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Tuesday, July 05, 2011

Marginal tax rates are surprising

Bruce Bartlett has a bunch of interesting facts in his article on whether taxes are high or low.


But what I want to focus on is the marginal tax rate at the low end.

Taking the figures for 2010, we see that the average tax rate for those at half the median income is zero – actually slightly negative because they can get refunds for taxes they didn’t pay.

But the marginal rate is huge: almost 39% at the federal level. Note that this marginal tax rate is substantially higher than the marginal tax rate at either the median income or at twice the median income.

Note also that this was NOT the case until recently – in the mid 1990’s. That’s when the earned income tax credit lowered both the tax rate for the poor and the incentives to earn more because the earned income tax credit phases out steeply.

Is it good policy to have so many federal voters paying no federal taxes (not even 2-3%) AND have diminished incentives to earn more? It’s hard to imagine this is a good reinforcement system.