...the highest marginal net tax rates are not imposed on the highest-income families. They are imposed on those with the lowest earnings. For example:
At two times the minimum wage ($42,800), working couples get to keep less than 30 cents out of each dollar they earn.
At 1.5 times the minimum wage ($32,100), they get to keep less than 20 cents out of each dollar they earn. By contrast, a couple earning $200,000 a year gets to keep 44 cents.
The disincentives to work at the low end of the income scale are even worse if we compare part-time with full-time work:
A minimum-wage couple that moves from half-time to full-time work will lose 97 cents out of every extra dollar they both earn.
At 1.5 times the minimum wage, the couple will lose $1.06 for every extra $1.00 they earn; for this couple, working more literally means having less.
What causes these marginal tax rates to be so high? In general, loss of transfer benefits is more important for lower-income families, while direct taxes on income are more important for higher-income families. Among full-time working couples:
At $32,100 (1.5 times the minimum wage), two-thirds of the marginal net tax rate consists of the loss of transfer benefits, while a little more than one in five dollars is lost to income and payroll taxes.
At $64,300 (triple the minimum wage), half of the marginal net tax rate consists of a loss of benefits, while two in five dollars are lost to income and payroll taxes. At $321,400 (15 times the minimum wage), four in five dollars of the marginal net tax are lost to income and payroll taxes.
Marginal net tax rates for low-income families are so draconian because our system makes a very generous package of welfare benefits available to people who do not work and then begins taking away those benefits at a steep rate as they begin to earn a modest income. In our model, for example:
A couple with two children can expect $489,100 in lifetime benefits if they never work.
However, if both spouses work full-time and each earns about $16,000, the loss of Medicaid and other welfare benefits will cost them two-thirds of their income over the whole of their worklife.
When all taxes and benefits are considered, the American fiscal system is fairly progressive - at least toward the lower half of the income spectrum. That is, the lower your income, the more generously you are treated. But the price of that generosity is lifetime marginal net tax rates that make working for a living very unattractive. - - National Center for Policy Analysis
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