[IMGCAP(1)]It’s no surprise that tax rates affect economic behavior.

In fact, the Tax Code is intentionally littered with economic incentives and disincentives. Recently, a number of economists have begun studying the impact of the Affordable Care Act on taxpayers.

A recent study by a number of economists at the Treasury Department’s Office of Tax Analysis examined the marginal earnings incentives that are implicit in the subsidy schedule of the ACA for taxpayers who purchase health insurance through the state exchanges.

“We are trying to document the incentives that are there and how many people they apply to,” said Bradley Heim, associate professor at the Indiana University School of Public and Environmental Affairs and a former economist at the Treasury Department. Heim, who co-authored “Waves and Cliffs: Marginal Earnings Incentives in the Affordable Care Act” with three of his former colleagues at the Office of Tax Analysis, said the study focused on taxpayers who were likely to purchase health insurance in the exchanges, and examined the extent to which their subsidy amounts decrease if they earn additional income. Gillian Hunter, Ithai Z. Lurie, Shanthi P. Ramnath, all of the Office of Tax Analysis, participated in and co-authored the study.

Under the ACA, a subsidy is available for purchase of insurance on an exchange in the form of a tax credit for families with incomes up to 400 percent of the Federal Poverty guideline, or FPL. This subsidy is calculated by comparing the price of the second-lowest silver plan to the maximum a family is expected to pay for health insurance. If the former is greater than the latter, taxpayers with Modified Adjusted Gross Income, or MAGI, below 400 percent of the FPL receive a subsidy for the difference.

”Because the maximum that a family is expected to pay is an increasing function of income, additional earnings can lead to a lower subsidy amount, resulting in an implicit tax on those earnings,” Heim said.

“Our study focuses on those who are likely to purchase health insurance in the exchanges, and examines the extent to which their subsidy amounts decrease if they earn additional income,” he added.

The study estimates that approximately 2.6 million taxpayers will face average implicit tax rates of more than 10 percent, and that these rates tend to be higher for married and older taxpayers. It also estimates that around 85,000 taxpayers who were likely to have purchased insurance in an exchange had income between 390 percent and 410 percent of the Federal Poverty Line, and over 30 percent of these will face a “cliff” in excess of $3,000, although close to 40 percent of these will face a cliff smaller than $100.

“It is important to note that these implicit marginal tax rates and the cliff at 400 percent of FPL are a consequence of the targeting of health insurance subsidies toward low- and moderate-income families,” the study concluded. “If the subsidies were less targeted by phasing the subsidy out more slowly, there would be a smaller increase in the implicit marginal tax rate, but the costs of the subsidies would be substantially larger overall, partly because more employers would eliminate coverage. Hence, policymakers face a tradeoff between more targeted subsidies with higher implicit marginal rates and less targeted subsidies with higher cost and a larger disruption to the current health insurance markets.”

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access