National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
MARGINAL
TAX RATES
AND HEALTH CARE
REFORM
LOUISE SHEINER*
INTRODUCTION
Major health reform initiatives that
promise substantial decreases in the
number of uninsured generally include
large increases in subsidies to the poor
and near-poor. The design of subsidy
and financing mechanisms involves
trade-offs between the generosity of the
subsidies, the size of the population receiving such subsidies, the size of the
marginal tax rate increases, and the
number of individuals affected by those
marginal tax rates. High marginal tax
rates are certainly undesirable, but increases in marginal tax rates are an unavoidable product of any self-financing
plan that increases subsidies for health
insurance. In order to be able to choose
among competing plans, it is essential to
develop a framework with which to
evaluate the welfare consequences of
these different trade-offs. This paper will
certainly not answer the question of
how to optimally design subsidy mechanisms, but hopes to point out some of
the important considerations, and to
compare how two competing health reform initiatives, the Clinton administra+Federal Reserve Board of Governors, Washtngton,
20551
DC
tion’s “Health Security Act” and Representative Cooper’s “Managed
Competition Act,” have dealt with them.
The problem of high marginal tax rates
has received a lot of attention lately,
particularly with respect to the Cooper
plan (see Aaron, 1994) but also with respect to the Clinton plan (see Feldstein,
1994). The welfare costs of high marginal tax rates can be divided into equity
and efficiency considerations.
EQUITY CONSIDERATIONS
Health reform subsidies can increase
marginal tax rates through two mechanisms. First, subsidies that are targeted
to the poor can either be phased out as
income passes beyond some threshold,
as with the Earned Income Tax Credit
(EITC), or abruptly terminated, as with
Medicaid, creating potentially high marginal tax rates over the phaseout range
or cliff. Second, financing the subsidies
may also require significant increases in
marginal tax rates. It is the first of these
for which the Cooper bill has received
so much attention. High marginal tax
rates resulting from the phaseout of
some benefit may indeed contribute to a
reduction in economic efficiency, but
some commentators
have also Implicitly
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
argued that imposing these high rnarginal tax rates on lower-income
families
is also unfair. This worry, I believe, is
largely misplaced.
Figure 1 illustrates the effects of a benefit phaseout on budget sets. The horiz#ontal axis in ihe figure represents pretax-and-transfer,
i.e., gross, income, and
the vertical axis represents posttax-andtransfer, i.e., net, income. The slope of
the budget constraint is one minus the
marginal tax rate, so that a slope of
one, where pretax ilqcome is equal to
after-tax income, indicates a zero marginal tax rate. Indivilduals prefer higher
posttax-and-transfer
income for any
given pretax income, and also prefer
lower pretax income for any given after-
FIGURE
1.
Net earninga
tax inl:om13. lndtviduals with different
abilities, and hence diffeirent wage rates,
will have different indifference curves
over this budget space. l~ndividuals with
higher abilities require less after-tax income to compensate thern for an increase in pretax income, since any given
increase in earnings requires less effort,
and thus have flatter indifference curves.
‘They will choose points along the budget set where both pretax and after-tax
earnings are higher.
For simplicity, assume that there are initlally no taxes, so that the initial budget
line has a slope of one. A health insurance subsidy valued at /-// by the reciptents is provided to all families with in(come below the poverty level, and this
I
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
TAX ASPECTS OF HEALTH CARE REFORM
taxes imposed to finance the subsidies,
individuals cannot be made worse off
even if health insurance is not valued
very highly. In addition, the lower the
value of health insurance, the fewer
people are affected by the marginal tax
rates. For example, consider a health insurance policy with a market value of
$2,000 that is provided free to those
with income less than $10,000, and is
phased out at a 100 percent effective
tax rate between $10,000 and $12,000.
If health insurance were only valued at
$1,000, then only individuals with income of $11,000 or less would buy the
health insurance, and they would be
subject to the same 100 percent rate.
subsidy is gradually phased out for individuals with income between 100 and
200 percent of poverty. Over this phaseout range, the slope of the budget line
decreases, indicating an increase in the
marginal tax rate. The most salient feature of Figure 1 is that the new budget
line lies strictly above the old budget line
for all income levels below 200 percent
of poverty, and is the same as the old
budget line for incomes above this level.
Thus, the family’s budget choices are
strictly enhanced. Families in the phaseout range do earn less per dollar of
work than they did before, but they also
receive higher benefits. Families can
choose their old budget point (by working the same amount and throwing
away some income), but will not. Thus,
while the increase in the effective marginal tax rate may induce families to
work less (as represented by the move
from point A on the original indifference
curve to point B on the new indifference
curve), their utility will also be enhanced.
Asserting that individuals are better off
even though they may choose to decrease their work effort implicitly assumes that the decisionmakers are rational. One worry associated with the
phaseouts of benefit programs, and in
particular with the Medicaid cliff, is that
it induces welfare dependency. Policymakers may be concerned about welfare
dependency because they believe that
people would be better off if they
worked, a paternalistic concern, or perhaps also because of the possibility of
negative externalities arising from such
dependency. But this type of consideration would be most important for benefits, like Medicaid, that are phased out
right at the work/no-work
margin. Thus,
it may be important to focus on the effect of a subsidy scheme at this margin.
Apart from this consideration,
however,
it seems clear that objections to benefit
phaseouts that produce high implicit
marginal tax rates should be those stemming from considerations of efficiency,
rather than from equity. The remainder
of the paper IS focused on the relative
efficiency of different subsidy mechanisms.
I have not considered the impact of the
taxes necessary to finance the subsidies.
Depending on how the subsidies are financed, some individuals can be made
worse off because the subsidy they receive is smaller than the extra taxes they
pay. If a flat tax is used to finance the
subsidies, then all those with income
above 200 percent of poverty will be
made worse off, and those with the income close to 200 percent of poverty
will also be made worse off. However,
those in the phaseout will fare better
than those with income greater than the
phaseout limit, so even considering the
taxes necessary to finance the subsidies,
those in the phaseout region are not unfairly affected by the subsidy scheme.’
In order for this argument to hold, it is
not necessary for the measure of HI, the
benefit amount, to equal the market
cost. As long as health insurance is not
mandated, then, again apart from the
TRADE-OFFS
The trade-offs between government
revenue and high marginal tax rates per499
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
vade the design of government
redistribution programs, and, as illustrated by
the following example, are at the heart
of designing health insurance subsidies.
