Marginal Tax Rates in the New Health Insurance Exchanges

Starting in 2014, subsidies will be available to families with incomes between 134% and 400% of the federal poverty line. (Families earning less than 134% of poverty are eligible for Medicaid.) For example, a family of four headed by a 55-year-old earning $31,389 in 2014 dollars (134% of the federal poverty line) in a high-cost area will get a subsidy of $22,740. This will cover 96% of an insurance policy that the Kaiser Family Foundation predicts will cost $23,700. A similar family earning $93,699 (400% of poverty) gets a subsidy of $14,799. But a family earning $1 more—$93,700—gets no subsidy.

To phase out the subsidy smoothly for families with incomes of 134% to 400% of poverty, the law would have to take away $22,700 in subsidies as a family’s income rose to $93,700 from $31,389. In other words, for every dollar earned in this income range, a family’s subsidy would have to decline by 36 cents. On top of 25% federal income taxes, 5% state income taxes, and 15% Social Security taxes, this implies a reward to work of less than 20 cents on the dollar—in economists’ language, an implicit marginal tax rate of over 80%.

Full article on the consequences of Obamacare’s subsidies.

Comments (5)

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  1. Jeff says:

    Sounds awful. I think I have seen material like this before at your site.

  2. Tom H. says:

    This makes no economic sense at all.

  3. Neil H. says:

    Ditto Tom’s comment.

  4. Don Levit says:

    These subsidies will do nothing, except make the policies more “affordable,” thus increasing premiums even more.
    As I understand it, the subsidies are tied to the CPI, so if health insurance costs exceed the CPI, the subsidies represent a smaller percentage of the premiums, right?
    Don Levit

  5. Phenocal says:

    Very Informative Site!!!!
    It really helps me a lot.
    Thanks for sharing this.