Greg Mankiw posted this his comments on a study by the Congressional Budget Office of the Baucus Health Care Reform Bill.
The bill aims to give households a subsidy for the purchase of health care. To limit costs, the amount of the subsidy phases out for richer families. What is implicit in this phase out is that it works as a 20% tax on income.
A family of four that earns $23,000 per year gets a subsidy of $15,000 while a family of four that earns $92,000 per year gets no subsidy.
Let's say that the low-earning family has a chance to earn $1,000 more dollars per year by working more. Their subsidy would fall by $210.
If you think about total income as money from work and from the subsidy, they originally earn $38,000. After working more, the family earns $38,790.
Increasing earnings by $1,000 per year would require 3 more hours of work per week earning $7 per hour. However, the additional 140 hours a year that this person works doesn't increase their income by $1,000 (it only goes up by $790). So they really only earn $5.56 per hour!
The family implicitly earns less than the minimum wage and so those 3 hours a week of work may not be worked at all. This bill creates an incentive to stay in poverty.
It goes further than just an incentive to work less. As the CBO states:
Higher tax rates also reduce people’s incentive to raise their income in other ways,such as working harder in the hope of winning raises; accepting new positions or responsibilities with higher compensation; or investing in their future earning capacity through education, training, or other means....There is no easy fix to health care. There are no free lunches.