Imagine that a government wishes to
provide free health care, valued at
$4,000, to all those with income below
a certain threshold, say the poverty line.
There are three principal mechanisms to
do this:
(1) a cliff: provide the health care to
anyone with income below the poverty line, and provrde nothing to
anyone with income above that.
(2) a phaseout: provide the health care
to anyone with income below the
poverty line, and provide a reduced
subsidy phasing out between 100
percent of poverty and some hlgherincome threshold.
(3) “National
Health”: provide the
health care to everyone.
Clearly, (1) and (3) are just examples of
the more general (2) , where the phaseout has a length of zero in (I), and an
infinite length in (3). The three mechanisms differ in two respects: the rnarginal tax rates implicit in the phaseouts,
aind the government revenue, and implicitly the new taxes required, to finance the subsidies. Figure 2 illustrates
the effect of these three mechanisms on
budget sets, where again the horizontal
axis represents pretax-and-transfer
income, the vertical axis represents postt,ax-and-transfer income, and the 45”
line represents the no-tax budget line. I
have assumed in these figures that the
subsidies are financed by a flat tax on all
income, though there are clearly an infinite number of ways they could be finianced.
Figure 2a shows the effects of a cliff.
Everyone is subject to a marginal tax
rate t,, and those with income below
the poverty level also receive health insurance, valued at $4,000. The marginal
tax rate at the cliff is undefined, because
the first unit of earnings/ above the cliff
is associated with a lossof $4,000 in
benefits. After the threshold, however,
the marginal income tax rate is again
only t,. However, individuals will not be
as well off as they are alt 100 percent of
poverty until their into ‘e exceeds poverty by $4,000, so no o1 e would be expetted to work over the range, and a
cliff is equivalent to a phaseout with a
100 percent tax rate. In ~fact, the range
over which people would not work is
larger. Anyone with wa es between uv,
and W, will choose to b% at the kink at
point A. Anyone with a Iwage above w1
will ble unaffected by the cliff. (It IS clear
that the cliff would not Iinduce anyone
to move up above the cliff, since if they
chose point B over poini C before the
health benefits were introduced, there
would be no reason for Ithem to prefer
point C to point B after ~the health benefits were introduced.)
Figure 2b illustrates the udget set under a phaseout, where t,:: e subsidy is
phased out between 100 and 200 percent of poverty. Once again, the nonconvexities of the budg t set will induce
people to jump. A corn arison of Figures
2a and 2b can demonst ate that a cliff
could be rnore efficient \ han a gradual
phaseout. Those in the haseout range
face lower taxes under t“h e phaseout
than under the cliff, and are likely to Increase their work effort,, but there are
workers beyond the phakeout range, say
at point B, who would not be affected
by the cliff, but will cho se to substantially reduce their labor $upply when
faced with a subsidy thal is only gradually phased out.
Finally, Figure 2c illustratbs
health insurance
and th
come. Clearly, the total
the case of
I
TAX ASPECTS OF HEALTH CARE REFORM
FIGURE
2(a).
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
-Cliff
Net earnings
everyone now faces a higher marginal
tax rate, but no one faces the high marginal tax rates in (1) or (2).
Figure 2d plots the marginal tax rates
from 2a, 2b, and 2c. In this figure, I
have assumed that a cliff is less costly
than a phaseout, though depending on
the numbers and wages of people who
increase their work effort, and hence reduce their subsidies, relative to the number who decrease their work effort and
increase their subsidy, it is possible that
a cliff could be more costly than a fast
phaseout. In general, though, there are
clear trade-offs: as the phaseout interval
lengthens, the marginal tax rate faced
by those in the phaseout decreases, but
more people are in the phaseout, and
those in the phaseout receive higher
benefits, so the marginal tax rate on
everyone else increases.
CHOOSING THE PHASEOUT
Without a framework to choose among
these trade-offs, it is impossible to compare different health reform plans in a
meaningful way. For example, many
point to the high marginal tax rates in
the Cooper plan as a problem, but do
not propose alternatives. This section
tries to apply basic ideas from the public
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
~~
FIGURE
2(b).
Net earnings
-Phaseout
T
100% of
P”eaY
finance
literature
lines about
how
subsidy
phaseouts
to yield general
guideto cornpare
different
The optimal
tax literature
explores
what
the optimal
nonlinear
income
tax schedule would
look like. However,
the tax
schedules
that come
out of these
models
are very complrc:ated
and unlikely
to be implemented.
Little attention
has
been focused
on how to choose
among
simpler,
nonoptimal
tax mechanisms,
apart from
the purely
linear income
tax.2
One reason
for this lack. of attention
is
that the choice
of nonoptimal
tax schedules will depend
crucially
on what
sort
of nonlinearities
are deemed
admissible.
Grosseamings
200% of
poverty
The economics
literature
has Irttle to say
about
what
types of tax schedules
are
admissible,
(and indeed
the number
of
tax rates In the United
States
tax code
has varied
significantly
over tirne
Ratably
phasing
out benefits
(i.e., with one
phaseout
tax rate),
however,
is a very
common
feature
of a number
of current
redistributive
policies,
including
the EITC,
and even the personal
iexemption
and
standard
deduction,
and many
have advocated
means-testing
social security
benefits
as well.3 Increased
focus
on
whether
benefits
should
be phased
out,
and if so, how,
seems warranted.
To analyze
the
rnost
simple
example,
I
I
TAX ASPECTS OF HEALTH CARE REFORM
FIGURE
2(c). -National
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
Health
that the size of the benefit
(i.e.,
the value of the health
insurance)
and
the beginning
point
of the phaseout
(for
example,
100 percent
of poverty)
are
fixed,
and analyze
only the appropriate
end point
for the phaseout.
This implicitly defines
the phaseout
tax rate, which
is equal to the length
of the phaseout
range
divided
by the value of the benefit.
assume
Figure
3 illustrates
the trade-offs
between
two possible
phaseouts.
To simplify the exposition,
I only compare
the
two phaseout
taxes,
without
drawing
in
the resulting
payroll
tax rate that is
needed
to finance
the additional
health
insurance
subsides.
Imagine
that the
choice
is between
phasing
out the benefit between
100 and 150 percent
of
poverty
versus
150 and 200 percent
of
poverty.
To simplify
the discussion,
I ignore the effect
of the different
drstributional
consequences
of the two phaseout schemes,
and focus
only on the
efficiency
costs.
In reality,
there
are likely
also to be some
preferences
over the
distributional
outcomes;
e.g., does society want
to
do some
redistribution
to-
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
FIGURE
Z(d).
