Skip to main content

Americans' 90% tax rate

By Edward J. McCaffery, Special to CNN
updated 10:00 AM EST, Fri February 8, 2013
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
updated 8:21 AM EDT, Mon September 1, 2014
Carlos Moreno says atheists, a sizable fraction of Americans, deserve representation in Congress.
updated 12:25 PM EDT, Sun August 31, 2014
Julian Zelizer says Democrats and unions have a long history of mutual support that's on the decline. But in a time of income inequality they need each other more than ever
updated 12:23 AM EDT, Sun August 31, 2014
William McRaven
Peter Bergen says Admiral William McRaven leaves the military with a legacy of strategic thinking about special operations
updated 12:11 PM EDT, Fri August 29, 2014
Leon Aron says the U.S. and Europe can help get Russia out of Ukraine by helping Ukraine win its just war, sharing defense technologies and intelligence
updated 1:24 PM EDT, Fri August 29, 2014
Timothy Stanley the report on widespread child abuse in a British town reveals an institutional betrayal by police, social services and politicians. Negligent officials must face justice
updated 9:06 PM EDT, Fri August 29, 2014
Peter Bergen and David Sterman say a new video of an American suicide bomber shows how Turkey's militant networks are key to jihadists' movement into Syria and Iraq. Turkey must stem the flow
updated 11:54 AM EDT, Mon September 1, 2014
Whitney Barkley says many for-profit colleges deceive students, charge exorbitant tuitions and make false promises
updated 10:34 AM EDT, Fri August 29, 2014
Mark O'Mara says the time has come to decide whether we really want police empowered to shoot those they believe are 'fleeing felons'
updated 10:32 AM EDT, Thu August 28, 2014
Bill Frelick says a tool of rights workers is 'naming and shaming,' ensuring accountability for human rights crimes in conflicts. But what if wrongdoers know no shame?
updated 10:43 PM EDT, Thu August 28, 2014
Jay Parini says, no, a little girl shouldn't fire an Uzi, but none of should have easy access to guns: The Second Amendment was not written to give us such a 'right,' no matter what the NRA says
updated 1:22 PM EDT, Sat August 30, 2014
Terra Ziporyn Snider says many adolescents suffer chronic sleep deprivation, which can indeed lead to safety problems. Would starting school an hour later be so wrong?
updated 9:30 AM EDT, Fri August 29, 2014
Peggy Drexler says after all the celebrity divorces, it's tempting to ask the question. But there are still considerable benefits to getting hitched
updated 2:49 PM EDT, Fri August 29, 2014
The death of Douglas McAuthur McCain, the first American killed fighting for ISIS, highlights the pull of Syria's war for Western jihadists, writes Peter Bergen.
updated 6:42 PM EDT, Tue August 26, 2014
Former ambassador to Syria Robert Ford says the West should be helping moderates in the Syrian armed opposition end the al-Assad regime and form a government to focus on driving ISIS out
updated 9:21 AM EDT, Wed August 27, 2014
Ruben Navarrette says a great country does not deport thousands of vulnerable, unaccompanied minors who fled in fear for their lives
updated 9:19 AM EDT, Wed August 27, 2014
Robert McIntyre says Congress is the culprit for letting Burger King pay lower taxes after merging with Tim Hortons.
updated 7:35 PM EDT, Tue August 26, 2014
Wesley Clark says the U.S. can offer support to its Islamic friends in the region most threatened by ISIS, but it can't fight their war
updated 4:53 PM EDT, Tue August 26, 2014
America's painful struggle with racism has often brought great satisfaction to the country's rivals, critics, and foes. The killing of Michael Brown and its tumultuous aftermath has been a bonanza.
updated 3:19 PM EDT, Tue August 26, 2014
Rick Martin says the death of Robin Williams brought back memories of his own battle facing down depression as a young man
updated 11:58 AM EDT, Tue August 26, 2014
David Perry asks: What's the best way for police officers to handle people with psychiatric disabilities?
updated 3:50 PM EDT, Mon August 25, 2014
Julian Zelizer says it's not crazy to think Mitt Romney would be able to end up at the top of the GOP ticket in 2016
updated 4:52 PM EDT, Mon August 25, 2014
Roxanne Jones and her girlfriends would cheer from the sidelines for the boys playing Little League. But they really wanted to play. Now Mo'ne Davis shows the world that girls really can throw.
updated 5:04 PM EDT, Mon August 25, 2014
Kimberly Norwood is a black mom who lives in an affluent neighborhood not far from Ferguson, but she has the same fears for her children as people in that troubled town do
updated 5:45 PM EDT, Fri August 22, 2014
It apparently has worked for France, say Peter Bergen and Emily Schneider, but carries uncomfortable risks. When it comes to kidnappings, nations face grim options.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT