Marginal Tax Rates

...and Magic! (I am not linking the article despite its good graph because the overall argument and tone is rather vile.)

Republicans and other pro-uber-wealthy people tend to harp on marginal tax rates as such a powerful incentive for work that nothing else can even begin to matter. They seem to "think" that wealthy people are particularly sensitive to even a small change and that their behavior will (in some bizzaro self-destructive pattern) cause them to want less money if taxes are higher.

There are, however, people for whom their marginal rate does exceed 100%. They are a subset of the working poor. There are other places where marginal rates for poor and middle class end up much higher than those for wealthy people, depending on their exact combination of benefits, welfare and income.

The biggest reasons are welfare and tax breaks that phase out, but which provide nearly equal if not greater benefit than earning the next dollar. Here, conservatives have a real point (though it is never the one they make) which is that for some people in the US there is a negative incentive to work and earn more. Combining this with the benefits of leisure, this group is not only those for whom their marginal rate is > 100%, but also some whose marginal rate is below but close to 100%.

This is something that really could be fixed, and in a way that is humane (as opposed to the GOP's fix which is ending welfare...and giving more money to rich people). This can be done iff earned income -taxes replaces welfare/tax break money faster than 1:1, and really, it should be in the 2:1 range. That is, if someone earns $1 extra, and pays $.25 in taxes then they only give up at most $.25 in benefits.

My preferred technique would be some target minimum "income" level, say $17,000. Anti-poverty programs would essentially guarantee that minimum for everyone. The bottom tax bracket would be 0% up to twice that amount, but welfare benefits would be reduced $.50 for every $1 earned, meaning an effective tax of 50%. Honestly I would rather see the bottom effective rate at something more like 25%, but there has to be a balance between minimum standard of living and not subsidizing people earning more than enough to get by.

The exact mechanism for this could be any of a number of things. I think that splitting it up into separate programs that phase out differently would be good. A housing allotment that started at $500/mo, a food allotment that started at $300/mo, and a discretionary allotment that made up the rest. As income goes up the discretionary would decline first, then housing, then food.

I believe it would also be good to tie the discretionary to some government work and/or training program. This way the leisure side benefit would no longer be an issue, with the transfer of hours being from government program that provided a discretionary allotment to job that provided more money, rather than going from staying home all day to working.

Note that this will never happen since it would require major changes to the tax code (not the least of which would be the complete elimination of all deductions) and major changes to welfare programs--some changes more major than others.

The point I want to make here is that, for all the completely wrong ideas that Republicans put out there, we really do have an issue with incentives for certain very low income individuals and families. At some price point it really is the sound economic decision to not work as much or as hard, and that should never be the case.