--Marginal
Tat Rates
Ikhlgidtaxratc
_
_ ._
... _. .
NationalHealth
.. . . . . .. . ...
Pllaae-out
-.---
-~---
___.100% of
PVeaY
ward
cent
those
between
150 and 200
of poverty
or not, and unless
per-
marginal
ulility
of rncome
ts equal across
individuals,
distributional
effects
may
have efficiency
consequences.
As explained
abovle,
there
is a continuum of abilities
(i.,e., wage
rates).
In the
figure,
I have drawn
the indifference
curves
of two crossover
points.
Workers
with ability
less than or equal to w, will
be unaffected
by the move
from
phaseout 1 to phaseout
2. They will either
choose
to be at the kink at point A or
on the budget
line below
it. Workers
-.--__-.-200% of
poverty
.-
,lifr
--
---+
Grosseamings
with ability
between
w, and w, will face
lower
margrnal
tax rates and will work
more
under
the slower1 phaseout.
They
will also have higher
utilities
and will
most likely cost the government
more
in
subsidies.4
Those
with abilities
above
w,
and below
w, will clearly
face higher
marginal
taxes under
the longer
phaseout and will cost the government
more
(since they cost the government
nothing
under
the short
phaseout).
Thus,
the
trade-off
between
the short phaseout
and the long phaseout~
is between
the
deadweight
loss reducjion
for those
between
w, and w, against
the dead-
I
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
TAX ASPECTS OF HEALTH CARE REFORM
FIGURE
3.
-
equal to one-half
the change
in income
times the tax rate. When
budget
sets
are convex,
deadweight
loss from
the
marginal
tax imposed
over the phaseout
is equal to l/2
w,L,~,f*,
where
E is the
elasticity
(compensated)
of labor supply,
L is labor supply,
w is the wage
rate,
and t is the tax rate. When
budget
sets
are not convex,
as in the case of a
phaseout,
this formula
is not quite
right
because
the change
in labor supply
is
discontinuous;
nonetheless,
this formula
should
provide
a good
approximation
of
the deadweight
loss from
the phaseout
since the labor supply
response
will be
weight
loss increase
from
distorting
the
behavior
of those
between
w, and w,,
as well as the deadweight
loss associated with
having
to finance
the increased
subsidy
cost.
Given
the assumed
indifference
over distributional
consequences,
one can measure the inefficiency
of the subsidy
mechanism
as the sum of the individual
deadweight
loss arising
l
losses, plus the deadweight
from
the need to raise reve-
nue to finance
the subsidies.
Starting
from a situation
of no taxes,
the imposition of a tax creates
a deadweight
loss
505
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
affected
by the size of the tax and the
labor supply
elasticity.
There
is also an
additional
deadweight
loss stemming
from
the costs of government
subsidies.
If this is financed
by a tax on all payroll,
the deadweight
loss stemming
from this
can be written
in the same way, where
the tax necessary
to finance
the costs is
just equal to the cost divided
by the
sum of labor income.
The general
principles
that stem from
this measure
of inefficiency
are quite
similar
to those
that emerge
from
the
optimal
tax literature
(see Stiglitz,
1986),
namely
that marginal
tax rates should
be
low where
there
are a lot of people,
where
people
have high abilities
(wages),
and where
the labor supply
response
to taxes is high. In addition,
this
formula
demonstrates
the reason
one
wants
to smooth:
the deadweight
loss is
proportional
to the square
of the tax,
but is only related
linearly
to the number
of people
affected,
and thus,
all else
equal
(i.e., Income
and labor supply
elasticity),
it is better
to reduce
the tax rate
and spread
it across
more
people.
For
example,
this formula
indicates
that the
deadweight
loss from
doubling
a phaseout, say from
$1 O,OOO--$15,000
to
$1 O,OOO-$20,000,
would
decrease
as
long as the product
of the total wages
and the labor supply
elasticity
in the
$15,000
to $20,000
group
is less than
three
times the product
of wages
and
labor supply
elasticity
of those
earning
between
$10,000
and $15,000.
Of
course,
one would
also have to rneasure
the additional
deadweight
loss arising
from
the increased
costs of the subsidy.
But, if income
in the second
group
were
greater
than three
times
the wage,
then
extending
the phaseout
would
almost
surely
increase
deadweight
toss.
When
there
is an existing
tax, to, the
deadweight
loss from
imposing
an additional tax t 1s larger,
~,I,E,(&
+ t2/2).
Consider
first the case of an existing
tax
that is a flat payroll
tax on everyone.
The higher
this tax, the harder
it is to
make
the case for having
a long phaseout. For example,
compare
the deadweight
loss associated
wi th phasing
out
a health
benefit
between
100 and 200
percent
of poverty,
and between
100
and 300 percent
of poqerty.
Doubling
the length
of the phaseout
halves
the
implicit
tax rate, say frdm
roughly
0.4 (if
we were
phasing
out a $4,000
benefit
over a $lO,OOO
range)
Ito 0.2 (if it is
phased
out over a $20/000
range).
Assume that there
are twp types of people, .those with
incomelbetween
100
and 200 percent
of poverty,
with wage
w,, lotal labor supply
L,, and labor supply elastkity
cl, and those
with
income
between
200 and 300 percent
of poverty, with wage
w,, labor supply
LZP and
elasticity
c2. The phase
ut tax is t, if the
phaseout
is between
1“, 0 and 200 percent of poverty,
and tZ ~if the phaseout
extends
to 300 percent
of poverty.
Then,
again
ignoring
the non$onvexities
of the
budget
constraints,
one could
decide
between
the phaseouts
by comparing
the
deadweight
losses:
0
DWL,
=
LV, l,E,
t,(t()
+
I/2
t,)
Recogniz
ng that t, = l/2
t,, and tetting
VV~E~,$ = z (w,E, L,), o?e finds that
DWL,
is greater
than LNVLI,
i.e., that
one might
prefer
the Idnger
phaseout,
depending
on the revedue
cost difference, only if
I
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
TAX ASPECTS OF HEALTH CARE REFORM
With to = 0, the deadweight
loss from
extending the phaseout, not including
the additional revenue costs, will decrease if z is less than three. However,
with to = 0.1 and t, = 0.4, the deadweight loss will decrease only if z is less
than two, and with to = 0.3, z must be
less than 1.5 for the phaseout extension
to reduce deadweight
loss. This type of
exercise would have to be done for all
possible phaseouts. For example, if there
were very few people in the 200 to 250
percent of poverty range, and if these
people had very low elasticities, it might
be preferable to phase out between 100
and 250 percent of poverty, even if
phasing out between 100 and 150 percent of poverty is preferable to phasing
out between 100 and 200 percent of
poverty.
