Skip to main content

Americans' 90% tax rate

By Edward J. McCaffery, Special to CNN
February 8, 2013 -- Updated 1500 GMT (2300 HKT)
Marginal tax rates are chaotic, confusing, and all over the map, says Edward McCaffery.
Marginal tax rates are chaotic, confusing, and all over the map, says Edward McCaffery.
STORY HIGHLIGHTS
  • Edward J. McCaffery: The working poor face very high rates on their next dollar earned
  • McCaffery: High marginal tax rates create "poverty traps" that keep the poor poor
  • He says it means these people will not gain all that much from working additional hours
  • McCaffery: Rather than criticizing the poor, politicians should fix our tax system

Editor's note: Edward J. McCaffery is Robert C. Packard Trustee Chair in law and a professor of law, economics and political science at the University of Southern California. He is the author of "Fair Not Flat: How to Make the Tax System Better and Simpler."

(CNN) -- In a recent opinion column on Phil Mickelson's tax comments, I pointed out that some of the working poor face marginal tax rates "approaching 90% as they lose benefits attempting to better themselves."

Readers were incredulous, asking how it could be that in a nation with a top federal income tax rate of 39.6% on individuals making more than $400,000 a year, anyone could face a 90% rate.

It is true. Marginal tax rates, especially for those below the top rate brackets, are chaotic, confusing, and all over the map.

Edward J. McCaffery
Edward J. McCaffery

As a result, some of the working poor face extremely high rates on their next dollar earned. Tax scholars and economists have long known this. Dan Shaviro of NYU published a study in 1999 showing marginal tax rates above 100% on the working poor; specifically, he illustrated that a single parent earning $10,000 would lose over $2,500, after taxes, by earning another $15,000, pushing her income to $25,000.

Last year, a study from the Congressional Budget Office shows how a single parent making $18,000 now faces a marginal tax rate of 88% in 2013, down from 95% in 2012. The CBO report is 45 pages long, with complex details. Adding in all the taxes along with a host of other things that have strange acronyms like SNAP and TANF, and the result is that it is possible to face marginal tax rates approaching 90%.

What does this mean? It means that, like Mickelson, these individuals will not gain all that much from working additional hours.

Take a hypothetical single mother of two, Jane, earning $18,000 a year. Earning an additional $1 will increase Jane's actual cash available to spend by just 12 cents.

Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



How can this be? The effect comes about because governments at various levels give aid to the very poor, such that the extremely low earners face negative tax rates. In short, we pay some poor to work -- this is the "welfare to workfare" move of Bill Clinton's legacy. But then the law takes these benefits back from the near-poor via high marginal tax rates in a "phaseout" range. The most important of these provisions is the earned income tax credit (EITC) located in the federal income tax. This provision pays the working poor up to 40 cents on the dollar up to approximately $10,000 of earnings.

If Jane makes $10,000, the government mails her a check for $4,000. Over a certain range, Jane keeps that money. But as she starts earning more than approximately $18,000, Jane begins to lose the $4,000, at a roughly 20% rate. Add that to payroll taxes (7.65%), the regular income tax (15%, at that range), and Jane is in a rate bracket over 40%, and we are just getting started -- other federal, state and local programs and taxes pile on to the same effect.

You might be thinking that losing a benefit is not a tax. That is an understandable sentiment, but Jane will not be comforted by it. Looking just at the EITC, as Jane's earnings go over $18,000, she loses some of the dollars she is earning to "regular" taxes, and the $4,000 she was getting in assistance is disappearing. It's real, green, money that she is losing. This is the net effect that Shaviro was describing: Compare Jane earning $10,000 in the workplace to Jane earning $25,000, and the latter Jane simply has over $2500 fewer dollars to spend.

If this is all so complex, how can it affect anyone's real behavior? But what we don't know, or don't fully, can affect us.

Obama: Avoid sequester, pass small cuts
Phil Mickelson takes a tax mulligan

It is known that working more brings in little if any additional cash for many poor households, especially those with children. These taxpayers may not calculate their actual rate, yet they notice the stress and lack of funds. That's real life. It is also a fact that marriage is very costly for the poor largely because of taxes and phaseouts -- and so, again, there is less cash, more stress, and fewer examples of married households all around. More a quarter of American children are being raised in single-parent households, most of them poor. A staggering 72% of African-American children are being raised by just one parent.

