The marginal rate is how much you spend for the next chunk of income. Usually we use this framework when talking about taxes. The next dollar I earn has a North Carolina marginal rate of a little over 5% which means I keep 95 cents and the state of North Carolina gets a nickel. This is important because decisions happen at the margin and from a social policy perspective, we should want to encourage good things and discourage bad things with marginal rates. Big jumps create discontuinities and playing hop-scotch is usually a bad thing.
The ACA subsidy formula has weird implied marginal rates. I am looking at what each additional $1,000 in income costs a family of two who are subsidy eligible and who are looking to buy the benchmark silver plan.
From $17,000 to$20,000 this couple pays an extra $2 per month for every thousand dollars more they earn a year. Annually this is about a 2% marginal tax rate on the additional income. And then there is a huge bump from $20,000 to $21,000. The benchmark premium suddenly becomes $256 more expensive. This is a 25% marginal rate. In our income tax system, the 2018 tax year 24% marginal rate applies to couples filing jointly only starts at $165,001.
And then the marginal rate drops again when the family increases their earnings from $21,000 to $22,000. The marginal rate for this slice is now about 11%. The marginal rate for couples earning under 300% FPL is in the mid-teens, and then there is a drop in the marginal rate to just under 10% for 300% to 400% FPL and then a potential massive spike as soon as someone earns over 400% FPL.
This is an applied microeconomist’s dream design as it creates tremendous research opportunities as there are numerous notches to shift behavior. It is bad social-fiscal policy.
It is also surprising because we run a major social welfare program, Social Security, with step functions that smooths out the impact of income changes. Ping pong can be a fun game to play but it is seldom optimal subsidy design.