Simple deadweight
loss calculations such
as these can only provide rough guidance on subsidy design. Besides the
budget set nonconvexities created by
phaseouts, whrch may have important
labor supply consequences not measured
by the deadweight
loss formula, there
are other effects that need to be taken
into consideration.
Clearly, policymakers
are not actually indifferent between distributional outcomes. Also, as discussed
above, there may be certain types of labor force distortions that are weighted
more heavily than others-for
example,
society seems to feel differently about
policies that induce people to leave the
labor force and those that just induce
people to reduce their hours of work,
and also feels differently about a married worker leaving the labor force versus a single worker, and in particular, a
single parent. Finally, there is a view that
imposing very high marginal tax rates is
just unacceptable, because government
ought not to take away the reward people get from increased effort.
Thus, an initially high level of taxes
makes it much more difficult to make
the case for a long phaseout. However,
much of the concern with the high
phaseouts in the Cooper bill is that the
workers in the phaseout range are already subject to higher marginal tax
rates than other workers, because the
phaseout of other benefit programs already occurs through this range. When
the initial taxes are not constant, it is
possible that an easier case may be
made for extending a phaseout. For example, take the same situation as above,
but let the initial tax rate be tb on
group 1, and tg on group 2. Then deadweight loss from extending the subsidy
decreases as long as
z<-
TWO RESOLUTIONS: MARGINAL TAXES
UNDER THE COOPER AND CLINTON
PLANS
The Clinton health reform plan and the
Cooper health reform plan both increase
subsidies for health insurance to lowerincome families. The subsidy mechanisms
in the two plans are quite different,
however, making comparisons difficult.
Neither of the plans follows the simple
subsidy and phaseout described above,
though the Cooper plan comes much
closer. The two plans also have many
other differences: the Clinton plan imposes caps on national health spending,
provides subsidies for early retirees, etc.,
and the Cooper plan changes the deductibility of health expenditures by expanding the tax advantage of health insurance below some cap, and
substantially curtailing it above that cap.
4t; + 3t,
4tZ, + t, .
With tb = 0.45, ti = 0.3, and t, = 0.4,
doubling the phaseout may reduce the
deadweight
loss as long as z is less than
1.9 (again, depending on the additional
revenue cost).
507
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
I do not address
any of these
issues
this compartson,
but focus
solely on
issue of low-income
su bsidies.5
SUBSIDIES
UNDER
THE
COOPER
in
the
PLAN
The Managed
Competition
Act provides
free health
insurance
for those
without
employer-provided
health
insurance
with
income
(roughly
AGI plus tax-exempt
interest
income
plus nontaxed
social security benefits)
equal to or less than the
poverty
level. The only difference
between
this scheme
and a classic
phaseout IS that the subsidies
are restricted
to
those
that do not have employerprovided
health.
For the purposes
of this
analysis,
I assume
that anyone
who
would
benefit
from the subsidies
will be
able to turn down
employer-provided
health
insurance
and have their wages
increased.6
The Cooper
plan also does not mandate
health
insurance
purchase.
As described
above,
when
individuals
do not value
health
insurance
at market
cost, .fewer
people
will be affected
by the marginal
tax rates.
However,
when
not evc?ryone
participates
in the market,
the health
in‘surance
premiurn
is also higher
because
Iof adverse
selection
(the reason
why
CBO (1994b)
assumes
that the premium
for a comprehensive
benefit
package
is
higher
under
Cooper
than under
Clinton). For the purposes
of this analysis,
I
assume
that everyone
purchases
Insurante under
the Cooper
plan.
SUBSIDIES
UNDER
,ADMINISTRATION
THE CLINTON
PLAN
The Clinton
administration
plan has
/much more
complicated
subsidy
mechainisms. Subsidies
are divided
into two
{distinct
parts:
those
for the 20 percent
.family share
of the premium,
provided
directly
to families,
and those
for the 80
Ipercent
fin-r share,
provided
directly
to
firms.
Family Subsidy
The family
subsidy
operptes
quite
close
to the benefit/phaseout
mechanism
described
above.
Families
eligible
for AFDC
and ‘SSI and those
with
income
below
$1,000
receive
a 100 percent
subsidy.
For all other
families,
tqe phaseout
IS at
a three
percent
rate until poverty,
and
then quickly
jumps
to a 3.9 percent
rate
thereafter.
The phaseout
ends (implicitly)
at roughly
$21,000,
or somewhere
close
to two tilnes
the poverty
level.
Employer
Subsidy
The Clinton
administration
health
reform
plan requires
employers
to provide
health
insurance
to theiir employees,
but
caps employer
contributions
at 7.9 percent of payroll
for larger
firms,
and at a
rate ranging
from
3.5 to 7.9 percent
for
small lovv-wage
firms.
For the purposes
of this discussion,
however,
I ignore
the
small firm subsidies
and1 assume
the cap
1s 7.9 percent
for all firms.
The average
required
(employer
contr’ibution
is
roughly
$2,400,
so employers
with average payrolls
of around
$30,000
or less
will end up paying
a 7.9 percent
payroll
tax, and will receive
a spbsidy.
Employers
with average
payrolls
edceeding
$30,000
will pay for their employees’
health
insurance.
Basing
the subsidy
on ayerage
payroll,
rather
than capping
then employer
contribution
for each employee
at 7.9 percent
of the employee’s
wagejs,
has two effects. First, not all low-income
employees will be in frrms that pay the 7.9 percent tax, i.e., that receive
a subsidy,
and
‘some higIl-wage
worketts
will be in firms
that pay a 7.9 percent
lax, and will end
up subsidizing
the systet-n.
