8/26/2012

100% effective marginal income tax rate?

Here are two stunning figures from the liberal Urban Institute.  If someone is facing anywhere near a 100% marginal tax rate, would they actually go out and work harder?  There is in fact a wide range of income for this hypothetical family with two children where the effective marginal income tax rate is above 80% for the range of income from about $15,000 to over $40,000.  The effect on people's incentives to escape poverty is obvious.

This last figure here does a good job of summarizing the point.  If you go from earning the poverty level in Alabama to twice that level, a $17,000 increase in income, you effective spending power goes up by only $6,852 -- implying a 60 percent marginal tax rate.


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