Who recognizes economic history first: politicians or economists?

Figure 1 is the familiar chart showing the “Laffer curve” relationship between a tax rate and the net revenue from the tax.  A small tax on, say, wireless internet service is expected to provide more revenue (point B) than would be obtained without any tax on wireless internet service (point A).  It is conceivable that the wireless internet tax rate could get so high that further increases in the rate actually reduce revenue (point C) as consumers take steps to evade taxation altogether.  At point C, economics gets really interesting because many of the difficult public policy marginal tradeoffs disappear.

When it comes to various taxes in the United States, at least, we economists typically expect that the operative point is B.  E.g., the Federal payroll tax is probably at a point where further increases in the rate would raise at least some revenue, albeit less than static scores that make little distinction between points A and B.

The statutory Federal corporate rate is an interesting case, especially three years ago when it was well above rates elsewhere in the world.  Arguably cutting that rate increased Federal revenue as at point C (combined revenues from payroll, personal income, and corporate income).  But other reasonable experts could opine that point B was and is the operative point for the corporate tax rate.  And even these opposing experts would likely agree that the operative point (B or C) is above point A where the tax is abolished.

My only point here is that we would be at a unique chapter in economic history if a tax were obviously at point C or beyond.  So turn now to Figure 2, especially its point D where the government receives more revenue by abolishing the tax.  This was the case with the Affordable Care Act’s tax on uninsurance (a.k.a., individual mandate tax).

(I cannot say for sure how the path evolves between points A and D, e.g., perhaps the path never crosses above the horizontal axis, but that issue is not important for what follows.)

The first chapter of my ACA book explained what was happening, using the story of Pastor Ben Winslett who described how the ACA “has placed an enormous financial burden on normal, everyday people quite literally forcing us onto government assistance we didn’t need before.”  In other words, the individual mandate penalized people for turning down government assistance!  Mick Mulvaney explains here.

The government saves money by reducing the punishment it imposes on people who turn down subsidies because more people turn down the subsidies.

You don’t have to believe me.  Look at Jonathan Gruber’s 2010 analysis of repealing the individual mandate, where he projected (p. 4) that repealing it would reduce Federal spending by about $46 billion per year, while sacrificing much less than that in terms of mandate collections.  Or the Congressional Budget Office projection that repealing the mandate would reduce Federal spending by about $34 billion per year, while sacrificing much less than that in terms of mandate collections.  I (and the current CEA) think that those two estimates are exaggerated, but if Gruber and CBO stand by their qualitative analysis then all four of us must agree that point D is the operative point.

Having a tax at point D easily makes the highlights of economic history. Neither my book (which focused on the subsidies and the employer mandate), Gruber’s report, nor the CBO’s report put their findings on the individual mandate in the context of a Laffer curve let alone follow up with an estimate of the massive economic damage that comes with pushing a tax down to point D.  It should be no surprise that, in doing the necessary work, the current CEA found massive net benefits of moving from point D to point A even after considering the various benefits of expanding health insurance coverage.

President Trump and Congressional Republicans recognized the historical damage done by the individual mandate well before economists did, even while it is economists who specialize in such matters.  President Trump reached the (important and correct) conclusion sooner because he reasons differently on issues like this.  Simulated annealing is a close analogy that I’ll write about later.  He did not get ahead of us by “playing 3 dimensional chess” or drawing Figure 2: that would be the kind of deductive reasoning that is prevalent in economics and proved slower at reaching the answer.  Many critiques of the President assume that deduction is the only method and thereby entirely miss the point of simulated annealing, which is that he would try both criticizing the mandate and (albeit briefly) praising it and then closely monitor the feedback.  I suspect that members of Congress did something similar (President Obama also recognized -- just privately until he left office -- that there was more to the individual mandate than the technocrats were telling him).

Health regulation is just one area of Federal policy where some of the most interesting economic history is happening now….

Honey, Who Shrank the Economic Pie?

Copyright, TheHill.com

Last week the White House released the latest Economic Report of the President that, following both statute and tradition, begins with a short letter to Congress from President Trump, followed by the detailed annual report of his Council of Economic Advisers.

The period from 2010 should have had relatively rapid growth as the economy recovered from the 2008-09 recession, but it did not. Both the president's letter and the CEA annual report blame the slow growth on federal policy failures during the previous administration.

A lot of research backs up their claim and suggests that higher growth rates are forthcoming if only some of those failures are reversed and not too many new ones are created.