This subsidy
mechanism
provides
lotier
benefits
to
low-income
workers
and taxes higherIncome
workers
more than a standard
phaseout
with a 7.9 percent
effective
tax rate, Ibut also costs the government
significantly
less. Second,
this subsidy
I
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
TAX ASPECTS OF HEALTH CARE REFORM
mechanism creates an additional inefficiency apart from the labor supply effects described above. Because the subsidy is based on firm characteristics
rather than individual characteristics, the
subsidy creates incentives to sort: lowincome workers will want to work at
firms with low average wages, so their
costs will be capped at 7.9 percent of
payroll, and high-income
workers will
want to work at firms with high average
wages, so that they will not be subject
to a 7.9 percent tax. This sorting increases the government subsidy costs,
and can also create a production
inefficiency if workers end up working at
firms where they are less productive
solely in order to have lower health care
costs. Quantifying this inefficiency, with
which we have essentially no experience,
is quite difficult, but other research I
have done indicates that this subsidy
mechanism is probably less efficient than
one that produces equal benefits to lowincome workers with a standard phaseout.7 The efficiency ranking is not clear
a priori since in order to equalize the
benefits to low-income workers, and
roughly equalize government
costs, the
phaseout tax rate would have to be
higher, and more people would be subject to it.8
plan, families with at least one worker
receive full coverage without additional
payments, except for the family premium share. Even if the insurance payments made by the firm on their behalf
are properly characterized as taxes, it is
not clear that they should be characterized as marginal taxes. For full-time
workers (defined as those working 30 or
more hours under the Clinton plan), the
employer’s liability does not increase as
hours or wages increase. Thus, the insurance cost will represent a tax on having a full-time job, and may encourage
people not to work, but should not affect the hours decision, or, once it has
been decided to work, the amount of
effort or training investment.g For parttime workers, however, the mandate is
prorated so that each additional hour of
work is associated with an increased tax
equal to the cost of health insurance divided by 30. The mandate does represent a distortionary tax for these workers, and, for low-wage part-time
workers, can be quite large.
In order to calculate the marginal tax
rates under the Clinton plan, it is necessary to know who will work in firms
that are subject to the 7.9 percent cap,
and who will not. Unfortunately,
there
are no data that can accurately predict
this. Instead, I use the average wages by
industry and firm size to proxy for the
average wage in each worker’s firm, and
use this to determine whether the
worker will be in a firm that will be subject to the cap.” Using this methodology, I find that roughly 45 percent of
workers are in capped firms, a number
similar to that found by CBO (1994a). I
also find that low-wage workers are indeed more likely to work in firms that
are capped, but a substantial fraction of
them (20 percent) do work in firms that
are uncapped. Similarly, higher-wage
workers are less likely to work in capped
firms, but roughly 30 percent of those in
The fact that not all low-income workers
pay a 7.9 percent tax also makes the
calculation of marginal tax rates difficult
under the Clinton plan. Workers in firms
that are not subsidized do have to pay
for the health insurance of their employees. If these employees value the insurance at cost, then the mandate would
not represent a tax. But, given that
some of these workers qualify for Medicaid (and some would continue to qualify under the Clinton plan), the insurance purchased for them by their
employer has no value. Similarly, secondary workers receive no value for their
payments, because, under the Clinton
509
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
the top income category do work in
firms that are capped and hence are
subject to the 7.9 percent payroll tax.
10.2 percent for the grqup with income
just above poverty. Looting at average
changes iI1 marginal tax’ rates misses the
big differential between1 workers at
capped and uncapped firms. Full-time
workers in capped firms1 face a marginal
tax of roughly 7.2 percqnt higher than
workers in uncapped firbs, although
low-income
part-time wbrkers face much
higher rates at uncappeb firms.12 The
rnarginal tax rates in cabped firms range
between 7.2 percent foi workers with
income above 300 perc#nt of poverty to
11.6 percent for those &ith income just
above poverty.
I use data from the Marc:h 1992 Current
Population Survey to calculate taxes and
benefits under the two plans. Table 1
presents the marginal labor income tax
rates faced by workers. Note that I ignore the impact of existing taxes, which
would reduce the marginal tax rate imposed by either of these plans by
roughly one minus the marginal tax
rate.” For the Clinton plan, I include
employer costs at uncapped firms as a
rnarginal tax only for part-time workers,
but present a column of employer costs
as a fraction of wages for all workers.
As Table 1 shows, the Cooper plan only
imposes a marginal tax on those with income between 100 and 200 percent of
poverty. The average marginal tax imposed on this group is quite high, however, roughly 25 percent.
In general, it is difficult fo gauge the efficiency of the Clinton d/an from these
numbers, because the different treatment of similar workers will clearly affect
wages and where peoplg work. If no
one were to change jobp as a result of
the Clinton plan, looking at these marginal tax rates would provide a decent
measure of potential efficiency losses.
However, the incentives to switch jobs
are very substantial. As people change
jobs iin response to the iIncentives cre-
The Clinton plan affects many more
people but at lower rates. The average
rnarginal tax rates range from 1.8 percent for the highest income group to
--Family Income
as a Percentage
of Poverty
-
MARGINAL
------
TAX
TABLE 1
RATES UNDER THE COOPER AND
~-
Cooper
Plan
Clinton
--Capped
Firm
--------&!!!T!z~~-
---____-~
-
--~
O-50%
so-100%
IOO-150%
1SO-200%
200-300%
300-500%
soo-750%
750-l ,oooo/o
1,OOO% +
All
---p-p-
CLINTON
Margmal
Tax
Marginal
Tax
0%
0%
25.4%
25.4%
0%
0%
0%
0%
0%
10.0%
9.6%
10.2%
6.7%
4.7%
3.3%
2.4%
1.9%
1.8%
1.6%
3.3%
---
-----~-
510
PLANS
Plan
Marginal
Tax
Tax (NoI
lncludin
Employe e
Cost)
Employer
Cost as
Fraction
of Wages
9.4%
10.2%
11.6%
8.7%
7.5%
7.2%
7.2%
7.2%
7.2%
2.4%
3.0%
4.3%
1.7%
0.3%
0%
0%
0%
0%
35.6%
20.6%
15.8%
13.0%
10.1%
7.3%
5.5%
4.2%
3.0%
7.6%
0.1%
6.1%
I
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
TAX ASPECTS OF HEALTH CARE REFORM
family member is working fuII-time,‘5
and because substantial subsidies are
available for the nonworker’s share
when it is owed. In particular, the
Cooper plan has no effect on working
for those with income below the poverty
level, though the tax on working is
higher for those with income between
150 and 300 percent of poverty. The tax
on working decreases substantially as income increases under the Cooper plan,
but remains significant for all income
levels under the Clinton subsidy scheme.
ated by the health plan, production becomes distorted and there are additional
efficiency losses.‘3 Furthermore, as the
low-wage workers move from uncapped
to capped firms, more workers become
subject to the distortionary
marginal tax
rates, though the incentive to actually
leave the labor market created by the
substantial per-job taxes in the uncapped firms diminishes. The movement
of the high-wage workers away from
the capped firms to the uncapped firms
contributes to production inefficiencies,
but reduces the number of high-wage
workers subject to the 7.9 percent payroll tax, which may enhance efficiency.
