A 70% Tax on the Poor?

Talk about unintended consequences - the phase-out of subsidies for health insurance in the Baucus bill could end up contributing to a 70% or higher marginal tax rate for people earning between 100% and 200% of the poverty level!

According to James Capretta (here), using the CBO analysis of the Baucus bill, the US government (taxpayers) would provide a $16,500 subsidy for families at the poverty line. As incomes rise, the subsidy declines. A family earning twice the poverty rate would only get a subsidy of $9,072. So, by earning $24,000 more, this family loses $7,428 in government subsidies, or almost 31% of their added income.

Capretta points out other existing government tax breaks that phase out over these income levels, like the Earned Income Tax Credit, which phases out at about $0.21 for each additional dollar earned. This family would lose about $5,000 of their EITC, about another 20% of their added income.

Economist Greg Mankiw (here) adds in additional effects of the payroll tax that bring the marginal tax rate closer to 80%. So, a family of four in 2016 when the Baucus bill would be in full effect, would only get to keep 20-30% of their additional income if they move from the poverty line to double that.

The unintended consequence is that this family has every incentive to just remain poor and beg their Congressmen for additional help. Why work harder if the benefits you lose are almost as big as the extra money you earn? And why not ask for more benefits when you aren't the one paying for them?