First is the high statutory corporate tax rate that had prevailed for decades prior to 2017 (yes, the "effective rate" was not as high, but a low effective rate is just a symptom of some of the growth-retarding effects of corporate-income taxation.)

The Obama administration agreed that America would benefit if the federal statutory rate were reduced, saying that a reduction would be "as close to a free lunch as tax reformers will ever get."

But they were not enough interested in corporate tax reform to reach a deal with Congress, so the long-overdue rate cut has President Trump's signature on it and is expect to add to economic growth over the next several years.

Second was the so-called federal "stimulus" law of 2009 that was supposed to jumpstart the recovery. But, unlike the stimulus laws in some other countries, such as the United Kingdom, our stimulus did not expand the economic pie by enhancing incentives.

Instead, our stimulus was a redistribution exercise that eroded incentives to work and earn income by expanding food stamps, mortgage subsidies, health insurance assistance and unemployment assistance primarily for people who were unemployed or otherwise had low incomes (the end of the Bush administration did some of this too). The result was less work and less national income for as long as the stimulus lasted.

Third, very soon after the stimulus expired, a new permanent redistribution began to take effect in the form of the Affordable Care Act (ACA). Indeed, the health-insurance assistance provisions of the ACA were presaged in the 2009 stimulus.

As its authors attempt to target assistance to people who they thought needed it most, the ACA unleashes a host of unintended consequences that shrink the economic pie in the process of redistributing it.

Businesses are encouraged to forgo hiring in order to keep their employment below 50 full-time equivalents and to cut workers' hours in order to keep the workweek less than 30 hours. Productive and knowledgeable employees are encouraged to retire early in order to be eligible for taxpayer-funded assistance.

The ACA is also remarkably uneven in its treatment of different sectors, regions and workplace circumstances. Another result is therefore a misallocation of resources away from the most penalized activities to the most favored ones, thereby depressing productivity; i.e., the amount of value that workers create in the marketplace.

Most businesses and households did not react to these incentives because other considerations were dominant, but it only takes a small percent of them who do to make a noticeable dent in the growth rate. If and when the federal government can repeal the ACA or relax its growth-retarding provisions, that will add to the growth rate.

Fourth, other regulations came into effect during the Obama years. Perhaps the leading instance is the 2010 Dodd-Frank financial regulation law. The law is so remarkably complicated that research on its effects will be ongoing for years, and massive complexity is hardly the leading ingredient for economic growth.

But it is likely that new financial regulations have reduced the willingness of banks to lend to small and medium-sized businesses, which further restrains economic activity.

The national economic pie has been smaller due to Obama-era policies, leaving opportunities for subsequent federal policies to enhance economic performance.

Casey Mulligan is a professor of economics at the University of Chicago. His recent research has focused on non-pecuniary incentives to save and work and how the economy affects policy. His two recent books are, "The Redistribution Recession: How Labor Market Distortions Contracted the Economy," and "Side Effects: The Economic Consequences of the Health Reform."

Employer Penalty Amount Finalized

Next week the Dept of HHS will publish the final rule for, among other things, the per-full-time-employee amount that large employers will be penalized for not offering federally approved health insurance coverage.

2017 $2,265

These are set according to the HHS Secretary's "Premium Adjustment Percentage."

As explained in my book, the employer penalty has a special business tax treatment that makes it more expensive than employee salaries. The salary equivalent of the employer penalties are:

2014 $3,046

2015 $3,174

2016 $3,299

2017 $3,449

After increasing 4 percent in each of the first two years, the last annual increase is 5 percent.

Another interesting way to look at it is the number of hours that a $7.25/hour worker has to work to create enough value for his employer to pay the penalty on his behalf (let alone pay the employee's wages):

2014 8.1 hours per week, 52 weeks per year

2015 8.4 hours per week, 52 weeks per year

2016 8.8 hours per week, 52 weeks per year

2017 9.1 hours per week, 52 weeks per year

In other words, only after the ninth hour of work in 2017 will the penalty be paid and there will be value creation that can go toward employee wages, employer profits, or other taxes.

Fortunately, taxing employment relationships to the tune of 9 hours per week, every week of the year, has essentially no adverse effect on those relationships.

Timothy Jost poses an economics question

In reading the [CBO's analysis of ACA marginal tax rates and the labor market], questions that occurred to me, admittedly a non-economist, included why there is no accounting for the increased employment of health care workers which surely must accompany the coverage expansions?

from Timothy Jost.

