April 20, 2019

Today’s Economist: Wages and Employer Penalties

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

The cost to workers of the Affordable Care Act’s employer responsibility penalties is greater than you think, because of their business tax treatment.

Today’s Economist

Perspectives from expert contributors.

Most low-skill workers are not offered health insurance by their employers, and those employers have been complaining about the $2,000-per-employee annual penalty they will pay beginning next year ($3,000 per employee who resorts to a subsidized exchange when insurance offered by the employer is deemed unaffordable to the worker).

Next year will not be the first time that employers had to pay taxes based on the number of employees they have. For example, they have been paying payroll taxes that amount to almost $2,000 per year for an employee with a $25,000 salary.

Employer payroll taxes have been extensively studied, and economists have concluded that employees ultimately pay for those taxes in the form of lower wages.

Thus you might think that the new $2,000 penalty would reduce wages by about $2,000 per employee per year. But unlike employer payroll taxes, the employer responsibility levies are not deductible from employer business taxes (see page 74 of this I.R.S. document). To have the same after-tax profit, an employer in the 39 percent bracket (a typical state-plus-federal bracket for corporations) would have to cut wages by $3,046.

An employer paying the $3,000 penalty would have to cut wages by $4,569. That would push someone working full-time at $10 per hour down to minimum wage.

Some good news for the employees who want health insurance: the employer penalties come with employee access to large federal subsidies for purchasing health insurance and paying out-of-pocket health expenses, unless you are in a family that is 400 percent or more above the poverty line.

Not all employers have to pay the penalties, and more good news for employees is that both types of employers will compete with each other in the market for labor, which might prevent penalty-paying employers from passing on the full cost to their employees.

Article source: http://economix.blogs.nytimes.com/2013/02/20/wages-and-employer-penalties/?partner=rss&emc=rss

Economix Blog: Older Workers Could Benefit if Companies Drop Insurance

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

As I’ve written before, older workers, once unemployed, have an extraordinarily difficult time finding re-employment. But they may get one unexpected employment booster next year: the health insurance exchanges put in place by the Affordable Care Act.

That theory was just proposed to me by John Challenger, the chief executive of Challenger, Gray Christmas, a global outplacement and executive coaching company. Here’s how it would work.

Once individuals are able to buy insurance on exchanges, employers may be tempted to “get out of the health care business,” as Mr. Challenger put it. In other words, they will dump their workers onto the individual market. For most workers, this is probably a less-than-desirable outcome. But for older workers, it might be a blessing.

One potential reason that older workers have so much trouble finding work, after all, is that employers do not want to be responsible for their health care. Health care spending rises steadily by age; in fact, the health care costs of an older person are around five times those of a young adult. If employers are no longer on the hook for those health care costs, that is one less negative to be held against older job candidates.

Of course, those older workers would still have to find their own insurance, but the Affordable Care Act forces younger people to subsidize older people on the exchanges. Under the law, a health insurance plan’s oldest subscriber can be charged no more than three times as much as a plan’s youngest subscriber (even though, as mentioned, the oldest subscriber’s costs are probably closer to five times as much).

It’s worth noting that the exchanges might increase demand for older workers, but could also reduce their supply.

If older people no longer need to be on someone’s staff in order to afford health insurance, they could decide to drop out of the job market altogether, or at least decide to go into business for themselves. We have already seen this phenomenon among Medicare-eligible workers. A recent Rand study documented a spike in entrepreneurship at age 65, when people newly qualify for Medicare and so have less to risk if they leave their employers and start their own businesses.

Article source: http://economix.blogs.nytimes.com/2013/02/15/older-workers-could-benefit-if-companies-drop-insurance/?partner=rss&emc=rss

Today’s Economist: Casey B. Mulligan: The Health Care Law and Retirement Savings

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Because of its definition of affordability, beginning next year the Affordable Care Act may affect retirement savings.

Today’s Economist

Perspectives from expert contributors.

Employer contributions to employee pension plans are exempt from payroll and personal income taxes at the time that they are made, because the employer contributions are not officially considered part of the employee’s wages or salary (employer health insurance contributions are treated much the same way). The contributions are taxed when withdrawn (typically when the worker has retired), at a rate determined by the retiree’s personal income tax situation.

Employees are sometimes advised to save for retirement in this way in part because the interest, dividends and capital gains accrue without repeated taxation. In addition, people sometimes expect their tax brackets to be lower when retired than they are when they are working.

These well-understood tax benefits of pension plans will change a year from now if the act is implemented as planned. Under the act, wages and salaries of people receiving health insurance in the law’s new “insurance exchanges” will be subject to an additional implicit tax, because wages and salaries will determine how much a person has to pay for health insurance.

While much about the Affordable Care Act is still being digested by economists, they have long recognized that high marginal tax rates lead to fringe benefit creation. And the Congressional Budget Office has concluded that the act will raise marginal tax rates.

Were an employer to reduce wages and salaries (or fail to increase them) and compensate employees by introducing an employer-matching pension plan, the employee is likely to benefit by receiving additional government assistance with his health-insurance costs. The pension contributions will add to the worker’s income during retirement, except that the income of elderly people does not determine health-insurance eligibility to the same degree, because the elderly participate in Medicare, most of which is not means-tested.

