Krugman and Blinder: Welcome to the Supply Side
By David Henderson
Obamacare defenders and Princeton University economists Paul Krugman and Alan Blinder have granted that the Congressional Budget Office is making a reasonable claim in saying that by 2024, Obamacare, if not repealed or delayed, will reduce the number of hours worked in the economy by the equivalent of about 2.5 million full-time jobs. That doesn’t mean that 2.5 million fewer people will work. It means that some people won’t work at all and that many millions of people will work a few hundred hours less. If you add up all those hours, according to the CBO, you get the equivalent of a loss of 2.5 million full-time jobs. (A standard work year is about 2000 hours.) The CBO does not break down its estimates into (1) reductions of hours by people who keep working and (2) reductions of hours to zero by people who stop working.
Virtually all of this effect is for lower-income workers. Why? Because the effect comes from the reduction in Obamacare subsidies to lower-income workers as they earn more. In other words, there’s a substantial implicit tax rate from the reduction in subsidies. I blogged about this in 2011 here and cited Greg Mankiw’s work in 2009.
Many low-income workers facing a marginal federal tax rate of, say, 15%, a combined Social Security (FICA) and Medicare (HI) tax rate of 7.65%, and a state tax rate of, say, 2%, are already in a 24.65% tax bracket. If the subsidy phases out at, say, $15 for every $100 of extra income, this is an implicit tax rate of 15%. Add that to the original tax rate and you get a whopping 39.65% implicit marginal tax rate. It should be no surprise that the CBO recognized this. It also should be no surprise that the CBO recognizes that this is disincentive to work will cause millions of lower-income workers to work less. Why work an extra hour for $15, when you get to keep only $9.05 of it?
But here is the surprise: that Krugman and Blinder agree that high marginal tax rates reduce work effort. They defend that result, saying it’s a good effect, but I’ll be responding to their defense in an article elsewhere.
Read through various Krugman and Blinder articles and books over the last many years and look for their discussion of the effect of high marginal tax rates on high-income people. High-income people have, for many years, been paying explicit marginal tax rates higher than 39.65%. Currently, for example, the highest-income people pay a marginal tax rate of 39.6%, almost identical to the above-calcuated rate for a lot of low-income people. They also pay a Medicare tax of 2.35 percent. (I’m not including the new Obamacare tax of 3.8% on net investment income because that tax is not on income from work.) So now we’re at 41.85 percent. But wait! There’s more! If they live in one of the many states with an income tax, their marginal state income tax rate can easily be 6% or more. So we’re at 47.85%. (They might get to deduct their state income taxes and so their net income tax rate will be about 2 percentage points lower, for a net rate of about 45%.)
So if low-income people are willing to work less in response to higher marginal tax rates, wouldn’t you expect higher-income people to do the same, especially since higher-income people have more options? I would expect that. And yet it’s hard to find Krugman and Blinder admitting that fact. That fact was one of the main building blocks behind the “supply-side” revolution in thinking about taxes in the late 1970s and early 1980s. Yet, pretty much whenever Krugman and Blinder discussed that revolution, they were hostile.
Well, better late than never. Welcome to the supply side, Paul and Alan.