>On Behalf Of Max B. Sawicky
>
> [mbs] A concern with marginal tax rates is founded on behavior.
> My skepticism rests on the question of behavioral effects.
> Certainly a raise that is consumed by the Gov is demoralizing.
> Whether someone has the flexibility and inclination to change
> their work schedules is the reason to be interested in the
> marginal rates.
Actually, my main interest in marginal rates is that the "demoralization"
involved has historically had a rather terrible political effect, in
creating the basis for rightwing politics using promises of tax cuts to
address those feelings, while delivering most of the benefits to the wealthy
and undermining progressive spending. ie. Reaganomics.
> Your calculations are slightly off-kilter.
> You forgot about the child credits. Also, if
> the couple saves for college they can shield the
> raise from tax altogether with an IRA.
Actually, I was being mischievious, since I knew you would bring them up
(although they don't change the tax burden that much on the person in my
example). Note that the passage of the child credits and other tax credits
of the 90s, which benefit a whole range of middle class folks, has largely
deflated the public taste for tax cuts. That the GOP can't get traction
should be a lesson for why addressing tax concerns is good strategy for
progressives.
What bothers me is that the result of all the tax policy of the 90s has left
folks in this $13,000-$28,000 range with the highest marginal tax rates
outside the very richest folks. From both equity standards and smart
political standards (since I see a political opening for a rightwing
"pro-working poor" tax cut strategy.
Also,
> the total FICA rate is 15.3, but if I
> get a raise of $1,000, I only lose 7.65 percent of it.
> The boss pays another 7.65 percent. Of course, this
> means my raise was not $1,000; it's really $1,076.50
> and I 'lost' $153, in the sense that half of what
> I 'paid' I never laid hands on in the first place.)
I had used a self-employed person just to avoid that complication. I could
have done a union strategy where the boss offered a set amount of money--
wages and taxes total--with the same results.
> The problem is if you want to do an earned income tax
> credit (or a negative income tax), the more you give, the
> more you have to take away, and the higher the implicit
> marginal tax rate must be in the take-away zone.
> If you want a low marginal rate at the bottom, you must
> dispense with income support down there.
You don't have to take anything away if you just get rid of the phaseout
altogether. The EITC credit is worth about $1620 per child. With about 70
million children, that means it would cost around $115 billion per year to
extend the credit to every child. Given the money we are already spending
on EITC (about $30 billion), and since there is already the $500 per child
credit, that takes out about a third of the rest of the cost. One solution
without spending much more money would be to convert the deductions for
children into pure credits, which would eliminate the advantages for high
marginal tax rate people from the deduction - redistributing the money
downwards by income.
And of course, it could be phased out gradually at higher-income levels at a
slower rate. The point is to have no phase-out in a zone of people who
should be facing no taxes at all.
Now, in the ideal, we would raise taxes on the wealthy to pay for the whole
deal.
So what is the proposal you are working on at EPI?
-- Nathan Newman
