Largely by stepping toward an
economy in which workers bear the burden of distributing healthcare and housing
with little regard to ability or willingness to pay, the Build Back Better bill (BBB) would implement
the single largest permanent increase in work disincentives since the income
tax came into its own during World War II.
The bill would also reduce work
by limiting competition in the labor market, imposing employer mandates, and
increasing consumer prices for telecommunications, energy, and other
products. All of
these disincentives go on top of those already in the baseline due to a continuing
portfolio of federal, state, and local tax, spending, and regulatory policies.
The implicit employment and
income taxes in BBB would increase marginal tax rates on work by about 7
percentage points. I expect that such a
change in the disincentive would reduce full-time equivalent employment by
about 4.5%, or about 7 million jobs.
Penalizing Work and Hiring
The disincentives are delivered through
two fundamental economic mechanisms.
First and foremost is the creation and expansion of employment-tested
benefits. Full-time employment is a
major barrier to participating in the programs, even if that employment
does not produce much income.
Especially, BBB allows even America’s highest-income households to participate
in subsidized “Obamacare” insurance plans as long as they are not engaged in
any job that offers health insurance.
For most full-time workers, their employment status by itself excludes
them and their family from the additional
Obamacare subsidies delivered through BBB, especially its sections 137501
and 137502.
[Some employers will respond to
BBB by dropping their coverage, but from an employment-incentive perspective
this only changes the form of the full-time employment tax to the Affordable
Care Act’s (ACA’s) employer penalty for not offering coverage. The salary equivalent of that penalty is
almost $4,000 per full-time employee per year].
Family medical leave is another benefit
tied to not working. Section 130001 is
quite explicit that eligibility requires a caregiving activity “in lieu of
work, other than for monetary compensation.” Family
medical leave is a cash benefit paid in proportion to the number of hours of
such caregiving. [Presumably the
beneficiary could not both engage in a normal work schedule and claim such
caregiving activities, but the details would be the subject of future
executive-branch rulemaking. If double-dipping were rampant, this would raise expenditure on the program
thereby requiring additional taxation that would itself discourage work.]
BBB also creates and expands
employer mandates, with compliance enforced with penalties that are
proportional to employment, regardless of how rich or poor the employees may
be. An example of a proportional
employer-penalty scheme is BBB’s new requirement to administer IRA deductions
from employee paychecks, with all employees enrolled by default. The penalty for non-compliance is $10 per
employee per day (Section 131101), which is similar in magnitude to the ACA’s penalty
for failing to provide health insurance.
Section 21004 increases penalties
on employers for failure to comply with federal occupational safety, health,
and labor-standards requirements. The
increases are tenfold or more. For
example, the penalty for a large (100+) employer to employ an unvaccinated
person is between $50,000 and $700,000 per violation and an additional $70,000
per day, all rescaled for the inflation adjustment prescribed in the statute. This could amount to $51 million (sic) for every year that each unvaccinated person remains on the
payroll.
These and other parts of BBB further
reduce employment by suppressing competition in the labor market. Such provisions seek to prevent non-union
workplaces, which are almost 95 percent of all private employment, from
distinguishing themselves from unionized workplaces. Others put nonunion workplaces at an outright
disadvantage. [The labor union movement,
of course, is an attempt to restrict or monopolize the supply of labor in order
to extract higher employee compensation.]
Section 138514 would allow union dues to be deductible from federal income
tax, putting about
$400 million per year on the union side of the economic scale. Other sections, such as 132002, target
“infrastructure grants” to “labor unions and other employers … that pay the
prevailing wage.” Section 136401 creates
a credit for the purchase of an electric vehicle that “satisfies the domestic
assembly qualifications” (that is, unionized).
Penalizing income
The second mechanism is
income-tested benefits, which discourage the earning of income by withholding
benefits as a household’s income rises.
For example, Section 136407 creates a tax credit for 15 percent of the
price of the purchase of an electric bicycle, but the credit is reduced $0.20
per additional dollar earned by the household.
More important, from an aggregate perspective, are the various additions
to major income-tested programs such as Medicaid, “affordable housing” and the
Child Tax Credit. By my count, the
various new affordable housing subsidies in BBB exceed $220 billion over ten
years [two days after I wrote this, CBO estimated $312 billion].
Other provisions are, legally or
economically, new excise taxes. These
discourage work by reducing real wages, especially to the extent these policies
raise consumer prices by protecting incumbent producers. A major example is section 31501, which
directs the FTC to further enforce “privacy” rules that are effectively
prohibitions on lower cost internet plans.
When President Trump and the 115th Congress repealed such
prohibitions, the cost of internet service dropped so sharply and immediately
that the consumer savings drew the attention
of then Federal Reserve Chair Janet Yellen due to its visible effect on the
overall Consumer Price Index. This shows
why we can expect higher prices for internet plans under BBB.
