Economists working for Democratic administrations in the past used to shine a light on high marginal tax rates and the extensive economic damage the rates cause. Last week White House economists and their allies remarkably reclassified such rates as a policy achievement.
Ever since the 2008 crisis, the federal government has been creating policies that eliminate the reward to working for millions of households by giving so many benefits to people who work part time or spent a greater fraction of the year out of work that family decisions to work more result in less money for them to spend.
In the George W. Bush administration, for example, the Federal Deposit Insurance Corporation offered a mortgage modification program that created terrible work incentives. Then came the American Recovery and Reinvestment Act, under which about four million people could earn more by remaining unemployed longer, because going back to work would erase federal health assistance and multiple sources of cash benefits.
The latest is the Affordable Care Act, which has created a system of health assistance that withholds its benefits on the basis of income and, in most cases, on the basis of full-time employment. A part-time worker may actually have less to spend if he takes on a full-time position. This kind of situation will occur at least a million times under the new law.
(I blogged about this earlier and now have a two-minute video clip that walks more thoroughly through the arithmetic. These effects, by the way, did not begin until this year and will not have their full effect until the new health exchanges are working as intended and citizens become aware of the new incentives they face, so there is no point looking in the 2013 data to measure them.)
This does not even begin to count how many millions of people will have their reward to work fully eliminated by “cliffs” in the premium assistance, cost-sharing and tax-credit reconciliation parts of the act.
It used to be that economists agreed that such stark disincentives — known as 100 percent tax rates — were a serious problem that needed immediate attention. As James Tobin, a John F. Kennedy adviser, Nobel laureate and leading Keynesian economist of his day, said in a 1965 article, a 100 percent tax rate causes “needless waste and demoralization,” adding:
This application of the means test is bad economics as well as bad sociology. It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.
Professor Tobin called the 100 percent tax situation demoralizing because the affected people find that all the benefits of their hard work and success go to the government in the form of more tax receipts and fewer benefit payments. The unintended result would be less work and more families earning less than the poverty line, which is why Professor Tobin described such policies as perpetuating poverty.
The Congressional Budget Office was one of the first to point out some of the high marginal tax rates in the Affordable Care Act, although at the time it was not aware of the 100 percent tax on full-time work. But the C.B.O.’s work on marginal tax rates had been kept separate from its work on the economic impact of the Affordable Care Act until now.
Last week’s big economic news was that the C.B.O. had begun using its longstanding work on marginal tax rates to inform its projections of the health law’s economic impact, and had recently concluded that the law would make the labor market significantly smaller. The new report also showed that C.B.O. was aware of instances of 100 percent marginal tax rates, including the one I cited above (see the sentence in its report that spans Pages 119 and 120, including the footnote), although I don’t know to what degree, if any, the prohibitive rates informed C.B.O.’s impact estimate.
No modern-day James Tobin stepped forward to proclaim that it was a serious policy mistake to wipe away the reward to work for millions of people. Instead, the White House spun the high marginal tax rates as a policy achievement, saying “individuals will be empowered to make choices about their own lives and livelihoods” and adding that people “would have the opportunity to pursue their dreams.” (The White House also quickly pivots away from high marginal tax rates to so-called job lock, which is a completely different issue than 100 percent marginal tax rate and far less prevalent.)
White House allies are in no hurry to emulate Professor Tobin, either. Instead they cheer about the voluntary aspects of the economic destruction done by high marginal tax rates. As Jonathan Gruber put it, “Voluntary reductions are not a cost of the health care reform law, they are a benefit.” Paul Krugman goes even further and calls it “misrepresentations” to interpret the marginal tax rate provisions of the Affordable Care Act as destructive.
Prohibitive marginal tax rates are not a policy achievement. Sadly, the economic problems the rates create cannot be fixed as long as those in power deny that a problem even exists.
Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”