TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, October 8, 2009

80% Marginal Tax Rates After Health Care Reform?

N. Gregory Mankiw (Harvard University, Department of Economics) speculates that marginal tax rates under the Baucus health care "concept" could be as high as 80%:

Jim Capretta looks at the Baucus healthcare bill and concludes that, because the subsidies phase out as income rises, it imposes an effective marginal tax rate on income of about 30% for many families. Add that figure to the income tax, the payroll tax, and the phase-out of the EITC and "the effective, implicit tax rate for workers between 100 and 200 percent of the federal poverty line would quickly approach 70 percent — not even counting food stamps and housing vouchers."

Indeed, Jim seems to understate matters, as he includes only the employee half of the payroll tax. Including both the employee and employer halves, as economic theory says is appropriate, appears to give a marginal tax rate closer to 80%. And, of course, many states impose income and sales taxes as well, and these would further raise the overall marginal tax rate. Jim was doing a rough back-of-the-envelope calculation.

I hope some Congressman asks CBO to do a more thorough analysis of the issue. Given all the income-linked programs already in existence and now being contemplated, what would effective marginal tax rates be for typical families? This is surely a question that needs answering before Congress can cast an intelligent vote on the healthcare bill.

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Tracked on Oct 9, 2009 4:16:01 AM

Comments

Perhaps the theory is, more people will stop working and then need the Democrats to protect them?

Posted by: Michael A. Livingston | Oct 8, 2009 9:34:27 AM

This is completely false. Obama said that he would veto a plan that isn't tax neutral. Why shouldn't we believe him?

Posted by: Woody | Oct 8, 2009 10:57:28 AM

Why work?

Posted by: Concerned Citizen | Oct 8, 2009 11:06:41 AM

Hmmmm.

"This is surely a question that needs answering before Congress can cast an intelligent vote on the healthcare bill."

Sorry professor. But we can't even get them to -read- the bill let alone put any serious thought into it.

Posted by: memomachine | Oct 8, 2009 11:08:05 AM

So many "tax incentives" deductions and surcharges. This causes cynicism and will create scofflaws. The tax laws need to be simplified and taxes should ONLY be for revenue. But then the politicians couldn't manipulate us for contributions.

Flat tax no deductions.
No VAT too easy to hide.

Posted by: Jim Ellison | Oct 8, 2009 11:13:52 AM

Woody is incorrect. Obama said he would only sign a bill that is "deficit neutral". This means congress can send up anything as long as new taxes and tax rate increases cover the difference. I am not counting the anticipated "savings" we'll see, for they do not exist.

Posted by: Jake Blues | Oct 8, 2009 11:18:06 AM

and when all of their gimmicks fail to produce the tax revenue that they're projecting b/c of the strain that these taxes will put on the economy, they'll come back and demand to raise taxes on the "rich" to make up for the losses. In other words, if this passes, we're all F'd.

Posted by: Real American | Oct 8, 2009 11:19:54 AM

It'd be so much simpler if employers sent their payroll deposits directly to the IRS for processing and for disbursement. Government experts can then evaluate how much ready cash we each really need, with appropriate reductions for antisocial behaviors like smoking and drinking soda. Then they'd be free to immediately spend the rest of the money on things which we would, of course, readily approve if we were smart enough to make such decisions on our own.

Posted by: Bryan C | Oct 8, 2009 11:24:40 AM

My wife, (along with 9 of the other 12 physicians in her inner-city pediatric practice), works part time and her pay is roughly equal to that of a full time teacher (but remember that teachers get the summer off). Most of these doctors have husbands with well paying jobs, and these 70-80% marginal tax rates will kick in on their first dollar of income. I know that my wife would simply quit, and I expect that there would be an exodus of working mothers from the labor force at those rates.

Posted by: R. Polan | Oct 8, 2009 11:34:59 AM

This is completely false. Obama said that he would veto a plan that isn't tax neutral. Why shouldn't we believe him?

I'm not sure if this intended as sarcasm or not, but it is possible for a plan to alter marginal tax rates and still be tax REVENUE neutral which is the usual meaning of the phrase "tax neutral."

A simple example would be to reduce deductions and exemptions but to tax the now higher (assuming no behavioral responses) taxable income at a lower marginal rate.

Posted by: Frank | Oct 8, 2009 11:36:41 AM

Let's have all government agencies that want a chunk of your change be required to do it via a regular monthly bill, just like your rent/mortgage, utilities, car loan, etc. I'd love to hear the universal outcry that would happen if everyone suddenly saw the real cost of all the "free" things they get from the government.

Posted by: submandave | Oct 8, 2009 11:37:14 AM

Canadian marginal tax rates are in the order of 80% plus. The federal Conservative government is managing to mitigate that tax burden somewhat.

Posted by: dewp | Oct 8, 2009 11:46:15 AM

They don't WANAT an "intelligent vote" - they want a POLITICAL vote.

And Jim Ellison gives the easiest and best answer to the whole tax mess. Of course, it's also the one with the absolute least possible chance of being passed by a politician.

Posted by: Deoxy | Oct 8, 2009 12:31:51 PM

Hey I thought criticism of ObamaCare was racist?
At least that is what Jimmy Carter and the media tell me.

Posted by: Borris | Oct 8, 2009 1:04:12 PM

Michael A. Livingston says: This is completely false. Obama said that he would veto a plan that isn't tax neutral. Why shouldn't we believe him?"