The answer is:

• when we redistribute income for the purposes of paying for some people's health care, that likely creates additional jobs in the process of supplying health care to the ACA beneficiaries.
• But we cannot forget about the other end of the redistribution. Somebody is paying for this, either by paying taxes or loaning money to the government, and that's funds that the payers cannot spend on other things. So there's a reduction in the employment of people who would be supplying the payers (whatever it was that they would have spent money on: anything from food to forming new businesses).
• The bottom line for labor demand hinges on a comparison of the labor-intensity of healthcare supply and the intensity of supplying those other things.

In effect, CBO and many others assume that they are equally labor intensive, so that there is no net aggregate-labor-demand effect. Only the composition of labor demand is changed.  (If I had to say how the "true" comparison works, I would say that just about anything for low-income people is less labor-intensive than the things bought by high-income people, but this gap is small in comparison to the marginal tax rate effects).

All of this is answered in my Side Effects and Complications: The Economic Consequences of Health-Care Reform.

I also addressed a similar question in my earlier Redistribution Recession.

Mr. Jost has been so busy digesting and summarizing ACA regulations (that you for that, sir!) that he probably hasn't had time to look at my books on the economics of Obama-era social programs.

Employer penalty amounts for 2016 and 2017

The ACA's employer penalty increases every year. It began in 2014 (although not enforced in that year) at $2,000 per full-time employee-year (over 30 employees). Its amounts in subsequent years:

2015 $2,084

2016 $2,166

2017 $2,265

These are set according to the HHS Secretary's "Premium Adjustment Percentage."

As explained in my book, the employer penalty has a special business tax treatment that makes it more expensive than employee salaries. The salary equivalent of the employer penalties are:

2014 $3,046

2015 $3,174

2016 $3,299

2017 $3,449

After increasing 4 percent in each of the first two years, the lasted annual increase is 5 percent.

Another interesting way to look at it is the number of hours that a $7.25/hour worker has to work to create enough value for his employer to pay the penalty on his behalf (let alone pay the employee's wages):

2014 8.1 hours per week, 52 weeks per year

2015 8.4 hours per week, 52 weeks per year

2016 8.8 hours per week, 52 weeks per year

2017 9.1 hours per week, 52 weeks per year

In other words, only after the ninth hour of work in 2017 will the penalty be paid and there will be value creation that can go toward employee wages, employer profits, or other taxes.

Amazon began shipping my new book today!

It is full of examples. The effects of Obamacare on the workweek are shown with diagrams rather than equations, which now part of an optional appendix.

Spending on health care has grown faster than the economy itself, even while the share of the population without health insurance was increasing. The Affordable Care Act (a.k.a., Obamacare) intends to reverse these trends, but in doing so has economic side effects. Businesses are complaining about the ACA's new tax and regulatory burdens, whereas supporters say that it is a long-overdue "shot in the arm" that will promote entrepreneurship and a "more rapid economic recovery."

Positive and negative tax effects of the ACA are carefully documented. The book offers a comprehensive market analysis of the law that arrives at conclusions as to effects on work hours, productivity, and national income. It shows what the ACA means for economic performance in the years ahead, and explains why forecasters have yet to acknowledge many of the economic forces that have been put in motion.

The book contains numerous facts and economic insights that have been unnoticed by both supporters and opponents. Anyone interested in economic performance over the next several years has to understand the contents of the Affordable Care Act from a labor market perspective and this book is so far the only comprehensive and user-friendly introduction to the topic.

Burtless: Two Economic Mistakes in One Sentence

Brookings' Gary Burtless writes

It seems odd that critics of the ACA emphasize the potentially adverse impacts of the law on workers forced to accept part-time jobs but fail to notice that their logic suggests more workers in total must be employed.

Dr. Burtless should have read my book, or some of the labor economics literature dealing with part-time work cited therein, to see why he has the economic logic backwards, and in fact nothing here is "odd."

My revised edition (to be published by University of Chicago Press), has the clearest explanation:

A conventional wisdom [e.g., Burtless quote] says that employment rates increase to “compensate” for work hours lost from taxes on full-time schedules. Under this view, more people working 29 hours rather than, say, 35, would mean that employers simply have to hire more or keep workers on the payroll longer in order to accomplish the tasks necessary to conduct their business. The conventional wisdom fails in two ways. ...full-time employment taxes can be avoided by reducing employment and increasing hours per employee. My conservative estimates suggest that this case will be far more prevalent than the twenty-niner situation: the ACA will reduce the nationwide weekly employment rate by 3 percent below what it would have been without the ACA.

