Income Responses to the Affordable Care Act: Evidence from a Premium Tax Credit Notch

We examine responses to the ACA subsidy for Marketplace health insurance in the first year of subsidy availability. Drawing on federal tax data and focusing on a notch in the schedule where eligibility is lost, we document that taxpayers lowered their income to remain eligible for the subsidy. The observed bunching is modest relative to the size of the notch, which, consistent with larger responses we detect in additional analyses among certain subgroups, is likely explained by significant optimization frictions. Finally, we find suggestive evidence that increased deductions drive some of the response, while reduced labor supply also plays a role.