Marginal tax rates are the percentage of an additional dollar of income that is paid in taxes or given up in government benefits; those rates affect taxpayers’ choices about many things, including how much to work and save. In 2013, 37 percent of low- and moderate-income taxpayers who have earnings face total marginal tax rates—including federal and state individual income taxes, federal payroll taxes, and the phasing out of benefits from the Supplemental Nutrition Assistance Program—between 30 percent and 39 percent, and over 20 percent of that group face marginal rates of 40 percent or more. CBO estimates that 56 percent of such taxpayers face marginal rates of 10 percent to 19 percent from the federal individual income tax system alone.
For more information on marginal tax rates, see Effective Marginal Tax Rates for Low- and Moderate-Income Workers (November 2012). The chart above incorporates the effects of the American Taxpayer Relief Act of 2012, which had not been enacted when that report was published, and the expiration of a temporary reduction in payroll tax rates. The analysis is based on a 2006 sample of nondisabled, working-age people who filed tax returns and whose income was less than 450 percent of the federal poverty guidelines.
Shannon Mok is an analyst in CBO’s Tax Analysis Division.