# Huge Marginal Tax Rates in Bush-Obama Housing Bailout

**Implicit Marginal Tax Rate Could be 131 Percent**

University of Chicago economist Casey Mulligan, in his latest NBER piece, finds greater than 100 percent marginal tax rates across a large swath of the U.S. population. How so?

From his NBER piece, “Means-Tested Mortgage Modification: Homes Saved or Income Destroyed?” NBER Working Paper 15281 (gated) [un-gated is here.]

The FDIC-HASP [HASP stands for “Homeowner Affordability and Stability Plan] plan massively distorts the supply of income-earning efforts, because its mortgage modification is large and means-tested: its formula implies that an action taken by a borrower to increase his income would increase his housing payment by 31 percent of the income increment. If the affordable payment (i.e., the payment that would comprise 31 percent of income) were re-evaluated monthly, this would amount to a 31 percent marginal tax rate in each month that a modification could occur.

Standard practice determines an affordable payment based on the most recent year’s income, and puts that payment in place for five years (recall the Citigroup practice cited above). Thus, a marginal dollar earned in the base year raises mortgage payment obligations by 31 cents in

eachof the following five years. If, say, 2009 income were used to calculate an affordable payment for the years 2010-14 and the interest rate wer zero, then the marginal tax rate would be 155 percent for 2009 (5 times the formula’s 0.31 limit on the payment to income ratio) and zero thereafter. Hereafter I assume an annual interest rate of 6 percent, which means that the marginal tax rate would be 131 percentfor 2009. (italics his)

In other words, if you’re in the federal government’s program for mortgage modification and you make an extra dollar, you pay an extra 31 cents in mortgage payment. This sounds like an extra 31-percentage-point increment to your marginal tax rate, which is bad enough. But wait; there’s more. If, as he says above, that extra dollar of income this year causes you to pay 31 cents more in mortgage for the next five years, then the present value of that extra 155 cents in mortgage is, at a discount rate of 6 percent, 131 cents. Implicit marginal tax rate: 131 percent. And that’s on top of a marginal tax rate that’s probably (with federal, social security, Medicare, and state income taxes) about 35 to 40 percent.

And note his next three sentences:

Moreover, underwater mortgages are ubiquitous enough that FDIC-HASP mortgage modification could produce distortions that are large enough to be visible in the national employment data, or at least visible in the employment data of the worst hit states. Means-tested mortgage modification has created a massive implicit tax that is significant even from a macroeconomic perspective.