Sunday, November 1, 2009

Marginal Tax Rates and Health Care Reform

In his latest NYT op-ed, Greg Mankiw argues that the current health care proposals will substantially raise marginal tax rates on middle-income earners. This has a lot to do with how economists (and policy analysts) view taxes, which isn't necessarily the way everyone else views taxes.

For example, Mankiw explains:

A family of four with an income, say, of $54,000 would pay $9,900 for health care. That covers only about half the actual cost. Uncle Sam would pick up the rest.

Now suppose that the same family earns an additional $12,000 by, for example, having the primary earner work overtime or sending a secondary worker into the labor force. In that case, the federal subsidy shrinks, so the family’s cost of health care rises to $12,700.

In other words, $2,800 of the $12,000 of extra income, or 23 percent, would be effectively taxed away by the government’s new health care system.
Will this dramatically damaged economic productivity? I'm not sure, but Mankiw's point should be taken seriously.

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