Ritter Insurance Marketing, Craig Ritter

A Look at the Marginal Tax Rate on Low Income Families, Post ACA

Here is a quick case study on the impact of phase out of tax subsidies on relatively low income families as they look to earn more household income.  In this example, take a family of 3 with one spouse working a job making $30,000/year (around 150% of poverty level).  Assume they live in PA, in the 17112 zip code, neither smokes and they need coverage for their child.  Using the Kaiser subsidy calculator, they would qualify for $4,219 in subsidies on their plan premiums.

Now, assume that their child begins school and the non-working spouse can get a job earning $25,000 (total income of $55,000).  This additional income would cut their subsidy down to $537.  So, the marginal loss of subsidy on the additional $25k of income is $3,682 or 14.7% of the income.  Add to the loss of subsidy the marginal federal tax rate at 13.4% (federal taxes go from $0 to $3358 using tax estimator tool), wage taxes of 7.65%, state taxes of 3.07% and local taxes of 2%.  This brings the total marginal tax rate (including loss of subsidy) for a family of 3 to increase their income from $30k to $55k to 40.82%.

Granting that pre-ACA, this family would not have had the benefit of the $4,219 subsidy, it’s interesting that now having this subsidy creates something similar to a very regressive “tax” on the relatively low income family looking to “get ahead” by earning more household income.

Posted by filed under Health Care Reform .

  • Anonymous

    With huge respect to all parties here and as always, huge thank you to Craig Ritter for all he has done for his brokers..

    I think she would go to work if she needs the net 15k additional family income.

    Admittedly not ideal circumstances, but if the money is needed, she’ll work.

    Yes, ACA needs huge reform. I’ve written 80 2014 ACA apps now and commented on this on Craig’s other post.

    i’m seeing huge abuses from underground economy people…people who hide a significant amount of their income…usually self-employed with access to cash.

    Asset testing would be overly complicated, but I am seeing asset-rich people with temporarily tight income get big subsidies, too.

    Small biz owners are big losers here — rates jumping 40% to 100%.

    My personal family cost increased by $500/month..costing me $6,000 extra per year…largely because we lost “good health underwriting discount” and joined the pool where we are all priced the same, based on ages and income above the subsidy cut-off.

    I call it “the Affordable for Some and not for Others Act.”

    But the prior system wasn’t fair either.

    Working poor/lower middle class…and middle class being increasingly marginalized by cost and access problems. The system was unsustainable and collapsing under its own weight of runaway costs…for premiums and for care..

    So I will raise a glass to continued reform until we get closer to doing something right.

    If we could get this monkey off employers’ backs, I think we’d see an explosion in job growth.

  • Anonymous2

    This case study focuses on increased tax liability and reduced subsidies. I’m saddened to see that some people still don’t see the big picture. Perhaps I am just not understanding your thought that “$15k ahead” is a good thing. After you factor in the likely additional costs of childcare, wardrobe for the new job and increased vehicle expenses, to name a few, you’re still eating up your earnings. By the time you factor in ALL of the financial ramifications of taking that second job, what have you accomplished?…spending more time away from your family to obtain less than a $10k gain in income. I know school will take away from some childcare expenses, but overall, the implication is the same…it’s just not worth it to most families. I have 3 boys and my wife stays at home. I chose to by an off marketplace plan and we’re not using any welfare benefits by scrimping and saving wherever possible. Every time we look at the possibility of my wife getting a job to give us some “extra” money, the math just never works out to justify her being away from the kids. Again, I could be wrong, but my guess is that most families will make the same choice where subsidies are involved…big difference is that their choice will cost the tax payers the subsidy money!

    • “Perhaps I am just not understanding your thought that “$15k ahead” is a good thing.”

      Please point me to the particular words Craig used that made the value judgement.you attribute to him.

