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How Marginal Tax Rates Affect Families At Various Levels Of Poverty

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

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    Article provided by National Tax Association in its journal National Tax Journal.

    Volume (Year): 65 (2012)
    Issue (Month): 4 (December)
    Pages: 759-82

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    Handle: RePEc:ntj:journl:v:65:y:2012:i:4:p:759-82
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    1. Bruce D. Meyer & Dan T. Rosenbaum, 2001. "Welfare, The Earned Income Tax Credit, And The Labor Supply Of Single Mothers," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 1063-1114, August.
    2. Eissa, Nada & Liebman, Jeffrey B, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 605-37, May.
    3. 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, vol. 60(2), pages 253-76, June.
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