>On Behalf Of Max Sawicky
> I happen not to put much stock in the so-called
> marginal implicit tax rate. I don't think people
> making $16,500 determine whether they will optimize
> by moving to $16,501 or $16,499. The main thing
> under the EITC is that, for those eligible, they
> have more income w/the credit than without it.
That's one main thing, but I think you are falling into serious
number-crunching wonkery if you don't think it matters to a person that when
they get a raise, the government takes a large chunk of it, especially when
they are poor.
Let me give you a concrete example of why marginal tax rates matter to
regular folks. Let's say a single mom or dad with two kids is making $7.21
per hour full-time as a self-employed house cleaner for a total of $15,000
per year of wages;
Here's what happens:
Subtract roughly 14% in FICA or $2100 in FICA taxes
Subtract 15% of taxable income (deduction on self and two kids of $14,600),
so lose $60
But add EITC credit of $3276
So their real income is $16,116 in take-home dollars.
Well, our single parent pushes to increase their pay rate by a dollar to
$8.17 per hour, so that's a gross pay of $17,000 per year, a nominal
increase of $2000.
But instead of that $2000 increase going to feed the kids, save for college
or whatever:
First subtract FICA takes 14% of the $2000, or $280, for a total FICA tax of
$2380
Subtract 15% of that $2000, or $300, for a total income tax of $360
And EITC is reduced by 20% of that amount, or $400, so EITC is $2855
So new income is $17,115 in take-home dollars.
So instead of taking home the $2000 raise, the single mom is only taking
home a $1000 increase, with the government taking the other $1000.
You may not think it matters much, but for folks trying to get ahead,
bargaining hard with employers for raises, this kind of regressive tax
burden makes it incredibly hard to get ahead.
This is how people feel the tax system's effect on their lives. You can
argue that the early large deductions and EITC make the overall
progressivity strong on paper, but most people think it sucks to be making
that little, so the nominal tax "advantages" of being there are less
appreciated. What people feel is the tax burden as they ask for raise, then
realize that the government is taking a large portion of the pay increase
they struggled with their employer to get.
-- Nathan Newman
