Wednesday, October 6, 2021

Build Back Better's Hidden but Hefty Penalties on Work

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.  This could amount to $26 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 Barrack Obama put it (watch for about 80 seconds), "I am absolutely convinced ... we have to have work as the centerpiece of any social policy."]


steve said...

Excellent review!
Thanks for the effort it took in putting this out there!

Michael Margolis said...

Why would lower uptake make BBB "more of an adverse productivity shock" as well as less of a work disincentive? I would expect less uptake to mean less impact on all outcomes.