Some may conclude that it is fair to take back the money given to the poor as soon as they are no longer really poor. But this creates the high marginal tax rates just noted. And this is a major public policy problem, for at least two reasons.

One, these high marginal tax rates create "poverty traps" that keep the poor poor, and make escape to the middle class difficult. Similarly, the middle class these days are having a hard time doing the savings that might elevate them from their class into the upper class. Our tax laws essentially create a caste system, with barriers between income class levels.

Two, the poverty trap is also a severe marriage penalty, making it virtually economically impossible for lower income classes to marry. If Jane, making $18,000 a year, marries Dick, also making $18,000, suddenly Dick and Jane become a household, a single taxpayer (and benefits recipient) as far as the government is concerned. Their income has moved from $18,000 to $36,000 -- exactly a range of steep marginal tax rates.

Politicians on both the left and right criticize the poor for not having more stable marriages, but they conveniently ignore the simple but brutal fact that the poor cannot afford to marry.

This is not the "fault" of the poor any more than it is Mickelson's "fault" that he is considering leaving the country for tax reasons. The poor cannot go to Canada, France, or Russia to flee taxes. But they can flee the institution of marriage. And they do. It is time to fix this situation, beginning with paying attention to it.

Follow @CNNOpinion on Twitter.

Join us at Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Edward J. McCaffery.

ADVERTISEMENT
Part of complete coverage on
September 16, 2014 -- Updated 1305 GMT (2105 HKT)
LZ Granderson says Congress has rebuked the NFL on domestic violence issue, but why not a federal judge?
September 16, 2014 -- Updated 1149 GMT (1949 HKT)
Mel Robbins says the only person you can legally hit in the United States is a child. That's wrong.
September 15, 2014 -- Updated 1723 GMT (0123 HKT)
Eric Liu says seeing many friends fight so hard for same-sex marriage rights made him appreciate marriage.
September 15, 2014 -- Updated 1938 GMT (0338 HKT)
SEATTLE, WA - SEPTEMBER 04: NFL commissioner Roger Goodell walks the sidelines prior to the game between the Seattle Seahawks and the Green Bay Packers at CenturyLink Field on September 4, 2014 in Seattle, Washington. (Photo by Otto Greule Jr/Getty Images)
Martha Pease says the NFL commissioner shouldn't be judge and jury on player wrongdoing.
September 16, 2014 -- Updated 1315 GMT (2115 HKT)
It's time for a much needed public reckoning over U.S. use of torture, argues Donald P. Gregg.
September 16, 2014 -- Updated 1225 GMT (2025 HKT)
Peter Bergen says UK officials know the identity of the man who killed U.S. journalists and a British aid worker.
September 16, 2014 -- Updated 1128 GMT (1928 HKT)
Joe Torre and Esta Soler say much has been achieved since a landmark anti-violence law was passed.
September 12, 2014 -- Updated 2055 GMT (0455 HKT)
David Wheeler wonders: If Scotland votes to secede, can America take its place and rejoin England?
September 16, 2014 -- Updated 1241 GMT (2041 HKT)
Jane Stoever: Society must grapple with a culture in which 1 in 3 teen girls and women suffer partner violence.
September 12, 2014 -- Updated 2036 GMT (0436 HKT)
World-famous physicist Stephen Hawking recently said the world as we know it could be obliterated instantaneously. Meg Urry says fear not.
September 12, 2014 -- Updated 2211 GMT (0611 HKT)
Bill Clinton's speech accepting the Democratic nomination for president in 1992 went through 22 drafts. But he always insisted on including a call to service.
September 12, 2014 -- Updated 2218 GMT (0618 HKT)
Joe Amon asks: What turns a few cases of disease into thousands?
September 11, 2014 -- Updated 1721 GMT (0121 HKT)
Sally Kohn says bombing ISIS will worsen instability in Iraq and strengthen radical ideology in terrorist groups.
September 16, 2014 -- Updated 2231 GMT (0631 HKT)
Analysts weigh in on the president's plans for addressing the threat posed by the Islamic State of Iraq and Syria.
September 11, 2014 -- Updated 1327 GMT (2127 HKT)
Artist Prune Nourry's project reinterprets the terracotta warriors in an exhibition about gender preference in China.
September 10, 2014 -- Updated 1336 GMT (2136 HKT)
The Apple Watch is on its way. Jeff Yang asks: Are we ready to embrace wearables technology at last?
ADVERTISEMENT