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Taxes and the poor: A microsimulation study of implicit and explicit taxes

  • S. Dickert
  • S. Houser
  • J. K. Scholz

The authors measure the cumulative burden on low-income households resulting from explicit taxes (state and federal income, and payroll taxes) and implicit taxes (reductions of program benefits as earnings rise). With monthly data from the 1990 Survey of Income and Program Participation, a simulation model calculates the benefits and taxes households receive and pay in 1990. A household's marginal tax rate is established by simulating the benefits and taxes the household would receive and pay if each member aged 15 or more received additional earnings of $10 per month. The changes in income that would result if all household members age 15 or older took a half-time, minimum-wage job are also calculated. Typical cumulative marginal tax rates on poor households are found to be about 27 percent, but this masks considerable variation across states as a result of differences in program eligibility rules, state income taxes, and state AFDC policies. The tax burdens resulting from taking a half-time minimum-wage job also vary greatly across states, and participants in AFDC and food stamps face median marginal tax rates significantly above the rates for all poor households. A consistent result, however, is that typical tax rates on the poor rarely exceed 60 percent when income changes resulting from incremental changes in monthly earnings are calculated. The authors conclude that for most poor households, tax rates are not so high as to diminish the possible effectiveness of such policies as the Earned Income Tax Credit, which try to make work more attractive than welfare.

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Paper provided by University of Wisconsin Institute for Research on Poverty in its series Institute for Research on Poverty Discussion Papers with number 1040-94.

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Handle: RePEc:wop:wispod:1040-94
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  1. Daniel H. Weinberg, 1985. "Filling the "Poverty Gap": Multiple Transfer Program Participation," Journal of Human Resources, University of Wisconsin Press, vol. 20(1), pages 64-89.
  2. Fraker, Thomas & Moffitt, Robert, 1988. "The effect of food stamps on labor supply : A bivariate selection model," Journal of Public Economics, Elsevier, vol. 35(1), pages 25-56, February.
  3. Rebecca M. Blank & Patricia Ruggles, 1993. "When Do Women Use AFDC & Food Stamps? The Dynamics of Eligibility vs. Participation," NBER Working Papers 4429, National Bureau of Economic Research, Inc.
  4. Wilson, Paul W. & Cline, Robert, 1994. "State Welfare Reform: Integrating Tax Credits and Income Transfers," National Tax Journal, National Tax Association, vol. 47(3), pages 655-76, September.
  5. Michael P. Keane & Robert Moffitt, 1995. "A structural model of multiple welfare program participation and labor supply," Working Papers 557, Federal Reserve Bank of Minneapolis.
  6. Daniel H. Weinberg, 1987. "Filling the "Poverty Gap," 1979-84," Journal of Human Resources, University of Wisconsin Press, vol. 22(4), pages 563-573.
  7. Robert Moffitt & Barbara Wolfe, 1990. "The Effect of the Medicaid Program on Welfare Participation and Labor Supply," NBER Working Papers 3286, National Bureau of Economic Research, Inc.
  8. Thomas Fraker Robert Moffitt, 1988. "The Effect of Food Stamps on Labor Supply: A Bivariate Selection Model," Mathematica Policy Research Reports efa52cc812a34ce2ac0427b91, Mathematica Policy Research.
  9. J. K. Scholz, . "The earned income tax credit: Participation, compliance, and antipoverty effectiveness," Institute for Research on Poverty Discussion Papers 1020-93, University of Wisconsin Institute for Research on Poverty.
  10. Hoynes, Hilary Williamson, 1996. "Welfare Transfers in Two-Parent Families: Labor Supply and Welfare Participation under AFDC-UP," Econometrica, Econometric Society, vol. 64(2), pages 295-332, March.
  11. Maurice MacDonald, 1985. "The Role of Multiple Benefits in Maintaining the Social Safety Net: The Case of Food Stamps," Journal of Human Resources, University of Wisconsin Press, vol. 20(3), pages 421-436.
  12. Robert A. Moffitt, 1979. "Cumulative Effective Tax Rates and Guarantees in Low-Income Transfer Programs," Journal of Human Resources, University of Wisconsin Press, vol. 14(1), pages 122-129.
  13. Scholz, John Karl, 1994. "The Earned Income Credit: Participation, Compliance, and Antipoverty Effectiveness," National Tax Journal, National Tax Association, vol. 47(1), pages 63-87, March.
  14. Howard Chernick & Andrew Reschovsky, 1990. "The Taxation of the Poor," Journal of Human Resources, University of Wisconsin Press, vol. 25(4), pages 712-735.
  15. Thomas Fraker & Robert Moffitt & Douglas Wolf, 1985. "Effective Tax Rates and Guarantees in the AFDC Program, 1967-1982," Journal of Human Resources, University of Wisconsin Press, vol. 20(2), pages 251-263.
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