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 .


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