85% Tax Rate On The Poor?


Posted on : 2/12/2013 07:00:00 AM | By : Dann | In : , ,

I read an awful lot of things while putting together the recent post about Phil Mickelson and tax rates, I came across this specious bit of reasoning that attempts to argue that people making US$18,000 per year end up paying an 85% tax rate.

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.
So how does they come up with that astronomical value?  They include social program benefits as "income" and calculate an effective "next dollar" rate based on lost social spending benefits due to increasing incomes.

The argument is that as income earned via legitimate employment increases, social program benefits decrease.  This decrease is then considered....by some...to be an effective "tax".

While I have long been aware of this sort of "welfare trap", I think it is fundamentally dishonest to suggest that the proper reduction of benefits to be anything like a tax.

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