Marginal Tax Rate

3 Key excerpts on "Marginal Tax Rate"

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  eBook - ePub

  The Power of Economists within the State

  • Johan Christensen(Author)
  • 2017(Publication Date)
  • Stanford University Press

    (Publisher)

  Economists also distinguish between marginal and average tax rates. The Marginal Tax Rate is the tax rate on the last dollar you earn, whereas the average tax rate takes into account the tax rate across all your earnings. Say that a tax is levied at a rate of 10 percent on the first $50,000 earned and 30 percent on the rest. In this case, someone with an income of $100,000 faces a Marginal Tax Rate of 30 percent and an average tax rate of 20 percent ($50,000 (0.1 + $50,000 (0.3 = $20,000). Tax schedules like this one, where rates increase with income, are referred to as progressive. By contrast, tax rates are proportional (or flat) when they are the same at all income levels and regressive when they decrease with income. Taxes fall under three main headings: taxes on labor, consumption, and capital (including corporate taxes). In revenue terms, taxes on labor are the most important. Labor is subject to several taxes—personal income tax, social security contributions levied both on employees and employers, and payroll taxes—which together account for more than half of total tax receipts in the OECD countries (see Figure 2.1). The total tax burden on a wage earner is the sum of these taxes. Although social security contributions may be earmarked for specific purposes or administered in particular ways, they are equivalent to personal income taxes in terms of their economic incidence: They add to the cost of labor. These taxes do, however, have different profiles. Personal income taxes are often progressive, with rates that increase with income and standard allowances for earnings up to a certain threshold. Social security contributions and payroll taxes, on the other hand, tend to be proportional or even regressive (see Prasad and Deng 2009)

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  eBook - ePub

  Macroeconomics, Third Edition

  • David G. Tuerck(Author)
  • 2021(Publication Date)
  • Business Expert Press

    (Publisher)

  They found that one in four low-wage workers face marginal net tax rates above 70%, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45%. The richest 1% also face a high median lifetime Marginal Tax Rate—roughly 50%….The overall median lifetime Marginal Tax Rate is 43.2% (Altig et al., 2000, p. 1). Having considered the effects of taxes on the economy, we turn next to the government expenditures for which taxes are imposed. ________________ 1 This ignores the fact that Adam could also deduct a portion of his accounting depreciation, depending on the tax law. 2 In the discussion of tax policy, it is important to distinguish Marginal Tax Rates from average tax rates. Consider a married couple who set out to calculate their 2020 federal income tax bill, and suppose that they find that their 2019 taxable income was $150,000. Using the IRS tax tables, we find that they owe the government $24,717. Their average tax rate equals their tax bill divided by their taxable income, or 16.48%. But their Marginal Tax Rate is 22%, given that they find themselves in the 22% income tax bracket. The distinction is important for assessing how their tax schedule affects their willingness to work. Suppose that our couple (Adam and Eve, of course) had to decide on January 1, 2019, whether one of them should take a consulting job that would pay $18,401. Because taking that job would push them into the 24% tax bracket, they would have to compute the after-tax reward for taking that job on the assumption that doing so would add $4,408 to their taxes. What matters is their marginal, not their average tax rate. From this example, we see why economists who attempt to determine the effects of tax-law changes on economic behavior focus on changes in marginal, not average rates.

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  Public Sector Revenue

  Principles, Policies and Management

  • Alberto Asquer(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  One of the controversial aspects of optimal tax theory is the determination of the Marginal Tax Rate for the highest income individuals (i.e. the tax rate that is applied to the very top income bracket). The work of Diamond and Mirrlees (1971) delivered the counterintuitive result that the top marginal income tax rate for the highest earning individual should be equal to zero. This result seems to contradict the general principles of fairness and redistributive concerns. Successive works by Tuomala (1990) found that, indeed, relatively low marginal rates on high-income earners result in incentive effects that compensate for the redistributive consequences of levying high taxes on the top income earners. Other scholars, however, came to different conclusions. Saez (2001), for example, argued that marginal rates should increase for mid- and high-income earners. Differences in results originate from different assumptions about the distribution of abilities to earn income and on the use of proxies (e.g. income or wages) for measuring such abilities (Mankiw et al., 2009). The results of the analysis also depend on heterogeneity of taxpayers, shape of their utility functions and their elasticities of tax income with respect to tax rates.

  Another controversial result of optimal tax theory is that individuals should be taxed differently according to personal characteristics that signal their ability to earn. The argument goes that the earning of income, as an economic condition of being a taxpayer, provides a partial approximation only of how much individuals could be taxed with minimal distortionary effect on the economy. Mirrlees (1971) noticed that intellectual quotient, degrees, address, age and colour of skin could be used as indicators of individuals’ abilities. Akerlof (1978) argued that individuals could be ‘tagged’ in relation to various social and physical characteristics. Along this line of reasoning, Mankiw and Weinzierl (2010) showed that individuals who are taller than others should pay more taxes on the same level of income. Although tax systems may actually ‘tag’ individuals and families for providing deductions and exemptions (e.g. child allowances or tax deductions based on age), tailoring taxation on the basis of innate features such as skin colour or height seems incompatible with the general principles of fairness.

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