Tuesday, May 10, 2005

Update on marginal tax rates

winterspeak reader JK has a good follow-up post on my recent note on marginal taxes. He notes that the Times adulterated the original graph published with the report -- here's the original:

Note how the Time's adulterated copy left out the far left. The negative marginal income tax you see there is the earned income tax credit, a popular anti-poverty program that I beleive was introduced under Clinton and has been supported under Bush. EITC is a good program.

One unfortunate negative consequence is that people exiting extreme poverty, and losing their EITC eligibility, see their marginal tax rates go from -40% to +20%. This 60% increase is the highest increase in marginal tax rates in the entire tax system and it falls on those who are just exiting from poverty. Talk about disincentives! But taxes cannot be both progressive and not discourage work. This is why I think taxes are a terrible way to transfer wealth.

Update I was wrong about the EITC. Reader JT kindly corrects me:
The EITC long predates Clinton. It dates back to 1975, and became permanent in 1978. It was introduced by Sen. Russell Long (D-LA), and has strong bipartisan support. It was substantially increased in 1986, 1990, and 1993. (Brief overview here: http://en.wikipedia.org/wiki/EITC ) You may be thinking of the last expansion when associating it with Clinton; it was also part of the 1986 and 1990 tax changes.

It's much more popular with Republicans than other antipoverty because it gives money to people who are working, instead of to people who aren't, and thus encourages work.


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