Friday, July 13, 2012

Anti-poverty programs raise effective marginal tax rates

Eugene Steuerle calculates the effective marginal tax rates from the system of taxes and transfers:

we calculate the effective average marginal tax rate if this household increases its income from $10,000 to $40,000. That is, how much of the additional $30,000 of earnings is lost to government through direct taxes or loss of benefits? The average marginal tax rate in the first bar of Table 3, 29 percent, is based simply on federal and state direct taxes, including Social Security and the EITC. The rate rises appreciably as the family enrolls in additional transfer programs in bars 2 and 3. For a family enrolled in all the more universal non-wait-listed programs like SNAP, Medicaid, and SCHIP, the average effective marginal tax rate could be 55 percent. Enrolling the family in additional waitlisted programs, like housing assistance and TANF, ratchets the rate up above 80 percent....

Some caveats are in order. A number of eligible households do not apply for benefits, such as the food subsidies for which they are eligible. We have performed some analyses of the population as a whole at the Urban Institute and find that the average rates across households will be lower than what you see in the table because of less than full participation in the programs. By the same token, we have not included the child care grants in these calculations. Add those in, and the rate can exceed 100 percent.