Marginal Tax Rates and Anti-Poverty Programs
Thursday August 14, 2008
Tyler Cowen on a reported Obama tax-plan:
The key point is this: "Reducing a person’s tax credit as his income goes up also reduces his incentive to earn more income." But before some of you get all upset, I do not intend this presentation as an endorsement of John McCain's utterances on fiscal policy.This idea that social programs can lead to very high marginal tax rates for low income households is one I discuss in detail in How Good Intentions Lead to Crushing Marginal Tax Rates on the Working Poor. In anticipation of the e-mails and blog comments I am going to get from this post, I would like to add two things:
Addendum: I am not saying that Obama is "raising taxes on the poor." It is about marginal rates and yes marginal rates do matter for incentives. This is a genuine problem of many indeed most anti-poverty programs...
- My linking to the Obama marginal tax numbers are not an endorsement of their accuracy (I have no idea if they are accurate) nor is it an endorsement of any candidate.
- Introducing a social program with a clawback feature does, all else being equal, raise marginal tax rates on the working poor. That does not necessarily mean that the social program should not be introduced - but one does need to understand the trade-offs.
Comments
I understand the disincentives “high” marginal rates can create. However, I don’t consider the marginal rates Obama has proposed for low and middle income families (middle income not well defined but somewhere around $45k to $150k) to be substantial enough even after phase outs to worry about. His plan seems to balance providing tax relieve to low income families with incentives to earn additional income quiet well. [As I recall, Obama’s marginal rates are below the negative income tax rate proposed by Milton Friedman under his Negative Income Tax proposal several years back.] I see all this talk about disincentives of phaseouts raising mtr’s slightly on lower middle class people as a disguise for keeping mtr’s on higher income people below those proposed by Obama. If you believe Obama’s mtr’s on people earning $250k or above are too high, then argued that point. But don’t suggest that folks in the middle income class are in someway worse off as a result of the credits and the effect the phase outs have on mtr’s. Their average tax rate is still lower than what it otherwise would be.