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CBO — Effective Marginal Tax Rates for Low- and Moderate-Income Workers

November 27, 2012

Effective Marginal Tax Rates for Low- and Moderate-Income Workers

Source: Congressional Budget Office

The effective marginal tax rate is the percentage of an additional dollar of earnings that is unavailable to a worker because it is paid in taxes or offset by reductions in benefits from government programs. In part, such rates are determined by income and payroll tax rates and other features of the tax system, such as tax credits and deductions that depend on earnings. However, effective marginal tax rates are also determined by programs providing cash and in-kind benefits, referred to as transfers, that target assistance to people of reduced means. Because increases in earnings for low- and moderate-income workers can cause relatively large reductions in such assistance, this analysis of effective marginal tax rates (hereafter referred to as marginal tax rates) focuses on those workers. Those rates affect people’s incentives to work: All else being equal, people tend to work fewer hours when marginal tax rates are high.

To examine the distribution of marginal tax rates across households, CBO simulated tax liabilities from income and payroll taxes and benefits from the Supplemental Nutrition Assistance Program (SNAP, formerly known as the Food Stamp program) using a sample of tax returns from 2006 supplemented with information from household surveys. Benefits from SNAP were included in the analysis because it is a widely used program with cash-like benefits that can be calculated using information from household surveys; including additional programs would generally increase estimates of marginal tax rates.

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