A plethora of “green policies”
have a similar effect on prices of transportation and energy, such as taxes on methane emissions (Section 30114), subsidies to rural utilities (Section 12007), and green electricity programs (Sections 30411, 136101). Undoubtably the BBB will be sold as a windfall for the poor, but all of the bill's explicit and implicit excise taxes are particularly regressive.
Projected Employment Effects
The magnitude of BBB’s
disincentives for work and hiring varies across households and firms. They also vary by margin of response, such as
adjusting work schedules, the duration of employment, or the duration of
nonemployment. Properly measured
disincentives also reflect
the reality that benefit takeup is typically well
below one hundred percent. I estimate
that, on average, BBB implicit employment and income taxes would add almost
seven percentage points to the marginal tax rate on labor income. At least another two percentage points would
someday be required to finance its projected $220 billion contribution to the
annual federal budget deficit.
These disincentives are on top of
the many other taxes on income, payroll, and sales; other implicit and explicit
employment taxes; and longstanding income-tested benefits. Even ignoring the additional financing, the
disincentives would reduce the share of marginal product kept by the average
worker from about 0.52 to 0.45, which is a reduction of about 13 percent. I expect that such a change in the
disincentive would reduce full-time equivalent employment by about 4.5%, or
about 7 million jobs. Perhaps employment
would prove to be more sensitive to incentives, as it did during the 1990s
welfare reform (see also the update below), or less sensitive, but 7 million is a good point estimate.
I estimated the 7 percentage
points by aggregating the disincentives in the various sections of BBB. The largest is the expansion of subsidies for
Obamacare exchange plans. Using the same
methods as Mulligan (2015), I estimate
that these subsidies by themselves add almost three percentage points.
For the employer IRA mandate, I
estimate 0.5 percentage points, which is the average result from two
methods. One method is from Council of
Economic Advisers (2019)
analysis of the removal of an IRA mandate.
The second method is, based on the Harberger
triangle method, to take half of the penalty and apply it to the 33
percent of workers who do not currently have pension coverage through an
employer.
Although the BBB’s expanded Child
Tax Credit (CTC) has received much attention, I do not find that it adds much
to the marginal tax rate on labor income.
The CTC expansion removes a negative tax on labor income, but that
applies only below the poverty line and is offset to some degree by expansions
in the Earned Income Tax Credit. The CTC
creates a new five percent phaseout range, but my estimates from the Current
Population Survey suggest that less than five percent of nonelderly persons
aged 21-64 are in a household that with 2019 incomes that would be in that
range. I therefore estimate the expanded
CTC’s contribution to the marginal tax rate increase to be only 0.24 percentage
points.
For several other provisions,
such as the Medicaid expansion in states that opted out of the original ACA
expansion, the new Medicaid home and community-based programs, and affordable
housing, I assume that each dollar budgeted in BBB translates into the same
contribution to disincentives as each dollar expected to be spent on the
expanded subsidies for exchange plans.
I assume that the effects on
restraining competition in labor markets are the same as Council of Economic Advisers
(2019)
found for four Obama-era regulations intended to bolster unions (the Fiduciary
rule, the Persuader rule, and two joint-employer rules). I assume that the Green Energy components of
BBB contribute one-fifth to the labor wedge of what Fitzgerald, Hassett, Kallen and Mulligan
estimated for Biden’s campaign promises regarding renewable energy.
Many of the details of the BBB programs will remain unknown
until it becomes law and executive agencies issue their rules for administering
them. Although I assume that benefit takeup is well under 100 percent, I may still have
overestimated it in which case BBB would be more of an adverse productivity
shock and less of a work disincentive.
[Adverse productivity shocks tend to have comparatively
small employment effects and large adverse effects on wages, capital
investment, and living standards. As
such, they have a lot in common with BBB’s prescriptions for higher marginal tax
rates on corporate
and noncorporate businesses, which are not analyzed here. I have also not yet quantified the
disincentive effects of various unemployment-benefit sweeteners in BBB, such as
the Section 137507 that makes exchange plans essentially free during any calendar
year in which a person has unemployment compensation.]
[Update: Many economists studying the EITC and CTC give a lot of attention to the option of having zero earnings during a full calendar year. It is a fact that BBB gives almost every parent a significant bonus for choosing that option. I find this option to be hardly relevant for a large majority of adults, but another approach would be to conclude from welfare reform and EITC changes that low-skill single mothers will be very responsive to the BBB's new subsidies for zero work. If so, perhaps I underestimate the national employment effect by a million or so. Thanks to Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu]
[2nd update: BBB reduces childcare costs for some families and increases it for others. Most important for these purposes, the bill's new childcare subsidies introduce a new set of income phaseouts much like Obamacare did in 2014. Including the various childcare/credit programs, I now project BBB's employment impact to be -9 million.]
As a younger Barack Obama put it (watch for about 80 seconds), "I am absolutely convinced ... we have to have work as the
centerpiece of any social policy."]
