This afternoon CBO released a new report on Effective Marginal Tax Rates for Low- and Moderate-Income Workers.
As workers’ earnings increase, the amount of taxes they owe typically rises and the amount of cash and other benefits they receive typically falls. The combination of rising taxes and falling benefits determines effective marginal tax rates—specifically, the portion of an additional dollar of earnings that is paid in taxes or offset by a reduction in benefits. Because increases in earnings for low- and moderate-income workers can cause relatively large reductions in benefits, today’s analysis of effective marginal tax rates focuses on those workers. Such rates affect people’s incentives to work: All else being equal, people tend to work fewer hours when marginal tax rates are high.
CBO finds that:
This report was prepared by Shannon Mok of CBO’s Tax Analysis Division.