2014 Marginal Tax Rates without the Individual Mandate

The odds of a one-year delay of the individual mandate have been rising since October 1. The work I did in August 2013 assumed that the individual mandate took effect 1/1/2014 as scheduled by the original law, and that the addition to marginal tax rates on that date would average 3.7 percentage points. Table 5 gives some of the details of the derivation.

The colored circle and rectangles show the ingredients that would change if the individual mandate were delayed beyond 12/31/2014. The red circle entry would become zero, which by itself would reduce the bottom line from 3.7 percentage points to 3.6 percentage points.

I based my estimates of the green rectangle's three parameters on rollouts of Medicare, Medicaid, and ARRA COBRA subsidies, none of which were supported by an individual mandate. Moreover, the most important of the three entries is the first one, representing unemployment, and I expect that the individual mandate will not apply to many unemployed people anyway. Arguably the green rectangle's entries would be the same without or without the individual mandate.

The blue entries are based on expectations of take-up of the exchange plans among workers who are not offered affordable coverage at work. Perhaps they would be cut by one third by eliminating the individual mandate for 2014, which would put the bottom line at about 3.3 percentage points.

[Added: If people without employer insurance do not begin their exchange coverage (perhaps because they don't have to because of the administrations new ruling) until 4/1/2014, their income between 1/1/2014 - 3/31/14 will still count toward their subsidy, but their subsidy will flow only for the last nine months of the year. The marginal tax rates from this scenario are therefore uniform throughout the year but the amount is 1/4 of the way from 3.7 percentage points (individual mandate all year) to the 3.3 percentage points with no individual mandate during the year).]

More important than the individual mandate is the take-up rate of subsidized exchange plans. If healthcare.gov fails and take-up was 1/3 of what was expected, the bottom line with the individual mandate would drop from 3.7 to 1.8 percentage points (see especially Table 8 of my paper). The health of healthcare.gov and the health of the labor market are inversely related.