Marginal Tax Rates

I say "Marginal Tax Rates" and even the ThreeSources choir gets heavy eyelids (I always say that by the time you get to EBITA, you can put any audience to sleep).

But here's a great story in Forbes that puts a 70% marginal tax rate into perspective. It enumerates the perverse incentives -- and puts human faces on them. Three workers are shown who would be better off working less or not at all.

There are now more than two dozen federal tax breaks, including seven created or expanded by February's $787 billion stimulus, that disappear (often simultaneously) as income rises. As her adjusted gross income climbs from $60,000 to $90,000, a single parent could lose some or all of the $1,000 per child credit, the $2,500 per college student credit, the $400 Making Work Pay credit and the $8,000 first-time home buyer credit, as well as deductions for contributions to an individual retirement account and for interest paid on a student loan. Such gotchas can push up the marginal federal income tax rate--that is, the tax on the next $1 earned--far beyond the top 35% rate imposed on rich folks. For a mom with a $30,000 income, the phaseout of the earned income credit and loss of a federal Pell college grant can produce a 40%-plus marginal rate, without counting Social Security and Medicare taxes.

This is a good column to mail. I don't know that it has any new news for the choir, but it does a superb job showing the tradeoffs from what seem like good programs.

Hat-tip: Instapundit, who sees it as "Going Galt."

Economics and Markets Posted by John Kranz at October 23, 2009 1:22 PM