Take, for example, a person whose four-member household would earn $95,000 a year if his employer were not making contributions to a pension plan or did not offer one. He would be ineligible for any premium assistance under the Affordable Care Act because his family income would be considered to be about 400 percent of the poverty line.

If instead the employer made a $4,000 contribution to a pension plan and reduced the employee’s salary so that household income was $91,000, the employee would save the personal income and payroll tax on the $4,000 and would become eligible for about $2,600 worth of health-insurance premium assistance under the act. (The employer would come out ahead here, too, by reducing its payroll tax obligations).

Even though the Affordable Care Act is known as a health-insurance law, in effect it could be paying for a large portion of employer contributions to pension plans. This has the potential of changing retirement savings and the relative living standards of older and working-age people.

Article source: http://economix.blogs.nytimes.com/2013/01/30/the-health-care-law-and-retirement-savings/?partner=rss&emc=rss

Economic View: Too Much Wishful Thinking on Middle-Class Tax Rates

Let’s start with the problem: the budget deficit. Under current policy, the federal government is spending vastly more than it is collecting in tax revenue. And that will be true for the next several decades, thanks largely to the growth in entitlement spending that will occur automatically as the population ages and health care costs increase. As a result, the ratio of government debt to the nation’s gross domestic product is projected to rise, substantially and without an end in sight.

That can happen for a while, or even a long while, but not forever. At some point, investors at home and abroad will start questioning our ability to service our debts without creating steep inflation. It’s hard to say precisely when this shift in investor sentiment will occur, and even whether it will strike in this president’s term or the next, but when it does, it won’t be pretty. The United States will find itself at the brink of an unprecedented financial crisis.

Republicans and Democrats agree on the nature of the problem, but they embrace very different solutions. My fear is that both sides are engaged in an excess of wishful thinking, with a dash of mendacity.

If Republicans had their way, they would focus the entire solution on the spending side. They say that reform of the entitlement programs can reduce their cost. The so-called premium-support plan for Medicare, from Paul D. Ryan, the 2012 Republican vice-presidential candidate, would let older Americans use their health care dollars to buy insurance from competing private plans. (Interestingly, it’s similar to the system envisioned for the nonelderly by President Obama’s Affordable Care Act.) The hope is that competition and choice would keep health care costs down without sacrificing quality.

The premium-support model may well be better than the current Medicare system, but its supporters oversell what it would be likely to accomplish. The primary driver of increasing health care costs over time is new technology, which extends and improves the quality of life, but often at high cost. Unless the pace or nature of medical innovation changes, this trend is likely to continue, regardless of structural reforms we enact for Medicare.

Democrats, meanwhile, want to preserve the social safety net pretty much as is. They balk at any attempt to reduce this spending, including even modest changes like altering the price index used to calculate Social Security benefits. They focus their attention on raising taxes on the most financially successful Americans, contending that the rich are not paying their “fair share.”

Fairness, like beauty, is in the eye of the beholder. Unfortunately, people’s judgment is often based on anecdotes that distort rather than illuminate. The story of the undertaxed Warren Buffett and his overtaxed secretary looms larger in the public’s mind than it should.

Here are some facts, so you can judge for yourself:

In 2009, the most recent year for which data are available, the richest 1 percent of Americans paid 28.9 percent of their income in federal taxes, according to the Congressional Budget Office. (That includes income taxes, both individual and corporate, and payroll taxes.) Members of the middle class, defined as the middle fifth of households, paid 11.1 percent of their income in taxes.

Some of this difference in tax rates is attributable to temporary tax changes passed in response to the recent recession. But not all. In 2006, before the financial crisis, the top 1 percent paid 30 percent of their income in taxes, compared with 13.9 percent for the middle class.

These data suggest that the rich are not, as a general matter, shirking their responsibilities to support the federal government. To me, the current tax system looks plenty progressive. Others may disagree.

One point, however, cannot be disputed: Even if President Obama wins all the tax increases on the rich that he is asking for, the long-term fiscal picture will still look grim. Perhaps we can stabilize the situation for a few years just by taxing the rich, but as greater numbers of baby boomers retire and start collecting Social Security and Medicare, more will need to be done.

Which brings us back to the middle class. When President Obama talks about taxing the rich, he means the top 2 percent of Americans. John A. Boehner, the House speaker, talks about an even thinner slice. But the current and future fiscal imbalances are too large to exempt 98 percent or more of the public from being part of the solution.

Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans. This could involve higher tax rates or an elimination of popular deductions. Or it could mean an entirely new tax, such as a value-added tax or a carbon tax.

To be sure, the path ahead is not easy. No politician who wants to be re-elected is eager to entertain the possibility of higher taxes on the middle class. But fiscal negotiations might become a bit easier if everyone started by agreeing that the policies we choose must be constrained by the laws of arithmetic.

N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to Mitt Romney in the 2012 presidential campaign.

Article source: http://www.nytimes.com/2012/12/30/business/on-middle-class-tax-rates-too-much-wishful-thinking.html?partner=rss&emc=rss