The movement of low-wage workers toward capped firms and of high-wage
workers away from capped firms will
also increase the government’s
subsidy
costs.
Table 3 compares the distributional
consequences of the two plans. In order to
make these comparisons, I assume that
there is no m’nimum wage constraint
and that any changes in employer costs
are passed on to workers in the form of
wage changes. This table uses families,
as opposed to workers, as the basic unit
of analysis, so the total contribution
for
health insurance is per family. The analysis also assumes that there are no behavioral changes, so that the contribution I calculate under the two plans is
based on current wages and income.16
The average contribution
for health insurance, and the average government
subsidy, are relatively similar under these
two plans, with the Cooper subsidies
providing less than $200 more per family. 17,18 The plans differ more in their distribution of subsidies than in the total
value of those subsidies. The Cooper
plan is more generous to both the
lower-income
classes and the higherincome classes (i.e., the Clinton plan
raises money from the high-income taxpayers, but the Cooper plan does not),
whereas the Clinton plan is more generous to those with income between 200
and 500 percent of poverty (roughly
$25,000 to $60,000 for a family of
three).
Nonetheless, a comparison of the
Cooper plan with the Clinton plan yields
two general observations. First, the Clinton plan spreads the phaseout much
further along the income distribution,
affecting more people but at lower rates.
Second, the Clinton plan has much
greater potential to distort the work effort of lower-income
workers, because
the subsidies provided to these workers
is not nearly as large, and for workers
that work in capped firms, there are no
direct subsidies for the employer’s share
of the premium.
One measure of the implicit tax on
working imposed by these two plans is
presented in Table 2.14 In this table, I estimate how much health care costs
would be reduced if a given worker
were to stop working. As the table
shows, the tax on working is generally
higher under the Clinton plan than the
Cooper plan. This result stems from the
fact that under the Clinton plan, a nonworking individual is deemed to have
satisfied the employer’s share of the
health insurance premium if at least one
In Table 4, I present some statistics on
the characteristics of workers-their
total wages, which are directly propor511
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
TABLE 2
TAXES ON WORKING
Reduction
in Health
Insurance
Contribution
Family Income
ax a Percentage
of Poverty
Reiduction as a
Perwntage
of Wage
Cooper
Plan
Clinton
Plan
Cooper
Plan
O-SO%
50-100%
loo-150%
150-200%
200-300%
300-500%
500-750%
750-l,OOO%
1 ,OOO% +
$639
$1,765
$2,916
$1,946
$888
$335
$7
$299
$770
$1,278
$1,670
$1,955
$2,169
$2,233
$2,300
$2,425
0%
0%
6.5%
13.2%
16.1%
7.5%
2.5%
0.7%
0%
14.5%
12.8%
13.0%
12.5%
10.8%
8.3%
6.3%
4.9%
3.8%
All
$1,412
$1,908
5.6%
7.5%
TABLE
DISTRIBUTIONAL
Total Contribution
for
Health Insurance
_
Cooper
Clinton
Plan
Plan
Family Income
as a Percentage
of Povertv
O-50%
50-100%
loo-150%
150-200%
200-300%
300-500%
500-750%
750-1,000%
1 ,OOO% +
All
-
EFFECTS
Contribution
as a
Percentage
of Total
Family Income
----Cooper
Clinton
Plan
Plan
$643
$1,943
$3,650
$3,824
$3,919
$4,031
$3,868
0%
0%
5.0%
10.7%
14.0%
9.2%
6.2%
4.6%
3.0%
13.8%
11.9%
12.2%
12.0%
10.9%
8.9%
7.1%
5.7%
4.2%
$2,603
$2,780
7.4%
7.9%
Avierage
$2,815
$2,384
$1,871
$1,303
$810
$134
-$524
-8955
-$I,432
$988
TABLE 4
CHARACTERISTICS
BY INCOME CLASS
-Hours
Total
Worked
as
%
Wages
Fraction of
Secondary
(.$Billions)
Average
Workers
126.2
12.7
40.9
79.2
126.2
372.4
951.6
849.4
431.9
388.6
3,253
38.1%
67.0%
84.9%
95.2%
101.6%
106.7%
110.1%
114.1%
120.9%
3.6%
8.5%
14.7%
17.5%
23.3%
29.4%
35.0%
37.3%
37.9%
100%
26.0%
512
Government
e
WORKER
Number of
Family Income
Workers
as a Percentage
of Poverty
(Millions)
---~
O-50%
6.1
50-100%
6.8
8.1
loo-150%
150-200%
9.4
200-300%
i!O 6
36:5
300-500%
500-750%
i!3 8
750-l,OOO%
9:o
5.8
l,ooo%+
Clinton
Plan
3
$117
$883
$1,562
$2,171
$2,840
$3,691
84,443
$4,986
$5,300
-----~
All
~
$811
-Education:
College
Degree
35.3$
23.3%
17.3$
7.3%
9.7%
9.3%
10.3%
13.2%
20.9%
33.8%
46.4%
62.5%
23.0%
I
TAX ASPECTS OF HEALTH CARE REFORM
tional to deadweight
loss, and some
other characteristics that might hint at
potential differences in labor supply elasticities across the income categories.
Workers with income between 100 and
200 percent of poverty represent 14
percent of all workers, but account for
only six percent of total wages. With the
current distribution of income, the
Cooper plan directly affects only a small
fraction of wages. Because of the nonconvexity of the budget constraint, however, workers in families earning more
than twice the poverty level may also
choose to reduce work effort given the
subsidies in the Cooper plan.
Secondary workers are more common in
the higher-income
categories. The fraction of secondary workers with income
between 100 and 200 percent of poverty is only around 16 percent, relative
to 26 percent on average. The hours
worked variable shows that higherincome workers work significantly more
than lower-income
workers, but the difference in earnings comes primarily from
differences in wages, rather than differences in hours. Hours worked increase
roughly threefold over the income
range, but earnings increase roughly 30fold. The education variables show, not
surprisingly, that education is highly correlated with family income. There are
not very many workers with college degrees in the 100 to 200 percent of poverty group, so one hypothesis, that these
high marginal tax rates may not have
much of an effect because many of the
people in the group are younger workers on their way up, does not get much
support in these data.
