[PEN-L:6673] Re: 50% Marginal Tax Rate for Working Families

["Max B. Sawicky" <maxsaw@xxxxxxxxx>]

Nathan Newman wrote:
>
> Speaking of minimum wage workers, do folks realize that if working
> families get any increase in wages above the minimum wage, they face the
> highest marginal tax rate of any income group? . . .

Careful.  Accounting for the standard deduction and exemption(s),
the first dollar over the min wage isn't necessarily exposed to
the first bracket of the personal income tax.  It depends on what
other income the family has.  In general, including the EITC benefit,
families under $30K pay little or no income tax.

The truly horrendous marginal rates apply to benefit programs, as
Gene Steuerle (Urban Inst) has written about, where moving out of
eligibility for Medicaid, Food Stamps, and/or AFDC by working can
easily imply marginal rates in excess of 100 percent.  Conservatives
have gotten a free ride on this issue, notwithstanding the fact that
their 'solution' is to eliminate the benefit whose loss triggers the
marginal effect.

One interesting option to me is to institute a standard deduction for
the payroll tax so that the 15.3 percent doesn't hit the first dollar
of wage income.  The only problem, as usual, is how to pay for it
without screwing up the Social Security system.

> One solution we should advocate is ending the phaseout of the EITC (except
> maybe with a long phaseout for very high incomes).  Essentially we would
> trump the Republicans and Clinton and advocate a $2000 tax credit for a
> first child and an additional $1000 tax credit for a second child
> (essentially what the EITC adds up to at its peak). This would have to be
> paid for with higher rates on the wealthy (say by having them pay the
> marginal 50% tax rate now faced by the working poor) but that would be a
> much more progressive situation than the present system.

A problem is that this ends up putting a very large number of families
on EITC, including non-poor ones.  This issue helped to kill good old
Dick Nixon's proposal for a negative income tax in the 1970's.

> This proposal if passed would have the additional advantage of
> institutionalizing the EITC not as a program just for the poor but a tax
> credit used by all income groups.  It also simplifies the tax code for a
> lot of people since they wouldn't have to do the calculations on phasing
> out the EITC.

Yeah but filing for the EITC is extra work in and of itself.
In general the potential for the tax system in and of itself to
accomplish distributional goals should be regarded as limited, in
my view.  An alternative approach is to minimize the complexity of
the tax code and use public spending to improve income distribution.

MS

=====================================================
Max B. Sawicky			maxsaw@xxxxxxxxx
Economic Policy Institute	202-775-8810 (voice)
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