NCPA - National Center for Policy Analysis

Low-Income Workers Suffer High Effective Marginal Tax Rates

January 22, 2013

A recent report by the Congressional Budget Office (CBO) reveals that effective marginal tax rates have unintended consequences for low-income workers, says Salim Furth, a senior policy analyst at the Heritage Foundation.

  • A poverty trap created by benefits such as Section 8 housing and food stamps discourages low-income workers from earning more.
  • Each additional dollar low-income workers earn between $5,000 and $20,000 brings only an additional $0.15 in disposable income, which amounts to a marginal tax rate of 85 percent.
  • Low-income earners in the $10,000 to $23,000 range keep a smaller portion of their new earnings.

Policymakers need to think more carefully about the unintended consequences of the policies meant to aid low-income workers.  For example, the argument supporting the minimum wage is weak because most increases in the minimum wage result in higher marginal tax rates and less income earned by the individual.

  • A 10 percent rise in the minimum wage increases take-home pay by less than 4 percent according to the CBO.
  • Lower minimum wages encourage free market competition and greater employment.
  • The Affordable Care Act adds to low-income workers' tax burden by raising the marginal effective tax rate for a single parent earning between $22,000 and $62,000 a year by phasing out premium credits as wages rise.

Despite our best efforts, we may never truly measure poverty correctly until we fix the way we measure poverty statistics. The Official Poverty Measure in use today was developed in the 1960s and does not accurately reflect the realities facing the poor today.

  • Furth also points out that the expiration of the temporary payroll tax cut will raise marginal tax rates another 2 percent for most wage earners.
  • Many benefits are considered in-kind, or non-cash, the benefits of which are not calculated correctly according to the CBO report.

As tax reform continues to take center stage in public discussion, policymakers should keep in mind the income earners on the other end of the pay scale that struggle to make ends meet.

Source: Salim Furth, "Effective Marginal Tax Rates for Low-Income Workers Are High," Heritage Foundation, January 8, 2013.


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