Using the information on wages from
Table 4, an estimate of the level of initial tax rates,lg and assuming that labor
supply elasticities are constant across the
income categories, one can do some
crude calculations of the relative deadweight losses arising from different
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
phaseouts.
In order to do the analysis,
I calculated what the payroll tax would
have to be to finance the subsidies, assuming no behavioral changes, and calculated what the final marginal tax rates
would look like for each income class
under a variety of phaseouts. These calculations are presented in Table 5. Under the assumption of constant labor
supply elasticities, the deadweight
loss
calculations suggest that faster phaseouts are preferable to slower ones. For
instance, the deadweight
loss*’ of extending the phaseout from between 100
and 200 percent of poverty to between
100 and 300 percent of poverty is
roughly 40 percent higher, and extending it further up the income range increases deadweight
loss even further.
I did find, however, that starting the
phaseout immediately, i.e., at zero percent of poverty, which would yield a
marginal tax rate of roughly 12.5 percent between zero and 200 percent of
poverty, would reduce deadweight
loss
substantially, on the order of 35 percent.
Starting the phaseout immediately clearly
changes the distributional
consequences
of the subsidies.” But, looking again at
Table 1, one sees that the Clinton plan
does subject individuals with income below poverty to rates almost this high.
There are a number of reasons that
these calculations should not be taken
too literally: the income measure is not
exactly the income measure used in the
Cooper plan (for instance, I do not have
capital gains income), the assumption of
a constant labor supply elasticity is essentially arbitrary, and the possibility of
workers substantially reducing their labor
supply or leaving the labor force altogether as a result of the nonconvexities
in the budget set is ignored. These nonconvexities are relatively large for a short
phaseout, so one might consider lengthening the phaseout somewhat beyond
what is suggested by these calculations.
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
INCREASE
IN DEADWEIGHT
PHASEOUT;
TABLE 5
DEADWEIGHT
LOSS CALCULATIONS
LOSS RELATIVE TO INCREASE FROM 100 TO 200°’
ASSUMES CONSTANT
LABOR SUPPLY ELASTtCtTY f
Phaseout
Phaseout
Begins
-100%
of Poverty
0% of Poverty
200%
of
Poverty
--
OF POVERTY
Ends
300%
of
Poverty
1
‘I .39
0.66
‘I .03
1.66
2.10
2.137
2.41
gorized. Furthermore, although many
low-income workers wit health insurance do i~~pllcitly spend, a large fraction
of their income on it, policymakers do
not feel comfortable
im osing mandates
on low-income individu Is without substantial subsidies.23 Thu , the programs
are inevitably expensive and provide big
windfalls for lower-into 11 e workers who
already have health insu~rance.
However, the calculated increases in
deadweight
loss as the phaseout lengthens are so large that it seems reasonable
to conclude that an accurate assessment
of the efficiency costs would demonstrate that long phaseouts are dominated by shorter ones.
h
Conclusions
This paper has highlighted some of the
important issues associated with rnarginal tax rates and health reform. While
I hope I have provided a useful framework for thinking about the trade-offs
between different subsidy designs, I do
not believe that I have answered the
questions in a satisfactory manner.
Clearly, more work is necessary on
choosing among different mechanisms
to increase subsidies. In particular, more
careful modeling of the nonconvexities
in the budget sets (and more empirical
work on the variatilon of labor supply
elasticities across income classes would
be helpful.
For the purposes of this1 paper, I have
assumed that the level of benefits provided to those with the ‘lowest incomes
is fixed. Given this fixed level of benefits,
I triecl to describe how ne might find
the subsidy phaseout wikh the lowest
costs. In reality, this level of benefits is
not fixed and should re pond to the potential costs of the program.
for exam5
ple, lowering the initial remiums by 15
percent cdn reduce the
arginal tax rate
“,
Ian from 25 to
imposed in the Cooper
21 percent, with potent ally large efficiency gains. A:; with m st welfare issues, policymakers will i ave to balance
the desire to provide co prehensive
benefits against the cos s of economic
distortions. In the healt care area, the
decision is particularly d fficult because
1
of a common, though not universal,
view that all Americans
ught to receive
the silrne level (i.e., the ery best) care,
independent
of their resources. With this
constraint, it is substant ally more diffir
cult to reduce the value,of the health insurance provided to then lowest-income
individuals.
0
Nonetheless, the potential inefficiency
costs of any health reform plans that in.
volve substantial increases in subsidies
are likely to be high. One frustrating aspect of health care reform is that, for
many, the main goal is ensuring unlversal health insurance coverage, and not
redistribution.
Unfortunately,
the uninsured are distributed across the income
distribution, across workers and nonworkers, etc., and cannot be easily cate.
0
514
I
TAX ASPECTS OF HEALTH CARE REFORM
ENDNOTES
I am grateful to David Cutler, Eric Engen,
Doug Elmendorf,
Billy Jack, and my discussants, Randy Mariger and Len Nichols, for
helpful discussions. The views expressed in
this paper are nevertheless
my own, and do
not necessarily
reflect the views of the staff
or members of the Board of Governors
of the
Federal Reserve.
Note that this does not mean that those in
the phaseout would not fare better under alternate mechanisms.
For example, providing
health insurance to everybody and then financing it with a flat tax (an infinite phaseout) would benefit those in the phaseout region more.
One exception
is Blinder and Rosen (1985),
who analyze the conditions
under which what
they call “notches”
(and what I call cliffs) can
dominate linear tax systems.
Feldstein (1987) uses a formal model with
two classes of workers to analyze conditions
under which welfare is improved by meanstesting social security benefits. The necessary
conditions
he finds are similar to the ones I
reach about when to extend a phaseout.
Kosters (1993) discusses the potential distortion
caused by the phaseout of the EITC.
Because of the nonconvexities
remaining in
the budget set, there may be some people
who will both be better off and be less costly
for the government.
However,
for a sizable
increase in the phaseout range, the result is
most likely that the increased phaseout will
cost the government
more money.
The interaction
between these other elements
of the plans and the subsidies may be important, however.
For example, the marginal tax
rate during the phaseout will increase if
health insurance costs continue to grow at a
rate faster than income growth. Thus, the effect of the two plans on health insurance
costs will also have an impact on the deadweight loss associated with the subsidies.
Although
the Cooper plan permits individuals
to deduct their health insurance costs from
income for purposes of the income tax, individuals who receive insurance from their employer still have lower payroll taxes. Thus, a
small fraction of those eligible for a subsidy
will not take it. I ignore this possibility in the
calculations.
