Economics, Taxes and Spending

The poor’s high marginal tax rate

After much hee-hawing about hurting small businesses and wealthy Americans, Congress raised the top marginal tax rate to 39.6% in January 2013.  But they forgot about the working poor. 
Low-income households face high marginal tax rates of 30%, nearly the same as upper income households, according to the Congressional Research Service.
Today in Tax Notes, Aspen Gorry and Sita Slavov show how low-income individuals face high implicit marginal tax rates because of the phase-out of government benefits.  The result is that low-income individuals have a strong disincentive not to work.
The same logic applies to older workers and married women, both of whom are highly responsive to changes in take-home pay.  Older workers face higher average tax rates because of the set-up of the entitlement system.  Secondary earners – usually married women — face higher tax rates on their earnings because their entire income gets taxed at a rate that is at least equal to the primary earner’s marginal tax rate.
The tax code should incentivize work, not discourage people from earning a paycheck.  Gorry and Slavov recommend transitioning to a proportional tax system to improve transparency and eliminate the variation in marginal and average tax rates within income groups.   The system could be made progressive by adding a universal transfer payment or an income exemption

4 thoughts on “The poor’s high marginal tax rate

  1. You’re right that people do what they are incented to do. When you’re in government you are incented to have MORE, not fewer people receiving government benefits.

  2. Funny how much higher tax rates in the previous century especially the forties through the sixties saw prosperity abound.Some of the US best decades for growth had high tax rates across the board.Americans have become brainwashed by the corporate run media that low top tax rates bring prosperity.One can spin and twist the facts to their point of view,but the archived data don’t lie.

    • Govt spend vs of GDP is increasing. The money is coming from somewhere. Even if it prints the money, it comes out eventually in an inflation tax.

      My point is simply, govt consumption of resources relatively high vs the periods you site.

      You can talk “tax rates” all you like, but that is the bottom line.

    • Kevin you may be spinning your point of view since you don’t offer data for a comparison. Or are you taking into account today’s reality? Eg older population, inflation, dismissal of the gold standard, corporate tax rates / worker tax rates, unemployment rates, government worker wages & costs to tax payers, compared to worker wages and real income.

      It’s a different world now, so before you spin your opinion you should possibly present real facts,,, or not because that’s what spin is ….. Just a sound bite right? Are you repeating something you’ve heard?

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