About 60 percent of all low- and moderate-income taxpayers face effective marginal tax rates above 30 percent, a substantial increase over last year. The Congressional Budget Office (CBO) credits the shift to higher payroll tax rates resulting from the “fiscal cliff” deal at the beginning of the year.
Effective marginal tax rates are complicated to calculate. Unlike effective tax rates, which measure the total amount a person paid in state, local, and federal taxes on tax day compared to their income, the effective marginal rate is a measure of how much of the next dollar a person earns will be canceled out by taxes or a drop in the public benefits they receive, such as food stamps. The CBO looked at the effective marginal rates faced by those making less than 450 percent of the federal poverty level, or in other words, those at the bottom end of the income scale.
About 37 percent of such earners will see between 30 and 39 percent of any additional income disappear, either sent to the tax man or cancelled out by a reduction in public assistance benefits. Over 20 percent of such earners will never see 40 percent or more of any new income.
The chart above, published on Wednesday, updates a similar CBO analysis from 2012. Prior to the tax deal that resolved the so-called “fiscal cliff” in January, the effective marginal tax rate trap affected fewer low- and moderate-income workers. But even prior to the 2013 payroll tax increase, more than half of that group faced effective marginal tax rates above 30 percent.
Losing out on even more dollars is a heavier burden to bear for this group, who make little to begin with. According to the 2013 poverty guidelines, the workers CBO looked at make less than $52,000 if they are single or less than $106,000 for a family of four. The marginal tax rate problem is worst for those making between 50 and 200 percent of the poverty level, or those feeding, sheltering, and clothing a family of four on earnings between $12,000 and $48,000 per year.