...Moreover, even if full-time employment taxes were avoided by reducing weekly work hours, there would not be a commensurate increase in the employment rate because weekly hours would not be reduced for normal business or personal reasons, but rather to avoid penalties and implicit taxes. The penalties and implicit taxes make the business of an employer more expensive, or being an employee less rewarding, even in those cases when people avoid the new tax by adjusting their employment conditions rather than writing a check to the federal treasury. Some employers may go out of business, or never start their businesses in the first place, because of the extra cost of the tax (or the costs of adjustments needed to avoid the tax) or because of the additional costs (e.g., higher wages) needed to attract workers to positions that render them ineligible for exchange subsidies. The net result is that the labor market will involve fewer total hours, and that higher employment rates, if any, will not be enough to compensate for the reduced hours per week. This economic reasoning has been confirmed by empirical studies of previous public policies that raised the relative employer cost of weekly work hours, and failed to create a commensurate increase in employment because the average hour worked by employees had been made more expensive or less productive.

Accurate quotation

Today's House session. 11:11 through 12:35 from here

Opeds about Redistribution and Obamacare

I published three opeds in the Wall Street Journal, but do not reproduce them here in real time to be consistent with WSJ's copyright. Here are some shortcuts to ungated versions:

• “The Myth of Obamacare’s Affordability.”  Wall Street Journal.  September 9, 2014.  Page A17.
• “A Recovery Stymied by Redistribution.”  Wall Street Journal.  June 30, 2014.  Page A11.
• “How Obamacare Wrecks the Work Ethic.”  Wall Street Journal.  October 3, 2013.  Page A13.

CSPAN covers economic impact

At the 4:58 mark, Dr. Aaron acknowledges that "there is a tradeoff." That was a big surprise to me, because Dr. Aaron was the lead signatory on the economists' letter to Congress saying that there is no tradeoff: the ACA both helps people and grows the economy.

#Grubergate : anticipated on the last page of "Side Effects: The Economic Consequences of the Health Reform"

Long before the Gruber video went viral, I had heard the general sentiment. It is NOT a universal sentiment in my field, but prevalent enough that I knew that it had to be addressed in a prominent location. From the last page of my ebook, completed in May 2014:

The book was also written to show that economics did not, and does not, have to be ignored or superficially considered at the policymaking stage.

...Political pragmatists may claim that it is sometimes necessary to ignore economic consequences to support a worthy effort. Even without its pessimistic assessment of the ability of voters to receive information, this argument has been contradicted many times in history when unintended consequences overwhelmed promised benefits.

Italics added. Mulligan, Casey B. Side Effects: The Economic Consequences of the Health Reform. JMJ Economics. Kindle Edition.

Radio interview with Kudlow and Batchelor

Jumps to 19:46
Download

How Obamacare Begets Gender Inequality

How Obamacare Begets Gender Inequality

By Casey Mulligan

In the past four decades, millions of American women have entered the workforce, sought out new occupations, and embarked on professional careers. In fact, by 2013, just 18 percent of working women worked only part time. This marks a sharp reversal of conditions in 1975, when men did the vast majority of full-time work, while women were less likely to be employed at all and nearly a quarter worked 20-hours per week or less.

These gains in gender equality are threatened by two provisions of the Affordable Care Act (ACA) ironically advertised as benefitting American workers. Taken together, these policies could drive the percentage of women working only part time back to what it was 40 years ago.

The first provision is the ACA's penalty on large employers who do not offer health insurance to their full-time employees, beginning next year and going into full effect in 2016. The second relates to the eligibility rules for the law's new health insurance assistance that began this year. The ACA imposes a penalty on large employers (generally those with 50 or more workers) who fail to provide health insurance for each of their full-time employees-defined by the ACA as those working 30 hours a week or more. Because part-time employees do not count toward the penalty, the provision induces employers to reduce more of their workers to 29 hours a week or less-a group now being referred to as the "29ers."

Compounding this effect is a disincentive on the employees themselves. The penalty does not apply to businesses that offer coverage to their full-time employees. But their full-time employees are finding that they are not eligible for the ACA's new assistance with insurance premiums and deductibles because the law requires them to join their employer's plan (or a plan offered by a family member's employer).

