Why a $2,000 Employer Penalty is Really $3,046

Under the ACA, employers not offering health insurance will owe a $2,000 per employee “shared responsibility” penalty (unless the employer has fewer than 50 FTEs). This penalty is not deductible from business taxes, and thereby is equivalent from an employer’s point of view to a $3,046 wage cut.

When an employer cuts wages by $3,046, he reduces his payroll expenses by $3,279, which includes the payroll tax he would have owed on the $3,046.

Payroll expenses are deductible, so by cutting his payroll expenses by $3,279, he increases his corporate tax by 39 percent of that = $1,279. So net of corporate tax this wage cut saves him $2,000, which is just enough to pay the $2,000 penalty.

Unless an employee (or employees like him) has opportunities to take a job at an employer who does not pay a penalty, he can expect the $2,000 penalty to ultimately depress his wages by $3,046.

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About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

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