Uwe Reinhardt enters the debate on the impact of Obamacare on the workforce by analyzing the inherent trade-off in means-tested public assistance.
“The red line in the graph assumes a tax rate of t = 50 percent and shows how quickly federal cash assistance melts away as the family’s earned income rises, which means that the family faces a strong disincentive for work to earn income. The threshold income below which a subsidy is received here is X = M/t = $20,000/0.5 = $40,000 only.”
“The blue line assumes a tax rate of only t = 25 percent, driving the threshold income to X = 20,000/0.25 = $80,000. That scheme confronts the family with less of an incentive not to work and earn income; but the price for that is a much higher federal assistance budget.”
“Whatever the distribution of households along the income scale may be, it is clear that, for a given minimum guaranteed income (M), the size of the federal assistance budget rises when the tax rate decreases.”
Reinhardt emphasized that CBO report’s analysis of the impact of Obamacare on the workforce is “is merely an estimate.”
“The rest depends on what assumption one makes concerning the likely behavioral response of employed or unemployed workers to changes in marginal income-tax rates.”