See Sheiner
(1994).
A 7.9 percent standard phaseout would provide a much higher level of benefits than
does the firm-level 7.9 percent phaseout,
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
since all low-wage
workers would receive a
subsidy.
If labor contracts generally had two parts,
consisting
of a lump-sum
payment (perhaps
from the employee to the employer)
and an
additional per-hour wage, then it would be
clear that an employer mandate would have
no marginal effect on hours or effort for
workers. These types of contracts are seldom
observed.
If instead, employees
lowered the
wage by the average per-hour
cost of insurance, and let employees
choose work hours
at that wage, then the mandate would have
a distortionary
effect. However,
if employers
and employees jointly bargain over hours and
wages, then the mandate is again best
viewed as a per-job tax rather than a perhour tax.
Note that if mandates are distortionary
because of this reason, then the current provision of employer-provided
health insurance is
also distortionary,
and the impact of the
phaseout tax would have to be compared
relative to the current distortionary
tax. For an
empirical test of how hours are determined,
in the context of overtime regulation,
see
Trejo (1991).
For a discussion
of the methodology
used to
derive these numbers, as well as a more indepth comparison
of firm-level versus individual subsidies, see Sheiner (1994).
It is difficult to accurately
take account of existing marginal tax rates, both because it is
difficult to calculate the correct marginal tax
rates near the bottom of the income distribution, where various programs
phase out, but
also because of the nature of the experiment.
Under current law, the employer share of the
health insurance premium is deductible,
but
not the employee share, unless contributed
through a cafeteria plan. This law would remain in effect under the Clinton plan. Under
the Cooper plan, 100 percent of the premium
up to the reference premium would be deductible, but only employer premium payments could escape social security taxation. In
order to maintain the baseline of current law
however, so that only the subsidy was analyzed, and not the increase in deductibility
of
the premium,
It might be appropriate
to analyze the Cooper plan under the assumption
that only 80 percent of the premium was deductible. In that case, the appropriate
marginal tax rate would be roughly ((1 - t)*O.8
-t- 0.2) trmes the marginal tax rates In Table 1
for Cooper, and (1 - t - t,)*employer
marginal tax plus the family marginal tax for the
Clinton plan, where t is the personal income
tax rate and tP is the effective payroll tax rate.
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
In this case, the marginal tax rates under the
Clinton plan would decrease slighlty more
than under the Cooper plan, but the general
findings would hold.
Since deadweight
loss is related to the square
of the tax, the deadweight
loss arising from
the Clinton taxes is higher than what one
would calculate using the average change in
marginal tax rates.
To the extent that vvorkers change by lob by
simple relabeling-for
example, by having
one firm split into two-a
low-wage
firm and
a high-wage
firm-with
no actual production
or workplace
changes, then no production
inefficiencies
would result, although the government would lose money from this relabeling. If widespread,
this type of relabeling
would transform
the firm-based
system into
one that was de facto an Individual-based
system, in that everyone with wages below a
threshold would be subsidized,
and no one
with wages above this threshold would be affected. If, despite the higher revenue costs,
the standard individual-based
subsidy scheme
is more efficient that the firm-based
one, this
type of relabeling would be efficiency enhancing.
I am grateful to Randy Manger for suggesting
this exercise. (Indeed, a table like this was included in his discussion of this paper )
The Clinton plan works on a month-to-month
basis; if a husband and wife both work fulltime for half a year, they will still be liable for
one-half the employer’s
share of the premium. Because I do not have any information
on monthly income, I underestimate
the nonworker’s
share of the employer premium by
assuming that all work is done sequentially
(so if a husband and wife each work full-time
for 26 weeks, I assume that they have the
equivalent of one full-time full-year worker).
Because there is a substantial
subsidy for the
nonworker’s
employer’s
share (limiting the
payment to 5.5 percent of nonwage income
for all those with nonwage income less than
250 percent of poverty), hlowever, this underestimate is likely to be small.
This is not an unreasonable
approach
to calculating tax benefits and burdens, although rt
will miscalculate
the revenue costs. For a discussion of methods of calculating
tax burdens, see Joint Committee
on Taxation
(1993).
Labeling these two iplans the Clinton plan and
the Cooper plan IS in some sense quite misleading. The subsidy schemes berng analyzed
here reflect only part of the spending under
the two plans. For example, the Clinton bill
contains additional small firm subsidies and
subsidies to early retirees, and the costs of
the subsidies over time are affected by the
cost controls imposed. Al$o, the behavioral effects incluced by the Clinton plan, which are
ignored here, can have substantial
distributional as well as cost effekts. The Cooper plan
is unlikely to have 100 p&cent insurance, as
is presumed
here, so the ‘costs of the plan are
likely to be lower as well, but the premiums
higher. The Cooper plan also imposes an excise tax on health insurance costs exceeding
some cap, but extends thle current favorable
tax treatment
provided ta employer-paid
health insurance premiurr)s to all purchasers.
Finally, the effect of the subsidies on the collection of other taxes is niot taken into account in these calculations.
l8 The revenue cost of the Clinton plan is
slightly overstated
because earnings in the
CPIS are top-coded
at $1~0,000.
Thus, workers with earnings over $lioO,OOO in capped
firms will end up contributing
more than the
amount I calculate. Their Iburden is similarly
understated.
’ As discussed above, it is difficult to calculate
the efficiency
losses from the Cllnton subsidy
schemes. Because I belie+ that individualbased subsidies are likely ito dominate firmbased subsidies, I only calkulate the deadweight I~ses under a variety of individualbased subsidy schemes.
’ Note that I consider only the deadweight
loss
from labor supply distortions.
Since the higher
marginal tax rates during the phaseout apply
to all types of income, 0tl;er inefficlencies
may also result. These inefficiencies
are likely
to be more Important
at the top of the income range, where capital income is more
common,
so the underestimate
of the ineffi-
I
National Tax Journal
Vol. 47, no. 3, (September, 1994), pp. 497-517
TAX ASPECTS OF HEALTH CARE REFORM
ciency is likely to be higher for longer than
for shorter phaseouts.
** Also, increasing the marginal tax rates at the
bottom of the income distribution
is counter
to the goal to “make work pay” that lies behind the substantial
subsidies for working
provided to those with low income.
23 For a discussion of this point, see Steuerle
(1994).
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Vol. 47, no. 3, (September, 1994), pp. 497-517