Does it Pay to Work More?

Policy Reports | Taxes

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


"High marginal taxes penalize the efforts of low-income workers to move up the economic ladder."

The United States’ tax-transfer system confronts the vast majority of American households with high effective marginal tax rates on labor supply.  The pattern of net marginal tax rates with respect to age, marital status and earnings is all over the map.  Factoring in the value of transfer benefits demonstrates that the United States tax system is anything but progressive.  For workers who take steps to increase their income through working overtime, or through furthering their education in order to obtain a higher-paying job, the incentives to do so are dismal.  Policymakers should consider a major overhaul of the tax system to avoid penalizing those who make an effort to move up the income ladder.  That overhaul, however, should steer clear of proposing additional programs involving means-tested tax subsidies, as these can raise marginal tax rates even further for low- and middle-income families.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.

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