Part-time employees are not restricted in this way, except in the increasingly rare instances that they too are offered coverage by their employer. As a result of its exclusive access to the law's new health insurance assistance, part-time employment becomes comparatively more desirable to workers, or at least less undesirable, than it was in the past.

Both of these employment disincentives are worth thousands of dollars per year and, in some cases, more than a thousand dollars per month. Both will lead to less full-time work, and even less productivity per hour of work that is performed. This is because some positions are vastly more efficient when worked full-time, and the new employment disincentives will not be enough to change that.

Nevertheless, a number of positions have traditionally been 30-to-39-hour jobs, and those who occupy these jobs typically will have less trouble adapting to a 29-hour schedule that avoids the employer penalty or allows the worker to get the ACA's new assistance. Women are at least twice as likely as men to be in those positions, which means they are twice as likely to be 29ers once the new health law goes into full effect.

Some defenders of the ACA may contend these factors will relieve many workers of the "job lock" previously associated with employer-provided health coverage, or the need to tolerate the drudgery of long hours just to keep their insurance. They may claim women are "voluntarily" leaving full-time positions to spend more time with their families, or even to pursue art, music, and other hobbies.

Their theory would make some sense if workers who left full-time employment were paying the entire cost of their decisions, but what's really happening is that taxpayers are bribing them to work less. Both female and male 29ers will be making the best of a bad situation created by public policies that take away much of the financial reward from working full time. To make matters worse, the new 29ers will be creating additional burdens for other taxpayers as the 29ers receive more non-ACA subsidies and pay less in taxes than they would as full-time workers.

These new ACA employment disincentives are just two among many factors determining the kinds of work schedules that employers offer and employees accept. Regrettably, they are likely to have the unintended consequence of turning back the clock on decades of progress women have made in the American labor market.

Casey B. Mulligan is an economics professor at the University of Chicago and author of a new working paper published by the Mercatus Center at George Mason University on "The Affordable Care Act and the New Economics of Part-Time Work." He is also the author of "Side Effects: The Economic Consequences of the Health Reform."

The Myth of Obamacare's Affordability

Copyright, Dow Jones & Company

Whether the Affordable Care Act lives up to its name depends on how, or whether, you consider its consequences for the wider economy.

Millions of people pay a significant portion of their income for health insurance so they and their families can get good health care when they need it. The magnitude of their sacrifices demonstrates the importance that people ascribe to health care.

The Affordable Care Act attempts to help low- and middle-income families avoid some of the tough sacrifices that would be necessary to purchase health insurance without assistance. But no program can change the fundamental reality that society itself has to make sacrifices in order to deliver health care to more people. Workers and therefore production have to be taken away from other industries to beef up health care, or the workforce itself has to get bigger, or somehow people have to work more productively.

Although the ACA helps specific populations by giving them a bigger slice of the economic pie, the law diminishes the pie itself. It reduces the amount that Americans work, and it makes their work less productive. This slows growth in both personal income and gross domestic product.

In further expanding the frontiers of redistribution, the ACA reduces the benefits of employment for both employers and employees. Employers that don't provide health insurance are either subject to large penalties based on the number and types of employees that they have, or are threatened with enormous penalties when they get the opportunity to expand their business. About a quarter of the nation's employees, more than 35 million men and women, currently work for employers that don't offer health insurance. These tend to be small and midsize businesses with employees who already make less than the average American worker. The result of penalizing businesses for hiring and expanding is going to be less hiring and expanding.

Another sixth of the nation's employees—almost 25 million people—are in a full-time position that makes them ineligible for the law's new and generous assistance with health-insurance premiums and cost sharing. They are ineligible for subsidies simply because they are working full time and thereby eligible for their employers' coverage. Because the only ways for them to get the new assistance is to move to part-time status, find an employer that doesn't offer coverage, or stop working, we can expect millions of workers to make one or more of those adjustments.

Most people wouldn't give up working merely to qualify for a few thousand dollars in assistance. But it is a mistake to assume that nobody is affected by subsidies, because there are people who aren't particularly happy with working, planning to leave their job anyway, or otherwise on the fence between working and not working. A new subsidy is enough to push them over the edge or to get them to stop working sooner than they would have otherwise.

The law has effects that extend well beyond the employment rate and the average length of the workweek. People, businesses and entire sectors will jockey to reduce their new tax burdens or enhance their subsidies. Their adjustments to the new incentives will make our economy less productive and stifle wage growth, even among workers who have no direct contact with the law's penalties and subsidies.

