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How Marginal Tax Rates Affect Families at Various Levels of Poverty

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  • Maag, Elaine
  • Steuerle, C. Eugene
  • Chakravarti, Ritadhi
  • Quakenbush, Caleb

Abstract

High marginal tax rates can make moving above poverty very difficult for low-income families. These high tax rates result from increasing direct taxes (both state and federal) as well as decreasing transfer payments (including both Supplemental Nutrition Assistance Program benefits and Temporary Assistance for Needy Families). Depending on which state a person lives, a single parent with two children can face an average marginal tax rate of over 100 percent or as low as 26.6 percent as they move from the poverty level of income to 150 percent of the poverty level. If her earnings are limited to only six months of the year, she may retain transfer benefits for the remaining six months, lowering her marginal rate over the same income range to between 66.0 percent and –17.7 percent for those additional earnings. Our analysis shows how sensitive marginal tax rates are to assumptions about earnings patterns and program participation.

Suggested Citation

  • Maag, Elaine & Steuerle, C. Eugene & Chakravarti, Ritadhi & Quakenbush, Caleb, 2012. "How Marginal Tax Rates Affect Families at Various Levels of Poverty," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(4), pages 759-782, December.
    • Handle: RePEc:ntj:journl:v:65:y:2012:i:4:p:759-82
    DOI: 10.17310/ntj.2012.4.02
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    References listed on IDEAS

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    1. Holt, Stephen D. & Romich, Jennifer L., 2007. "Marginal Tax Rates Facing Low– and Moderate–Income Workers Who Participate in Means–Tested Transfer Programs," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(2), pages 253-276, June.
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    4. Dickert, Stacy & Houser, Scott & Scholz, John Karl, 1994. "Taxes and the Poor: A Microsimulation Study of Implicit and Explicit Taxes," National Tax Journal, National Tax Association;National Tax Journal, vol. 47(3), pages 621-638, September.
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    Cited by:

    1. Gizem Kosar & Robert A. Moffitt, 2017. "Trends in Cumulative Marginal Tax Rates Facing Low-Income Families, 1997-2007," Tax Policy and the Economy, University of Chicago Press, vol. 31(1), pages 43-70.
    2. Richard Blundell, 2016. "Coase Lecture—Human Capital, Inequality and Tax Reform: Recent Past and Future Prospects," Economica, London School of Economics and Political Science, vol. 83(330), pages 201-218, April.
    3. Casey B. Mulligan, 2012. "The ARRA: Some Unpleasant Welfare Arithmetic," NBER Working Papers 18591, National Bureau of Economic Research, Inc.
    4. Golosov, M. & Tsyvinski, A. & Werquin, N., 2016. "Recursive Contracts and Endogenously Incomplete Markets," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 725-841, Elsevier.
    5. Beznoska, Martin & Hentze, Tobias, 2019. "Die Grenzbelastung der Lohneinkommen im zeitlichen Vergleich: Berechnungen für verschiedene Einkommensgruppen," IW-Reports 21/2019, Institut der deutschen Wirtschaft (IW) / German Economic Institute.
    6. Ravallion, Martin & Chen, Shaohua, 2013. "Benefit incidence with incentive effects, measurement errors and latent heterogeneity," Policy Research Working Paper Series 6573, The World Bank.
    7. Haskins, Ronald, 2017. "Using Government Programs to Encourage Employment, Increase Earnings, and Grow the Economy," Working Papers 07513, George Mason University, Mercatus Center.
    8. Hansen, Emanuel, 2021. "Optimal income taxation with labor supply responses at two margins: When is an Earned Income Tax Credit optimal?," Journal of Public Economics, Elsevier, vol. 195(C).
    9. Mike Brewer & Jonathan Shaw, 2018. "How Taxes and Welfare Benefits Affect Work Incentives," Fiscal Studies, John Wiley & Sons, vol. 39(1), pages 5-38, March.
    10. Terrance Jalbert & Gary Fleischman & Mercedes Jalbert, 2014. "Marginal Tax Rates Around The Hawaii Itemized Deduction Cliff," Accounting & Taxation, The Institute for Business and Finance Research, vol. 6(1), pages 25-38.
    11. Mikhail Golosov & Maxim Troshkin & Aleh Tsyvinski, 2016. "Redistribution and Social Insurance," American Economic Review, American Economic Association, vol. 106(2), pages 359-386, February.
    12. Mikhail Golosov & Aleh Tsyvinski & Nicolas Werquin, 2014. "A Variational Approach to the Analysis of Tax Systems," NBER Working Papers 20780, National Bureau of Economic Research, Inc.
    13. Ravallion, Martin & Chen, Shaohua, 2015. "Benefit incidence with incentive effects, measurement errors and latent heterogeneity: A case study for China," Journal of Public Economics, Elsevier, vol. 128(C), pages 124-132.
    14. Johannes Fleck & Chima Simpson-Bell, 2019. "Public Insurance in Heterogeneous Fiscal Federations: Evidence from American Households," 2019 Meeting Papers 296, Society for Economic Dynamics.
    15. Marchand, J. & Smeeding, T., 2016. "Poverty and Aging," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 905-950, Elsevier.
      • Marchand, Joseph & Smeeding, Timothy, 2016. "Poverty and Aging," Working Papers 2016-11, University of Alberta, Department of Economics, revised 20 Nov 2016.
    16. Emanuel Hansen, 2020. "Optimal Income Taxation with Labor Supply Responses at Two Margins: When Is an Earned Income Tax Credit Optimal?," CESifo Working Paper Series 8630, CESifo.
    17. Randy Albelda & Michael Carr, 2017. "One Step Forward, One Step Back? Labor Supply Effects of Minimum Wage Increases on Single Parents with Public Child Care Support," Working Papers 2017_01, University of Massachusetts Boston, Economics Department.

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