November 15, 2012
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:
- Low- and moderate income workers face a marginal tax rate of 30 percent, on average, in 2012. That estimate takes into account federal and state individual income taxes, federal payroll taxes, and the reductions in benefits from the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program) that occur when earnings increase.
- Over the next two years, various provisions of current law will cause marginal tax rates among this population to rise, on average, to 32 percent in 2013 and to 35 percent in 2014.
- Under provisions of law in effect during this period, marginal tax rates vary greatly across earnings ranges and among individuals within the same earnings range.
This report was prepared by Shannon Mok of CBO’s Tax Analysis Division.