The "29er" phenomenon is a good example of how the law harms productivity. Because ACA's "employer mandate" requires firms with 50 or more full-time workers to offer health plans to employees who work more than 30 hours a week, many employers and employees have adopted 29-hour work schedules. This is not the most productive way to arrange the workplace, but it allows employers to avoid the mandate and its penalties and helps the employees qualify for individual assistance.

All of this, and much more, exacerbates the societal problem that the economy cannot expand its health sector without giving up something else of value. A complex law like the ACA has a few provisions that encourage work, such as counting unemployment income against eligibility for health assistance. But the bulk of the law overwhelms them. The ACA as a whole will have the nation working fewer hours, and working those hours less productively.

I estimate that the ACA's long-term impact will include about 3% less weekly employment, 3% fewer aggregate work hours, 2% less GDP and 2% less labor income. These effects will be visible and obvious by 2017, if not before. The employment and hours estimates are based on the combined amount of the law's new taxes and disincentives and on historical research on the aggregate effects of each dollar of taxation. The GDP and income estimates reflect lower amounts of labor as well as the law's effects on the productivity of each hour of labor.

By the end of this decade, nearly 20 million additional Americans will have health insurance as a consequence of the law. But the ultimate economywide cost of their enrollments will be at least double what it would have been if these people had enrolled without government carrots and sticks; that is, if they had decided it was worth spending their own money on health insurance. In effect, people who aren't receiving assistance through the ACA are paying twice for the law: once as the total economic pie gets smaller and again as they receive a smaller piece.

The Affordable Care Act is weakening the economy. And for the large number of families and individuals who continue to pay for their own health care, health care is now less affordable.

Mr. Mulligan is a professor of economics at the University of Chicago and the author of the new e-book "Side Effects: The Economic Consequences of the Health Reform" (JMJ Economics, 2014).

My one cent

Apple refused to list my book for $3.00 -- they listed it at $2.99.
Amazon went with the $3.00 price for about a week, and then cut it to $2.99.
BN is still charging $3.00.

The best way to read illustrated ebooks?

For multi-device users, amazon's free kindle app is nice. You can buy a book once and view the same book (including your personal bookmarks and notes) on PC, Mac, ios, android, and more. My only complaint here is that, unlike kindle for tablets and phones, kindle on PC or Mac does not let you double click one of the book's illustrations in order to enlarge it.

Apple's free ibooks app solves this problem with consistent image viewing in IOS and Mac: double tap or double click. In addition, the ibook store delivers to ipads an ipad-optimized version. For purchased books, ibooks synchronizes notes and bookmarks across all of your devices that have ibooks installed. I don't think ibooks will run on a PC, although in principle the itunes app will allow you to read an ibook that you purchased.

My work around for PC- or Mac-based kindle illustration views is to switch to (or stay in) full-screen single-column reading when I want a close look at an illustration. On a PC, the two buttons are next to each other on the kindle app bar (see the upper left in this screen shot):

On a Mac, the single-column button is the same and the full-screen button is Shift-Comm-F on the keyboard.

Fortunately, Side Effects is so cheap that you might as well buy it twice: one from amazon and another from apple ibooks!

Another approach is to closely examine my charts and data using the excel webapp on your PC or Mac.

Side Effects: The Economic Consequences of the Health Reform

Spending on health care has grown faster than the economy itself, even while the share of the population without health insurance was increasing. The Affordable Care Act (a.k.a., Obamacare) intends to reverse these trends, but in doing so has economic side effects. Businesses are complaining about the ACA's new tax and regulatory burdens, whereas supporters say that it is a long-overdue "shot in the arm" that will promote entrepreneurship and a "more rapid economic recovery."

Positive and negative tax effects of the ACA are carefully documented. The book offers a comprehensive market analysis of the law that arrives at conclusions as to effects on work hours, productivity, and national income. It shows what the ACA means for economic performance in the years ahead, and explains why forecasters have yet to acknowledge many of the economic forces that have been put in motion.

The book contains numerous facts and economic insights that have been unnoticed by both supporters and opponents. Anyone interested in economic performance over the next several years has to understand the contents of the Affordable Care Act from a labor market perspective and this book is so far the only comprehensive and user-friendly introduction to the topic.

Browse or buy the book now! Check acasideeffects.com in early September for numerous extras and bonus features.

