One of the negative consequences of giving subidies to people based on income is that you drive up the implicit marginal tax rate on income for those targeted for the subsidy. High marginal tax rates discourage people from working harder and making more money, which is bad for them and bad for the economy in general.
American society has become accustomed to a progressive income tax in which high income people face higher tax rates than low income people. Because of deductions, tax credits, and subsidies which phase out with income, however, there are many points along the marginal tax rate versus income curve in which low income people face implicit marginal tax rates well in excess of the rate for the highest income tax bracket (currently 35%, going up to 39.6% in 2011).
For example, the earned income tax credit appears to have a phase out which creates an excess marginal tax rate of 21.06%. Combined with a regular income tax rate of 10%, a social security tax rate on wages of 6.20%, and a medicare tax rate on wages of 1.45% (I've even neglected the employer portion of FICA taxes that most economists would claim is paid implicitly by the worker), the total marginal tax rate for a very poor worker with two or more children exceeds the current rate for the highest bracket. I haven't looked into this carefully yet, but rumor has it that there are pretty common situations where a taxpayer faces marginal tax rates approaching 100%.
The new health care reform bill will provide health care insurance subsidies for those making less than 400% of the federal poverty line (which in 2009 was $22,050 per year for a family of four). The subsidies phase out mostly linearly, but with jumps at certain thresholds. I decided to calculate the implicit marginal tax rate of the health care insurance subsidy for a family of four, based on the 2009 federal poverty line. The graph is below:
What isn't shown in the graph is that the marginal tax rate for a family with income at 400% of the federal poverty line ($88,200 in 2009) is infinity. The subsidy completely goes away, and the difference between the cost of the benchmark health insurance plan and $8,379 (i.e. 9.5% of that family's income) is lost to that family if it makes even $1 extra. For my example and my graph, I have assumed of course that the benchmark health insurance plan for a family of four is in excess of $8,379, but I think I'm pretty safe there. Even today such an insurance plan probably costs more than $12K per year, and once Obamacare kicks in, that plan will probably cost 25% higher.
Anyway, these implicit marginal tax rates (fluctuating between 10.90% and 21.65% before exploding to infinity) are due solely to the health care insurance subsidies embedded in Obamacare. Families at the relevant income levels will be facing these marginal tax rates in addition to the ones that they're already familiar with.
American society has become accustomed to a progressive income tax in which high income people face higher tax rates than low income people. Because of deductions, tax credits, and subsidies which phase out with income, however, there are many points along the marginal tax rate versus income curve in which low income people face implicit marginal tax rates well in excess of the rate for the highest income tax bracket (currently 35%, going up to 39.6% in 2011).
For example, the earned income tax credit appears to have a phase out which creates an excess marginal tax rate of 21.06%. Combined with a regular income tax rate of 10%, a social security tax rate on wages of 6.20%, and a medicare tax rate on wages of 1.45% (I've even neglected the employer portion of FICA taxes that most economists would claim is paid implicitly by the worker), the total marginal tax rate for a very poor worker with two or more children exceeds the current rate for the highest bracket. I haven't looked into this carefully yet, but rumor has it that there are pretty common situations where a taxpayer faces marginal tax rates approaching 100%.
The new health care reform bill will provide health care insurance subsidies for those making less than 400% of the federal poverty line (which in 2009 was $22,050 per year for a family of four). The subsidies phase out mostly linearly, but with jumps at certain thresholds. I decided to calculate the implicit marginal tax rate of the health care insurance subsidy for a family of four, based on the 2009 federal poverty line. The graph is below:
What isn't shown in the graph is that the marginal tax rate for a family with income at 400% of the federal poverty line ($88,200 in 2009) is infinity. The subsidy completely goes away, and the difference between the cost of the benchmark health insurance plan and $8,379 (i.e. 9.5% of that family's income) is lost to that family if it makes even $1 extra. For my example and my graph, I have assumed of course that the benchmark health insurance plan for a family of four is in excess of $8,379, but I think I'm pretty safe there. Even today such an insurance plan probably costs more than $12K per year, and once Obamacare kicks in, that plan will probably cost 25% higher.
Anyway, these implicit marginal tax rates (fluctuating between 10.90% and 21.65% before exploding to infinity) are due solely to the health care insurance subsidies embedded in Obamacare. Families at the relevant income levels will be facing these marginal tax rates in addition to the ones that they're already familiar with.
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8 comments:
Eric,
http://www.newdeal20.org/2010/03/09/principal-writedowns-and-the-fake-stress-test-8835/
Check this link out. These guys are commies, but they seem to be quite correct. If the big four are marking their HELOC's at .86, I call bullsh*t.
I haven't heard a compelling narrative yet on why the banks won't do loan modifications for people who can pay. Perhaps this is the reason.
It seems they only do loan mods for folks who *can't* pay.
It's pretty tough when you don't trust either the banks or the govt to come clean on this stuff ...
Oh, and here's a theme for another blog post.
What do the Euro and Obamacare have in common?
They are both inherently flawed systems that were designed by political processes. Their flaws were apparent and discussed at their creation. It was well reasoned that they were unlikely to prove durable.
And most importantly, they were aspirational policies. They were driven by what policie makers dreamed and hoped for. They were detached from reality at their creation. Their creators realized they were imperfect, and expected that their inherent problems would cause them to ultimately evolve into what they truly wanted.
