NCPA - National Center for Policy Analysis

The High Marginal Tax on Working

March 6, 2003

Over time, going to work raises some taxes and government benefits and lowers others. Using a computer model of a two-earner couple with two children at various income levels, economists calculated the lifetime consequences of employment.

They found that Americans at every income level face a lifetime marginal net tax rate greater than 50 percent. That is, for every dollar they earn, they will lose more than 50 cents in higher taxes and reduced transfer benefits.

Furthermore, they found the highest marginal net tax rates are imposed on those with the lowest earnings. (See Figure IV.) For example:

  • At two times the minimum wage ($42,800), working couples keep less than 30 cents out of each dollar they earn.
  • At 1.5 times the minimum wage ($32,100), they keep less than 20 cents.
  • By contrast, a couple earning $200,000 a year keeps 44 cents.
  • The disincentives to work at the low end of the income scale are even worse comparing part-time with full-time work:
  • A minimum-wage couple that moves from half-time to full-time work will lose 97 cents out of every extra dollar they both earn. (See Table II.)

At 1.5 times the minimum wage, the couple will lose $1.06 for every extra $1.00 they earn; for them, working more literally means having less.

Marginal net tax rates for low-income families are draconian because our system has a very generous package of welfare benefits for people who do not work, but begins taking away those benefits at a steep rate for modest income workers.

The couple modeled, for example, can expect $489,100 in lifetime benefits if they never work. However, if both spouses work full-time and each earns about $16,000, the loss of Medicaid and other welfare benefits will cost them two-thirds of their income over the whole of their worklives.

Source: Jagadeesh Gokhale, Laurence J. Kotlikoff and Alexi Sluchynsky, "Does It Pay to Work?" Policy Report No. 258, March 2003, National Center for Policy Analysis.

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