      • Anonymous2

        Sorry…to clarify…my value judgement was attributed to the question posed by “Anonymous” and not to the original post. I did not feel Craig made any such comments, I just missed the “reply” button until now and posted a general comment.

  • Correction to my last post: The net benefit to the family would be less than $15,000, not $17,000.

  • Anonymous

    I read the last paragraph again and still don’t see why this is bad.

    The family has 15k more income if she works versus not working, right?

    The 7.65/% wage tax…..isn’t that really s.s. and Medicare… can we see the s.s. tax an insurance premium for an old-age annuity, possible disability annuity, possible parent dies and family gets an annuity for the child for a few years, and affordable Medicare health insurance when that day comes. She is getting good value here.

    Losing the ACA subsidy ..so be it. She is using her money to buy health insurance for her family. Hopefully the health insurance protects them from the number one cause of bankruptcy — no health insurance and serious illness.

    I think it would be rational decision to work here, versus not work.

    • “I think it would be rational decision to work here, versus not work.”

      Read Craig’s last sentence in the next to last paragraph.

      Assuming a 25k wage, the loss of subsidy effectively lowers the newly employed spouse’s take home pay by $3700. The additional tax liability increase because of the wages lowers the couple’s net income $3400 further.

      In this scenario, the net benefit to the family of the $25,000 is less than $17,000. This is a classic case of regressive taxation in practice, and a large disincentive to work..

      Also, see Craig’s recent post about the CBO findings on Health Care “Reform”. for further information.

    • “I think it would be rational decision to work here, versus not work.”

      Apparently, you don’t feel that a 40% marginal rate is such a huge disincentive to work. I think it’s a huge one..

      “The net effective tax rate on an incremental $1,000 in income could easily exceed 50% as workers are forced to forgo some of their subsidies for the additional income when they straddle certain wage bands. Obamacare implicitly assumes that people won’t grow their take home pay, but will instead remain fixed in certain income bands. So it imagines that workers won’t face these tradeoffs. That’s not true, and it’s certainly not consistent with peoples’ aspirations.

      These are some of the unfortunate effects of the law that have long concerned conservatives but were dismissed by Obamacare’s proponents. Now CBO is being forced to acknowledge how Obamacare collides with some seemingly obvious economic principles…..:”

      http://www.forbes.com/sites/scottgottlieb/2014/02/04/cbo-explains-how-obamacare-will-tax-low-wage-workers/

      • And if the spouse declines the job, they still have health insurance, with subsidies.

        Why work, if the cost is so dear, and the net benefit is so little?

  • “Is that bad?”

    For the case Craig discussed above, yes. It’s VERY bad.

    Read the final paragraph of the post again.

  • Anonymous

    Hi Craig,

    If I get this right, she gives up 10k of her 25k wages due to higher taxes, loss of subsidy, but the family is still 15k ahead…vs her not working.

    Is that bad?

  • I don’t like the fact that we’re creating a new “disincentive” to achieve more . . . .I also don’t like the fact that I’m subsidizing people who are well above the poverty level, with plenty of assets who are choosing to not produce income so that they can get a big subsidy. . . .It’s a mess . . . .

  • Dave G.

    Isn’t life sweet on the plantation? Score another victory for the culture of dependency. The only positive is the ACA is opening the eyes of many new folks to the confounding ways of Uncle Sugar and a needlessly complex tax code.

  • frekerinsurance@verizon.net

    Hi Craig,   Great article. Excellent perception on your part. Thanks for all you do for us.   I’m heading to Medicare next month. No, I can’t take a plan because I have to stay on the Prudential retirees plan til my wife turns 65 in November. I read a Siler Script flyer today and I’m surprised that nowhere in the flyer does it mention the Part D penalty. I know most consumers aren’t aware of it but I would have thought the carriers would at least mention it. is that not allowed by CMS?   Take care

    Tom Freker Lic 0500854  714 401-0587 voice 714 908-0433 fax 9550 Warner Ave #250, Fountain Valley CA 92708


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