declared a tax. Therefore, any additional cost that the law imposes on any activity is considered to be a marginal tax.

Obamacare Marginal Taxes

The study first evaluates the marginal tax of employment, of both employing and being employed, under the new rules of Obamacare. The law contains a provision known as the Employer Shared Responsibility payment, which is more commonly referred to as the employer mandate. This requires that all companies that employee 50 or more people offer employer sponsored insurance plans, referred to as ESI throughout the study.

By setting this arbitrary floor, Obamacare automatically increases the marginal tax of having 50 or more employees. This cost can vary greatly given a number of different circumstances. Say, for example, that the firm in question has 49 employees and is ready to hire one more employee that puts them over the mandate threshold, yet that employer did not previously offer an ESI. The marginal cost of hiring that employee immediately becomes not just his or her salary and other benefits but also the combined cost of providing benefits to the rest of the company or the cost of the associated penalty. With healthcare premiums slated to skyrocket in most states, the cost of actually employing a modest number of people above the law’s 50 employee floor will be prohibitively expensive.

If employers do not comply with the mandate, regardless of whether or not they even have the means to do so, they will be assessed a penalty per each employee. The study has determined this cost to be $192 per month per employee in 2015, growing at a rate of 1.6 percent each year with the inflation of healthcare costs. This amounts to a fine of roughly $115,200 in 2015 for a company of 50 that does not offer ESI. This is the minimum marginal tax of employing more than 49 people.

While the law intends this provision to be a force for large companies to provide health insurance, the more likely impact will be layoffs and stunted growth as businesses seek to be below the 50 threshold.

Businesses can also avoid this huge marginal tax by reducing the number of hours that their employees work. Obamacare qualifies those that work 30 hours a week or more as full-time employees eligible to be counted toward the 50 threshold. Already, we are seeing businesses across the country cutting hours and shifting their employees from full time to part time to avoid shelling out potentially millions of dollars to comply with this arbitrary standard.  This not only impacts economic productivity but will also shrink the paychecks of millions of American workers.

Yet, because of another Obamacare program, working fewer hours may not be an undesirable option. As the study explains, individuals or households making between 100 and 400 percent of the federal poverty line are eligible for lucrative subsidies to purchase insurance through Obamacare’s state exchanges. These are individuals that do not qualify for Medicare or Medicaid and are not offered ESI. The way the subsidies work is by capping out-of-pocket costs and tying premiums to a percentage of household income. As income increases, these caps begin to evaporate, theoretically incentivizing individuals to work fewer hours or accept lower pay. Each extra hour they work or dollar they make is an additional marginal tax under this new system.

Many may balk at such a notion; that people would voluntarily accept lower wages and fewer hours than they would otherwise desire. Indeed, on the surface, this scenario violates some very fundamental laws of economics and assumptions about human behavior. However, the study uses a hypothetical scenario of a part time and full time employee at given wage levels to demonstrate just how much this law warps reality and incentives. The study compares a 40 hour a week worker with $100 per-week work expenses and a 29 hour a week worker with $75 weekly work expenses, each costing their employer $26 per hour worked. Assuming a 50 week work year, after factoring in Obamacare subsidies and current tax law, the study found that the part time worker will take home $28,929 per year while the full-time worker will only bring home $27,021; more than $1,900 less!

All told, the study determines that these marginal tax increases will average 10 percent by 2015 for near-median households, reducing take-home pay, or the incentive to work, by 17 percent for median-waged workers.

This is not insignificant. In fact it is a major adjustment slated to fundamentally alter the structure of American businesses, the labor force, and the economy as a whole. Considered on a macro-economic scale, the disincentives to employ or work theoretically amount to decades of productivity and growth being wiped out.

The full study is available online here:

Casey B. Mulligan, Average Marginal Labor Income Tax Rates under the Affordable Care Act, National Bureau of Economic Research Working Paper No. 19365, August 2013.