The distortion of thresholds

The Obama administration has decided to delay by one year the implementation of the employer health care mandate for businesses with more than 50 employees. The fear was that companies with slightly more than 50 employees would simply lay off or convert to part-time the workers above the threshold to avoid the penalties. I think in general thresholds are a bad idea for economic and tax policy as they provide an incentive to game the system. They should be replaced by smooth scales. US federal income taxes have a small number of rigid brackets for which income above a certain amount is taxed at a higher rate. This should be replaced by  a smooth function so the tax rate for an extra dollar earned will only be slightly higher than the previous dollar. The shape of the function can be debated but a smooth one would certainly work better than the current discontinuous one. In terms of the employer mandate for providing health care, a smooth phased-in penalty would avoid the incentives for companies to manipulate the number of employees they have.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s