The New Full-Time Employment Taxes

The Affordable Care Act (ACA) introduces or expands taxes on incomes and full-time employment, beginning in 2014. The purpose of this paper is to characterize the new full-time employment taxes from the perspective of a household budget constraint, measure their magnitude, and assess their likely consequences for employee work schedules. When the ACA is fully implemented, full-time employment taxes will be prevalent and often as large as what workers can earn in five hours of work per week, 52 weeks per year. The economic significance of the ACA's full-time employment taxes varies by demographic group: they are nonmonotonic in age, increasing with family size, and negatively correlated with schooling.A full-time employment tax is a tax or penalty owed by, or subsidy withheld from, a person as a consequence of his full-time employment status. For the first time in 2014, millions of people face such taxes on their full-time work. More workers will face full-time employment taxes in 2015 when assessable employers owe penalties on the basis of the number of full-time employees on their payroll. Both of these taxes are provisions of the Affordable Care Act of 2010 (hereafter, ACA), on top of the longstanding taxes on incomes and payroll. This paper assesses the magnitude, direction, and economic characteristics of the full-time employment tax wedges created by the ACA.By definition, part-time employed and nonemployed persons are exempt from a full-time employment tax. I follow the usual steps of public finance analysis and first look at the tax wedge--the gap between supply and demand prices created by a tax or subsidy--before attempting to draw conclusions about the tax's behavioral effects and ultimate incidence. For simplicity, I assume that employees are legally liable for all marginal taxes and penalties and are legally entitled to all marginal subsidies, even when the actual liability falls on the employer. As long as prices can fully adjust to reflect supply and demand, and ignoring enforcement issues, my legal liability assumption is just a normalization and does not imply that employees ultimately bear the burden of taxes. However, proper tax measurement requires an assessment of the treatment of the ACA's full-time employment taxes by other parts of the tax system, for example, whether a full-time employment tax is deductible from employer business income taxes. The last step in the analysis is to begin to consider the equilibrium consequences of the new tax wedges.The prevalence and size of the new full-time employment tax (hereafter, FTET) wedges are economically important. Almost half of the working population is directly affected by at least one of the new FTETs. The ACA's FTET wedges vary substantially across groups: they are most significant for young and uneducated workers and least significant for the elderly. From an aggregate point of view the employer penalty by itself is historically significant, but nonetheless the wedges that they create are matched, if not exceeded, by the ACA's implicit FTET. My results account for the facts that a variety of longstanding tax and subsidy rules also affect work incentives (in both directions) and that many people will not participate in programs for which they are eligible.1Although this paper does not even attempt to discuss all of the parts of the ACA that relate to the labor market or to taxation, its Section I begins with an overview of the ACA's main components related to insurance coverage. Section II explains how two of those components contain taxes on full-time employment and represents the taxes in terms of household budget constraints. Section III discusses determinants of the magnitude of those taxes. Section IV has the main results on the distribution of the ACA's FTET across workers. Section V discusses some of the behavioral effects of FTETs, and Section VI concludes