Available now!

Spending on health care has grown faster than the economy itself, even while the share of the population without health insurance was increasing. The Affordable Care Act (a.k.a., Obamacare) intends to reverse these trends, but in doing so has economic side effects. Businesses are complaining about the ACA's new tax and regulatory burdens, whereas supporters say that it is a long-overdue "shot in the arm" that will promote entrepreneurship and a "more rapid economic recovery."

Positive and negative tax effects of the ACA are carefully documented. The book offers a comprehensive market analysis of the law that arrives at conclusions as to effects on work hours, productivity, and national income. It shows what the ACA means for economic performance in the years ahead, and explains why forecasters have yet to acknowledge many of the economic forces that have been put in motion.

The book contains numerous facts and economic insights that have been unnoticed by both supporters and opponents. Anyone interested in economic performance over the next several years has to understand the contents of the Affordable Care Act from a labor market perspective and this book is so far the only comprehensive and user-friendly introduction to the topic.

Browse or buy the book now! Check acasideeffects.com in early September for numerous extras and bonus features.

The Massive Tax Increase Hidden Inside Obamacare

The Massive Tax Increase Hidden Inside Obamacare

By Casey Mulligan

With this week's federal announcement that millions of middle- and low-income people are getting a surprisingly large number of taxpayer dollars attached to their participation in the Obamacare health plans, can we begin to take seriously the idea that the fiscal policies and regulations hidden in the Affordable Care Act are shrinking our economy?

Real GDP fell last quarter, but the conventional wisdom says that cold weather gets all of the blame. If we add the self-employed to payroll employment, we would see that nationwide employment fell last month for the first time in more than a year, but we are collectively ignoring that as a statistical aberration too.

At first glance it might appear that the Affordable Care Act helps people get access to health care and disproportionately benefits low-income households without many new taxes. By one estimate, the ACA's tax increases are less than 0.5 percent of gross domestic product, and less than several other hardly memorable tax increases of the postwar period. The White House suggested that health reform would largely pay for itself, without mentioning taxes that, individually or in combination, would have more than a "little effect" on the labor market.

Politicians and journalists use the term tax more narrowly than economists do, but the economic definition is needed to understand the economic effects of the ACA. Suppose, hypothetically, that the government provided a "universal" $2,000 health benefit to every person and paid for it with a tax, in the narrow sense of the word, of $4,000 per employee. Employees are half the population, so the employee taxes average $2,000 per person and are enough to pay for the universal benefit.

Now consider an alternative "targeted" approach that pays the $2,000 health benefit only to people who do not work, and gets the revenue from a $2,000 tax per employee. By excluding workers from the benefit, the targeted approach appears to spend and tax less: only $1,000 per person. But the economic result is the same because, in both systems, employees pay $2,000 more than they receive. In both systems, people who are not employed receive more than employed people do: in the universal system their lack of employment exempts them from a large tax whereas in the targeted system it exempts them from a smaller tax but also gives them access to a benefit that is withheld from workers.

Withholding benefits from people who work or earn is hardly different than telling them to pay a tax. For this reason, economists refer to benefits withheld as "implicit taxes." What really matters for labor market performance is the reward to working inclusive of implicit taxes, and not the amount of revenue delivered to the government treasury according to economically arbitrary distinctions between implicit taxes and other taxes. The targeted system gives the same economic results, including the economic harms from taxes, as the universal benefit system does but without the (politically ugly) appearance of bringing significant revenues to the government treasury.

The ACA resembles the targeted approach because it is full of implicit taxes. Many of them have remained hidden in the "fog of controversy" surrounding the law and their effects excluded from economic analyses of it. The chart below puts the ACA's new taxes in perspective of federal tax increases over the past seventy years. The taxes include federal personal income taxes (Form 1040, shown in pink), social insurance payroll taxes (gray), and various employment and implicit taxes (red).

The chart does not show revenue for the U.S. Treasury-that statistic is vulnerable to some of the arbitrary distinctions noted above-but instead shows the effect of various tax laws on the incentives for workers to earn more labor income rather than less as measured by a marginal labor income tax rate (by marginal labor income tax I mean the extra taxes paid, and subsidies forgone, as the result of working). During a period that included more than a dozen tax increases, the ACA is arguably the largest as a single piece of legislation, adding about six percentage points to the marginal tax rate faced, on average, by workers in the economy. The only way to cite larger marginal tax increases would be to combine multiple coincident laws, such as the Revenue Acts of 1950 and 1951 and the new payroll tax rate that went into effect in 1950. Even with these adjustments, the ACA is still the third largest marginal tax rate hike during the seventy years.

