Marginal Tax Rates, Again
By Arnold Kling
A reader recommends a paper by Laurence J. Kotlikoff and David Rapson. The reader views this paper as contradicting the article I linked to earlier. Kotlikoff and Rapson report marginal tax rates of closer to 40 percent than 100 percent for people in the lower income ranges. One difference is that Kotlikoff and Rapson do not include housing subsidies. Otherwise, it is difficult to trace the sources of the difference.
The incentive structure for low-income households is a maze, which Kotlikoff and Rapson describe as “bizarre.” There are some hypothetical profiles where tax rates are extremely low, and some where they are extremely high.
Some quotes from the paper follow.
Take couples age 30. The marginal rate is -14 percent at $10,000 in earnings, 42 percent at $20,000, 24 percent at $50,000, 37 percent at $75,000, 46 percent at $150,000, 37 percent at $200,000, and 44 percent at $500,000.
In addition to anomalous patterns of marginal rates with income, holding age constant, there are also unusual patterns with respect to age, holding income fixed. Take singles earning $10,000. Thirty-year old members of this group face a marginal net tax rate of 72 percent. Were they age 45, their marginal rate would be -10 percent. And were they 60, their marginal rate would be 39 percent…
One way to appreciate the size of work disincentives facing this [45 years old, $25,000 income] household is to ask how much more it must earn, after losing all its benefits, to achieve the same living standard it enjoys when earning $25,000 and receiving all its benefits. The answer is roughly $50,000. I.e., the couple has to double its earnings simply to break even with respect to maintaining its living standard. Such high net taxes apply to all low-income households, regardless of age or marital status.
…To further appreciate the nature of life-cycle labor supply disincentives, consider our 60 year-old couple earning only $10,000. For this couple earning $55,000 a year for
the duration of its working life is only marginally better than earning $10,000.