David R. Henderson  

Linda Gorman on How ObamaCare Treats Middle Class

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Linda Gorman, my former Naval Postgraduate School colleague and author of three excellent articles in The Concise Encyclopedia of Economics (here, here, and here), has written a post laying out some weird consequences of the ObamaCare law. I would be tempted to call them "Rube Goldberg" consequences but the difference is that the Rube Goldberg device, however complicated, actually worked.

An excerpt:

Here are some sample calculations for a wage earner couple with two children living in a state that offers Medicaid to households with incomes at or below 133 percent of the federal poverty level (FPL). Because the law allows 5 percent of income to be "set aside," this is functionally equivalent to offering Medicaid to families with incomes under 138 percent of the federal poverty level. The federal poverty level for a family of four is currently $23,550. Allowing for the income set-asides and multiplying by 1.38, this family would be eligible for Medicaid as long as it doesn't earn more than $32,499.

Now, suppose that the family earns an additional $501. It will now be ineligible for Medicaid. If the employer does not offer affordable coverage, the family will have to turn to a health insurance exchange.

According to the Kaiser Health Reform Subsidy Calculator, the premium cost for family coverage purchased through an exchange will be $1,143 per year (3.46 percent of annual income). Yet, after paying this premium and paying the additional federal income taxes it owes, this family is actually worse off as a result of its higher earnings. (See the table).

The whole thing is worth reading.

One correction, though. The last column in her table, which is the most important column in the piece, is mislabeled. It is not the "Percent Change in Marginal Tax." Rather, it's the marginal tax rate on the additional $501 of income. That's what's shocking. A family can get implicitly taxed 238% on that additional $501.

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COMMENTS (14 to date)
Matt H writes:

Pretty much all federal benefits work this way, making marginal tax rates excessively high at the cut off points. To single out Obama care for this is a bit silly. This is the excessive taxation I wish republicans would focus on.

Tom West writes:

I suspect the left would agree with you on the silliness of this aspects of Obamacare. Just go universal, single payer and this aspect is instantly solved :-).

KLO writes:

Gorman's analysis is incorrect in at least one respect. The subsidies for Exchange coverage are based on premiums for the cost of the second lowest cost silver plan. Thus, a family will receive a subsidy large enough to bring the cost of the premium for the second lowest cost silver plan down to 3.5% of household income. But a family may purchase the lowest cost bronze-level plan with the subsidy, thereby lowering the total cost below 3.5% of household income. Since all plans (and no plans) are treated as effectively identical for purposes of Gorman's analysis, this is a significant oversight.

Hazel Meade writes:

I don't know if I would call $32,000 /year for a family of four "middle class".

The Sheep Nazi writes:

What Matt H said. Just out of curiosity, is there a proof somewhere of this as a general result? It would seem as if any type of subsidy bracketed to income would have to create pockets where the marginal tax rate is 100%.

DougT writes:

High marginal tax rates as a result of phase-outs is well-documented:


Page 7 is a good summary! And this is before Obamacare.

Also note page 10: "Not getting married is the major tax shelter for low- and moderate-income households with children."

A family can get implicitly taxed 238% on that additional $501.

Which is the whole point of Casey Mulligan's The Redistribution Recession.

Michael writes:

Matt H and Sheep - We have the lowest effective tax rates since WWII. We are most certainly not "excessively taxed".

It's a national disgrace that we have so many people on Medicaid in the first place! If you adjust the 1968 minimum wage for productivity, it would be $33,000 today - meaning that no full-time employee supporting a family of 4 would even qualify for Medicaid!

If we *really* want to cut down on entitlement spending we need to address the root cause. Income inequality.

MG writes:

Sheep, if I may be so familiar, look at


Note that as he points out, the graph is alittle bit "stylized by averaging taxpayers" in that it does not show the cliffs that an individual taxpayer wold face (which would make the first derivative blow off the chart).

Clearly, when you look at page 8 of http://www.aei.org/files/2012/07/11/-alexander-presentation_10063532278.pdf

you see what causes this to happen at various points, and that the marginal tax rate has to be over 100%.

The Sheep Nazi writes:

@DougT, @MG: thanks for the links.

@Michael: nobody said anything here about whether taxes in general were too high, or too low, or just right. What's being talked about here are marginal rates. If you take a look at the John Cochrane post that MG links to, you can see the CBO graph he's referring to. (You can also click through to the report itself. Cochrane's graph is on page 7.) You can see the region between about $17,000 - $22,000 per annum -- marginal rates there are over 80%. It's interesting that ACA does not change this much -- there's a similar graph on page 27, with rates for 2012 through 2014.

Kevin writes:

Michael, you wrote:

If you adjust the 1968 minimum wage for productivity, it would be $33,000 today.
But aggregate wages don't track aggregate productivity. That completely misunderstands the relationship between wages and productivity. Textbook Econ 101 tells us that raising the minimum wage has adverse effects on employment. Much empirical research indicates that those effects are smaller than predicted when the increase is small. But I don't think anyone besides Elizabeth Warren (who seems to think she is an economist) argues that you can double the minimum wage without increasing unemployment.

ThomasH writes:

Just think how much better this hypothetical person would be if there were no ACA!

Michael writes:


The National Income does track productivity - it's consistently between 78-80% of GDP. If wages are falling behind, then the economy is not sustainable. How can you produce more without also consuming more? The only way would be if the relative costs of production were increasing, but they aren't.

The falling share of labor income over the last 30+ years has directly led to the demand problem the economy has today. Take a look at the correlation between wages, household borrowing and GDP:


Andre Fu writes:

Although Obamacare may be unfair treatment to a portion of the middle class, it is necessary. From a broader perspective, people who are eligible and who can technically afford insurance through exchanges should do so. Reason being the country has been running on debt and continues to run a deficit. How long can the country continue to sustain a welfare program, where the population is continually growing.

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