Opinion Editorial | |
| Monday, February 16, 1998 | |
Families Face Sharply Higher Marginal Tax Rates |
One of President Bill Clinton's first acts upon taking office in 1993
was to push through one of the largest tax increases in American history.
Later he fought Republicans tooth and nail to prevent any reduction in
federal taxes, acquiescing last year only when a tax cut seemed inevitable.
Now, Clinton is taking credit for the tax cut he resisted until the bitter
end. Last week, he bragged that a typical family earning $25,000 per year
now has the lowest tax burden in three decades. Mr. Clinton is correct. According to the Treasury Department, a family
of four earning half the median income -- roughly $27,000 -- will pay an
average federal tax rate of just 7.14 percent this year. This is for federal
income taxes and the employee's share of the payroll tax. One has to go
back to 1966 to find a year in which such a family would have a lower tax
rate. Last year the tax rate was 10.3 percent. The reduction in taxes for moderate income families this year is, of
course, due entirely to the $500 per child tax credit, which was the centerpiece
of the Republican Congress's Contract With America. Although any reduction in the federal tax burden obviously is good news
for families already struggling to make ends meet, it has come with a stiff
price.
This anomaly is caused mainly by Mr. Clinton's favorite tax provision,
the Earned Income Tax Credit (EITC), which he greatly expanded in 1993.
The EITC subsidizes earnings for low income workers, but is withdrawn as
a family's income rises. This reduction in benefits is like a tax, creating
high marginal tax rates. Ironically, when the credit was enlarged in 1993
it raised the de facto marginal tax rate as well, because the rate at which
the credit is phased-out also had to rise. Economists know that it is the marginal tax rate that is most important
for economic incentives. High marginal tax rates discourage people from
working and make it harder for them to raise their standard of living.
If Mr. Clinton wants credit for lowering average tax rates, be must also
take responsibility for raising marginal tax rates. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
February 16, 1998.
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