European Fiscal Union and Universal Single Payer health care.
JCD,
The banks are probably marking their book of Home Equity Lines of Credit (HELOCs) and closed-end second liens (CES) too high, but I doubt that it's as egregious as the article implies.
First, any loan that is delinquent for 180 days (and maybe as little as 120 days) has to be revalued and marked down. I think the banks are probably writing off the delinquent loans quickly and completely, so they are not going to be a significant part of the average value that the article cites.
As for the non-delinquent loans, CES would probably have a very low market value, but the HELOCs might not. They are much higher quality loans, in general, and the stuff that banks kept on their books were higher quality still (they made sure to securitize and sell the crappiest loans).
I do agree that the presence of bank-owned second liens is a factor in the loan mod process. Banks may have written their second liens down to zero, but they might still be hopeful about having some recovery. Unlike many first lien purchase loans, second lien loans are recourse loans. The second lien holder can pursue a deficiency judgment against the mortgagor and go after his other assets. Any loan modification would have to involve giving up this legal right, and I don't blame the banks for not wanting to do it.
re: EMU and Obamacare
I agree in part with your thesis. Where I disagree is that Obamacare is not really intelligently designed to achieve anything. It is a horribly mutilated version of what Obama originally intended to achieve. There is no coherence or long-term plan evident in its design. This is partly because from the very beginning Obama was far more concerned with passing something - anything - that would enhance his stature as a consequential president than he was about getting the policy right. In order to increase the probability of passage, he left the drafting to Congress and the lobbyists.
Another problem he had was that he got himself all tied up into knots by promising that his health care bill wouldn't increase the deficit.
Anyway, Obamacare may in fact lead to a socialized medical system down the road, but frankly Obamacare is just as bad and maybe worse already. And I think its many flaws make it very vulnerable to repeal and reversal. That's what gives me hope.
"Designed" was perhaps a poor word choice. "Created" might be better.
In any case, the point is that in both instances, the legislators that enacted the new policy, knew in advance that it was flawed, and incomplete. They hoped that over time the law would move their way.
Now Europe is left in an untenable position, they have a currency without a country, and countries without their own currencies.
I suspect that in 10 years or so, we will also find our selves in an untenable position, as the predictable consequences of this law are realized.
Just as Germany must now decide if they're going to bail out Greece, or let their common currency fail, Congress will ultimately be forced to decide if they are going to bail out our failing health insurance companies, or let them fail.
We saw it coming over a decade ago. We can see it coming now.
Where I agree with you is that Obama clearly has a "let the beast loose" plan that he's following, the polar opposite of the Reagan conservatives' "starve the beast" strategy.
Reagan wanted to cut taxes in order to force the government to become smaller. Obama wants to overcommit the government in order to force tax hikes later, and the best way to do that is to create a new entitlement, especially one which is not a fixed stipend like social security or welfare, but rather an all-you-can-eat buffet.
I may be unique in believing this, but I think Obama's ultimate goal is higher taxes on the rich because he believes in redistribution above all else.
Yes, there is an element of the arrogance that many elitists have that the government can do a better job than the private sector as long as they are in charge of the government. But he understands that Democrats (and especially he) will not be in power forever, so I don't think his primary focus is expanding government for the sake of controlling people's lives. His primary focus is redistribution of wealth.
Well I'm not as confident as you are in his ultimate motives, I suspect you may be correct.
But I think the French bureaucrats who dreamed up the Euro, had similar motives. They wanted fiscal unification with Germany to forever tame the beast to their East. They couldn't get that, so they settled for a common currency.
They assumed the currency would eventually lead to a crisis, and the result would be greater fiscal union.
We will soon see if they were correct.
Eric,
On marginal rates exceeding 100%.
I think one of the simplest (and least egregious) examples is in the Foreign Tax Credit. For people filing the non-AMT 1116 they will come across the magic number 0.4286 (which, not coincidentally is about 0.15/0.35). The government is trying to make sure you only get a credit for foreign taxes only up to the amount you would have paid if the foreign rates were equal to the US rates. Because of the structure of the computation, the ratio of your US tax rates on dividends to the top marginal rate enters.
The consequence is that for a hypothetical country that has a 100% tax rate on dividends, you would still only be able to receive a tax credit equal to 15% of the dividends - because that's the US rate on dividends. (This is not quite true, if your marginal rate is lower than the top marginal rate, you are actually getting a slightly better deal). However, there's a Heaviside function lurking in the instructions ( a good indicator that there's an infinite marginal rate somewhere ). If your foreign taxes on dividends are below $300 you can claim the credit for the whole amount without filing Form 1116. In our example of a country with 100% taxes on dividends, if your foreign taxes went from $300 up to $301, your credit would go down from $300 to $45.15. Since your additional income of $1 caused you to pay more than an additional $1 in taxes, clearly your marginal rate exceeded 100%. Something less extreme would occur for countries with rates between 15% and 100% - though it would still result in marginal rates exceeding 100%.
There are certainly worse cases out there - though people seem less interested in going through them. Perhaps because going through them in detail is a bit tedious. Back in the 90's Forbes once ran a good article with several examples - most involving Social Security payments.
If you verify the FTC or find any others, do let me know.
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