Tax Policy

JCT Study: Effective Marginal Tax Rates Higher (SUMMARY)

A study by the Joint Committee on Taxation of the U.S. Congress (JCT) finds many taxpayers may be subject to much higher or lower marginal tax rates than advertised. The JCT says taxpayers at all income levels may be affected.

The marginal tax rate is the incremental increase in a taxpayer's liability from a $1.00 increase in income. The statutory marginal tax rates are 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent. But phaseouts, phase-ins and floors that limit the ability of certain taxpayers to claim certain deductions, credits or other tax benefits raise or lower the effective marginal tax rate.

  • The Tax Code includes 22 provisions that can result in a taxpayer's effective marginal tax rate deviating from the statutory marginal tax rate.

  • The JCT estimates that in 1998, 33.2 million taxpayers, or about one quarter of all taxpayers, will have an effective marginal tax rate different from their statutory tax rate.

  • Most of these provisions increase the marginal tax rates of higher income earners; but some provisions raise rates for low income earners.

  • Since provisions overlap and may have contrary affects, two taxpayers can have the same income but face widely divergent tax rates.

For example, because the earned income tax credit, a lower income earner with no children faces an effective marginal income tax rate of 22.65 percent on wage income between $5,570 to $10,030. A parent with one child faces a 30.98 percent marginal tax rate on earned income between $12,260 to $26,473. And some middle-income seniors may face marginal rates of 90 percent or more (see figure).

The JCT says marginal tax rates are important because they create incentives or disincentives to work or save, and may promote an inefficient allocation of labor and capital resources.

Source: "Present Law And Analysis Relating To Individual Effective Marginal Tax Rates," JCS-3-98, February 3, 1998, Joint Committee on Taxation, Washington, D.C.

Home | Support Us | All Issues | Social Security | Debate Central | Contact Us

Dallas Headquarters: 12770 Coit Rd., Suite 800 - Dallas, TX 75251-1339 - 972/386-6272 - Fax 972/386-0924
Washington Office: 601 Pennsylvania Avenue NW, Suite 900 South Building, Washington, DC 20004 - 202/220-3082 - Fax 202/220-3096
© 2001 NCPA