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Tuesday, November 27, 2012

The working poor pay high taxes, too

The working poor pay high taxes, too

From the piece:

ompare that with a hypothetical single mother earning $18,000 a year before taxes and transfer payments: She will pay a marginal tax rate of 88 percent, down from 95 percent this year. That means she will keep only 12 cents from each additional dollar she earns in pretax income after taxes and transfers. Yes, that’s better than keeping only 5 cents of every dollar. But it's nevertheless a rate high enough to be a severe disincentive against the work that would secure her economic independence.

How is that possible? Don't lower-income individuals pay virtually nothing in federal income taxes?

Yes: On net, average federal income tax rates are negative -- post-tax income exceeds pretax income -- for the two lowest income quintiles. But that's not the same as marginal tax rates, which measure the amount of money taken out of each additional dollar earned. It's the marginal rate, most importantly, that creates the disincentive to work.


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