• Income cutoffs and health care subsidies

    Yesterday, I wrote about income cliffs in the ACA and their potential effects on wages. They are real, and simple microeconomic theory predicts that they could be a disincentive to work.

    However, a number of people have written to me explaining that while the theory is sound, empirical data show that they don’t seem to pose nearly the threat they might. In fact Jared Bernstein (among others) will be testifying today before the Subcommittee on Human Resources of the Committee on Ways and Means, in a hearing entitled, “How Welfare and Tax Benefits Can Discourage Work“. Key findings:

    • While benefits of means-tested programs are, by definition, reduced as incomes rise beyond a certain point, their work disincentives differ, and a number of significant programs, including the EITC and SNAP (formerly Food Stamps), are found to have either positive or neutral impacts on labor supply.
    • A recent, exhaustive review of the poverty reduction effectiveness of our safety net and social insurance programs found that “…the combination of the means-tested and social insurance transfers in the system have a major impact on poverty, reducing deep poverty, poverty, and near-poverty rates by about 14 percentage points in the U.S. population as a whole in 2004.”
    • Importantly, the study concluded that “…this impact is only negligibly affected by work incentives which, in the aggregate, have almost no effect on the pre-transfer rates of poverty in the population as a whole.”
    • Recent research also finds positive generational effects of safety net programs on later education and earnings outcomes of children from families that received such benefits.  In the full accounting that I’m advocating, these benefits too must be assessed against any costs of work disincentives.

    It’s been stressed to me that this type of cliff is a characteristic of any means-tested program, that research shows that in terms of labor supply the effect is less than might be predicted theoretically, and that the only way to avoid the issue entirely is to have a slow phase out (which of course costs more money).

    I completely admit that my concerns are theoretical, not empirical. I have no evidence that what I’m worried about will occur. I think Jared makes a good case that the research doesn’t support my fear, at least in domains other than the ACA. Go read.

    @aaronecarroll

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    • EITC raises labor supply of single mothers; lowers labor supply of married mothers particularly along the phase-out range.

      Another interesting paper is Saez’s do taxpayers bunch at kink points (http://elsa.berkeley.edu/~saez/bunch.pdf). He finds that “self-employed” workers bunch at EITC. I believe you’ll find similar bunching along the subsidy lines, if they’re well known.

    • AA personal anecdote that might shed some light on why this is so complex:

      Income cliffs like this actually exist in the private employer insurance market. A few years ago, my company tiered its health insurance premiums so that higher-earning employees bear a greater share of costs.

      When they did this, I found my self exactly $1 over the cutoff. I worked out the numbers and figured that this one marginal dollar in salary cost me about $300.

      So did I stop working so hard? Of course not. Like a lot of people–and perhaps, in this economy, foolishly–I don’t see my income as a fixed amount. I imagine it can grow over time. So while that extra dollar cost me $300 this year, its annoying but unavoidable transition on the way to higher income I hope to earn later.

      Now, I make a decent salary; the effect on a low income person might be different. My starting hypothesis would be that lower-income people would but an even greater weight on mobility than on marginal effects. Then again, $300 is a bigger deal if you earn less.

      But maybe the effect of all of this is swamped by the fact that its hard for people to precisely calibrate their work to reach a desired income amount. Most of us just get a choice to go to work and do the things we need to do to keep our jobs, or not.

    • Could this be more of an issue of work not being worth taking a job when the incentive to do so is too low?

    • I own a small company so we don’t do a lot of hiring, last year and the year before I had 4 people turn down jobs to stay on unemployement. I wasn’t paying sufficently above unemployement so they didn’t see it worth taking the job until their benefits ran out.

      Working with my clients I heard the same thing from a majority of them. In a terrible economy I would usually expect to be able to hire people well under market value, I would lose them when the economy recovered but this time there was no one to hire. I had to compete against myself as a tax payor to find workers.

      I have one employee now that only works part time so she doesn’t lose Social Security. This is very common.

      Some of those stats above appear dated;

      In 2000, 4.7% of Americans lived in extreme poverty.
      In 2007, 5.2% of Americans lived in extreme poverty.
      In 2010, 6.7% of Americans lived in extreme poverty.