Another feature of the ACA that distinguishes it from other large marginal tax rate rises is that the former is, by law, entirely permanent whereas essentially the only other permanent ones shown in Figure 1.1 are the payroll tax rate changes.

Let's not be surprised that, as we implement a new law that taxes jobs and incomes, we are ending up with fewer jobs and less income.

Casey B. Mulligan is the author of The Redistribution Recession (2012) along with the forthcoming ebook Side Effects: The Economic Consequences of the Health Reform. Mulligan is also the recipient of the Manhattan Institute's 2014 Hayek Prize.  

How ObamaCare Wrecks the Work Ethic

Copyright, Dow Jones & Company

A new wave of redistribution will arrive in America on Jan. 1, primarily thanks to the Affordable Care Act. The president's health-insurance plan forces those who hire, work and produce to pay full price for health care, while creating generous discounts for practically everyone else.

This second redistributionist wave of the Obama era will follow a first wave of tax hikes, additional unemployment benefits, food-stamp expansions, waived work requirements for welfare benefits, etc. These measures were supposed to be temporary, intended to help people cope with the recession. The recession officially ended in mid-2009, but many of the administration's measures continue.

Regardless of whether redistribution is achieved by collecting more taxes from families with high incomes, levying employment taxes on businesses, providing more subsidies to families with low incomes, or all of the above, an essential consequence is the same: a reduction in the reward for working. In a National Bureau of Economic Research paper issued in August, I quantify the combined effect of the two redistribution waves and higher payroll taxes on the financial reward for working.

The chart nearby shows an index of marginal tax rates for non-elderly household heads and spouses with median earnings potential. The index, a population-weighted average over various ages, occupations, employment decisions (full-time, part-time, multiple jobs, etc.) and family sizes, reflects the extra taxes paid and government benefits forgone as a consequence of working.

The 2009-10 peak for marginal tax rates comes from various provisions of the "stimulus" programs in the American Recovery and Reinvestment Act of 2009 and the extension of unemployment benefits to 99 weeks in some states. At the end of 2012, the marginal tax rate index reached its lowest value since 2008: 43.9%. A little over a year later (January 2014), the index will be close to 50%, driven up by the expiration of the payroll tax cut and multiple provisions of the Affordable Care Act. The ACA employer penalty, delayed until 2015, adds more than a percentage point in that year alone, while other ACA provisions strengthen their disincentives for the various reasons cited above.

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The Affordable Care Act signup page on the HealthCare.gov website
Reuters

By 2016, the index exceeds 50%, which is at least 10 percentage points greater than it was in early 2007.

The 50% rate is even higher than the rates that prevailed when the so-called Recovery and Reinvestment Act's redistribution was at its peak. Without new federal legislation and a departure from the strategy of forcing workers and employers to finance everyone else's health care, the new 50%+ rate will not be a peak, but rather a new normal for tax rates.

To appreciate the added burden that the two redistribution waves put on the labor market, look at what people keep, on average, when they decide to retain or accept a job, or to take on a longer work schedule. Before the recession, a decision to work would benefit public treasuries by an amount equal to 40% of the compensation from the job. The worker and his family got the other 60%.

In the years 2015 and beyond, full-time workers with median incomes will keep only half of the compensation created by their decisions, with the other half going to the government in the form of additional taxes and savings on subsidy payments. By keeping 50% rather than 60%, workers will find that the reward for holding a job will have fallen a damaging 17%.

Advocates of redistribution try to perpetuate the income-maximization fallacy that business continues as usual as long as tax rates are less than 100%, because receiving even 1% of your compensation is supposedly better than getting no compensation at all. But even if full confiscation were the only way that taxes would depress the labor market, recall that the nearby chart is just an average: The average rate rising to 50% and above involves millions of people with rates far higher.

America absolutely must have taxes and safety-net programs, even though they reduce the reward for working. But advocates for the recent program expansions have failed to acknowledge that redistribution necessarily increases marginal tax rates and contracts the labor market.

Don't be surprised if the second redistribution wave coincides with a recessionary double-dip.

Mr. Mulligan is a professor of economics at the University of Chicago and the author of "The Redistribution Recession" (Oxford, 2012).