Does it Pay to Work More?

Policy Reports | Taxes

No. 310
Tuesday, April 15, 2008
by Laurence J. Kotlikoff and David S. Rapson


"Working additional hours can cost a family thousands of dollars in benefits."

Does it pay to work more hours in order to earn more income? The answer depends on what one earns after taxes.  A worker knows his pretax wage, but determining his post-tax wage can be quite difficult thanks to various tax and transfer programs.  As a result, many Americans face higher marginal tax rates than they think. This study considers the entire panoply of taxes and transfers in measuring the total marginal effective tax rates facing American households with different levels of pretax earnings. The findings are striking. Virtually all American households are confronted with high to very high marginal tax rates when they increase either the number of hours they work in the current year or the number of hours they work in each future year.  Further, due to the loss of benefits as household incomes rise, marginal tax rates are generally and substantially higher for lower-income households than for high-income households.  Much of this regressive taxation comes courtesy of means-tested government transfer programs, particularly Medicaid. Indeed, for many households, small amounts of additional earnings can mean the loss of thousands of dollars in benefits.

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