Because he said Illegal aliens wouldn't be covered, when in fact, at the time he said it, they were. The bill does not require proof of citizenship which is the exact same thing, except not explicitly worded as such, in other words: lawyer-speak. in other words: A lie

He said abortions wouldn't be covered, they are. It's called something like complete woman's coverage or some such weasel-worded phrase to cover abortions, all abortions, third trimester abortions, everything at tax payer expense. Another lie.

So why should we not believe him? his track record of lawyer-lying double talk, speaks for itself. He will do anything, say anything to shove Big Government run healthcare down our throats.

And if you want to know how that is going to work out look at the two (of the three) domestic auto makers that Big Government runs, they are, for all intents and purposes, the same companies, one didn't take the bail-out Ford, & isn't get run by Big Government. Ford is down only 5%, while the two virtually identical companies run by Big Government are down 42% & 48%.

Why don't I believe a word out of his mouth? His speeches say one thing but his actions say something quite different: His actions say he wants Big Government everywhere, running everything: while time & time again history has shown everything that Big Government touches, is the Midas Touch in Reverse. USPS, Amtrack, Unions, farm subsidies Welfare, Medicare, Medicaid, DOE, the list of failed Big Government programs are endless and are bleeding this country to death.

Where in the Constitution does Big Government draw it's authority to take these powers away from the States? To print money to the point even our grand children have no possibility of covering the debt? This train is running off a cliff.

I learned everything I needed to know about Barry 0, the same place as he: The Cloward-Piven Strategy & Black Liberation Theology. If you want to know where this country is heading, do your research; it fits like a glove.

Posted by: Constitution First | Oct 8, 2009 1:19:21 PM

All these folks on this board complaining...I have no idea why; they're the same ones who stayed away in the mid term elections because they don't like the Christian right.

Elections have consequences. You people wanted this to happen.

Change it and get out and vote. Vote out all incumbents otherwise you'll be stuck to your computers whining.

Posted by: dave | Oct 8, 2009 1:30:22 PM

The 70 pct figure in the New Atlantis piece http://www.thenewatlantis.com/blog/diagnosis/a-70-percent-tax-on-work is derived by comparing the subsidy to a low income family to the subsidy to a middle income family. In other words, we are talking about how much more out of an assumed $24k insurance premium a middle income family would pay versus a low income family. To call this an "implicit tax" is rather disingenuous. how many of the above commenters actually read the source article and actually looked at what the 70 pct. number meant? It would be unfortunate if this blog became a venue for disinformation.

Posted by: r. | Oct 8, 2009 1:44:18 PM

Sorry, Prof. Mankiw, but I don't think Congress is looking to cast an intelligent vote on the healthcare bill.

Posted by: SukieTawdry | Oct 8, 2009 2:12:46 PM

Obambi & Co want all of the taxpayers' money.

Posted by: Emily Nelson | Oct 8, 2009 4:39:53 PM

In case anybody cares about what is being talked about in the post, a family of four that would be in the range discussed would have in income between $20,000 and $40,000. This isn't taxing the rich more. And it may not be about taxing the people in this income range more, per se. The topic isn't average tax rates, it's marginal tax rates in a lower distribution rates as they react to certain phaseouts. This is like the historic pattern of high marginal rates where the EITC is phased out and the tax per additional marginal dollar earned is higher in a certain range of income. This can happen without having particularly high average tax rates. The economist's question is whether this range where additional income does not have a high after-tax yield creates damaging incentive effects for the working poor and lower-middle-class earners. The point isn't about politics, it's about policy.

Posted by: Pay Attention | Oct 8, 2009 6:42:46 PM

. . . and don't forget property tax too.

Posted by: Daniel | Oct 8, 2009 7:50:18 PM

Tough times for now regarding our health care policy but what can we do? We don't have the power and all we have to do is to follow. We are just ordinary people and hoping for a better future for our children's health care system.I hope our president will realize what do we really need and not what their pockets want.

Posted by: buy soma online | Oct 8, 2009 9:22:21 PM

People don't really care if health care causes their taxes to rise or not.
As long as we are getting something for our money.
Would you rather pay a trillion dollars to bring freedom and democracy to Iraq...or a trillion dollars to provide health insurance to Americans?
Republicans voted yes to billions of dollars to build roads, schools, bridges, and hospitals in Iraq...to train and equip their entire police force and their entire army...And they didn't ask for a dime in return. Iraq got it all for FREE
So now when it comes time to do something for the citizens of AMerica...to provide affordable health insurance for Americnna who don't have insurance... those same Republicans complain that its going to cost something...and demand that we do it without spending any money.
Makes you wonder what country they owe allegiance to.


Posted by: Norris Hall | Oct 9, 2009 2:06:13 AM

Makes you wonder what country they owe allegiance to.

LOL!

The Corruptocrats and their minions are not the brightest crayons in the box! They have finally figured out that The Race Card(TM) has failed to silence any and all who oppose the Corruptocrat totalitarian agenda so they are now resorting to the kind of BS posted by Norris Hall.

Here is a news flash for you, Norris.

That isn't going to work, either. In fact it only serves to lob another supertanker full of gasoline on the fire that you and your ilk have created. A fire that, in the end, will consume you.

Posted by: Nahanni | Oct 9, 2009 9:33:30 AM

Jake Blues was correct and I was wrong on the Obama quote in which I said that it was to be tax-neutral while the actual quote was that it would be deficit-neutral. Thanks for correcting me, JK.

In fact, the latest Democratic proposal will require medical costs to exceed 10% of AGI, up from the current 7.5%. That increases taxes on the middle class and adds about another $600 of taxes on many people already having a problem paying their medical bills.

Posted by: Woody | Oct 9, 2009 9:14:34 PM