The Unseen Taxes Created by the Affordable Care Act

The Affordable Care Act (ACA) was launched in 2010 to increase insurance coverage in the United States. The ACA represents a major change in the health insurance market and, according to Burkhauser et al (2011), relies on four primary strategies: “an expansion in Medicaid to low-income adults, a series of sliding scale subsidies for other low to middle income families, fines for certain employers and individuals who do not offer or obtain coverage, and a restructuring of and reforms to the individual health insurance market to create health insurance exchanges.”

The subsidies are applied to individuals of families whose aggregate income lies between one and four times the poverty line income. For example, a one-member household is considered on the poverty line if its family income is lower than 11,670 dollars per year. Individuals also must satisfy other criteria to receive these subsidies; they must not be covered by their employer or by another family member’s employer.

While the subsidy schemes started in early 2014, the penalties on employers come into effect in 2015. Penalties are applied to employers with at least 50 full-time employees who don’t offer qualified health insurance to their workers. Aside from the direct benefits (health access) and costs (subsidies) of this new health policy, there is an ongoing debate about the indirect effects on employment created by this employer mandate.

A new study, “The new full-time employment taxes,” characterizes these hidden effects created by the ACA and measures their impact on employment. The author, Dr. Casey Mulligan, develops a model to understand how employees make decisions on working hours based on their individual wages, the benefits of this new health policy, the taxes imposed on full-time employees, and their families’ income. It also allows us to understand how the penalties affect employers’ decisions when offering positions.

Mulligan first analyzes the potential effects on supply and demand for labor created by the taxes. For this purpose he models how the provisions affect the individual’s choice of working hours within their household budget constraint. He estimates the distribution of full-time employment taxes created by the ACA, using data from the March 2012 Current Population Survey from the Bureau of Labor Statistics. The author states that in order to understand the economic effects of the provision, we must use the economic definition of tax, which includes both explicit and implicit, or indirect, taxes.

The penalties to employers are explicit taxes to be paid. They are a direct cost to employers; hence they incentivize firms to replace full-time hires with part-time hires or reduce wages to compensate for the effect. By working full-time, workers exempt themselves from receiving the subsidies given to part-time or unemployed workers. These non-received subsidies are implicit taxes. As such, full-time employees bear opportunity costs greater than part-time workers or the unemployed. The results show that these implicit taxes incentivize workers to work less.

This will occur in cases in which an employee’s benefit from working extra hours—giving him insurance from his employer and also making him ineligible for the subsidy—is less than the benefit received by an effortless subsidy. This incentive is similar to that provided by unemployment benefits, which reduce the labor supply by discouraging returning to work or encouraging layoffs.

Mulligan states that almost half of the working population will be directly affected by new full-time employment taxes. The penalty paid by employers is equivalent to approximately four hours per week, the equivalent time employees would have to work to compensate their employers for the penalty. On the other hand, the forgone subsidy for fulltime workers is equivalent to 10 hours per week. This represents the implicit tax paid by those employees.

The study shows that low-paid workers are much more sensitive to the subsidy effect. They will make more significant changes to their number of work hours than any other group. Additionally, the family size and the age of workers significantly alter the effect of the subsidies. Independent of their income-level, individuals from large families and individuals from older demographic groups have greater incentives to reduce work hours. The foregone subsidies tend to be bigger for those individuals, and they may find it less attractive to work. As such, we could observe some people retiring earlier.

Looking at more general effects in the labor force in another related research publication, Mulligan estimates that the overall impact of the ACA will be a reduction of three percent on aggregate working hours, which represents two percent of GDP. In addition, in 2014, the Congressional Budget Office (CBO) released its estimates of the ACA effects on employment. According to its report, the ACA will reduce hours worked by about 1.5 percent and 2 percent during the period 2017 to 2024. This means a reduction of 2 million full-time-equivalent workers in 2017.

The labor market responds to incentives given by explicit and implicit taxes. This research is very important in understanding labor market responsiveness to tax provisions. Though the ACA looks to benefit mostly low-income workers by providing insurance for free, it also may incentivize them to work less.

 

Article Source: The New Full-Time Employment Taxes, Casey B. Mulligan, National Bureau of Economic Research, Working Paper #20580, October, 2014

Featured Photo: cc:/(Alex E. Proimos)