Marginal tax charges on earned income

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Marginal tax rates on earned income

The Family Safety Act recently proposed by Senator Mitt Romney (R-UT) would replace the Child Tax Credit (CTC) with a monthly child benefit administered by the Social Security Agency, making the benefit more generous and accessible to low-income households without households Earned income. The aim of the proposal is to reduce child poverty while simplifying the existing social benefits provided by the tax code. In evaluating this proposal, policy makers should consider both the change in benefits and the impact on marginal tax rates, which measure the tax rate workers face when they earn an extra dollar of income.

Romney’s proposal would also reform the Earned Income Tax Credit (EITC) by simplifying dependent benefits by providing $ 1,000 for single applicants and $ 2,000 for joint applicants and an additional $ 1,000 for applicants with dependents. The EITC provides benefits based on income level and number of dependents under applicable law, which makes tax legislation more complex. The phase-in and phase-out rates of the EITC are also reduced compared to applicable law.

The proposal removes the CDCTC (Child and Dependent Care Credit), Head of Household Status, and State and Local Tax Deduction (SALT). In addition to the tax law, the temporary aid for families in need (TANF) is also canceled.

While it is important to consider changes in household benefits under the proposal, it is also important to assess how the proposal will change marginal labor income tax rates compared to applicable law. The marginal tax rates indicate the effective tax rate used to earn another dollar of income and may differ from the statutory tax rate. Examining marginal quotas can reveal what incentives workers are exposed to and how policies affect the overall labor supply.

The marginal tax rates are based on the tiered income tax plan, wage tax rates, and refundable tax credits such as CTC and EITC. Both loans will be phased in over a range of revenues, minimizing large spikes in marginal tax rates. However, there are also several points where marginal rates change dramatically as income increases. By examining marginal tax rates, we can see how tax law treats an extra dollar of earned income under the Family Safety Act compared to applicable law.

Take, for example, a married household who files an application with two children under the age of 6. In the case of low incomes, households would see a comparatively higher marginal tax rate under the proposal, since child benefit is no longer as high as the income earned and the EITC phases come in and out more slowly (see Figure 1).

At higher income levels, the Family Safety Act tends to apply lower limit rates for this household, as the reformed EITC has a lower exit rate. The more generous CTC will expire over a longer income range of $ 400,000 and above, increasing the marginal tax rate by 5 percentage points.

The proposal removes the status of Head of Household Registration, which affects marginal tax rates for households that would normally use this registration status. Instead, applicants would submit as a single, using a tariff plan that increases statutory tariffs at lower income levels compared to the head of household tariff plan (see Figure 2).

Comparison of household limit rates under applicable law and the Mitt Romney Family Security Act, 2021. Mitt Romney Child Tax Allowance

Part of the loss of head of household status will be offset by the EITC changes at lower income levels, while those earning more than $ 53,000 will see higher marginal tax rates than applicable law up to an income of approximately $ 105,000.

For both joint applicants and heads of household with children, the largest change in marginal tax rates occurs on low incomes. This is because child benefit is not in line with income and the EITC adoption rate is lower. The rise in marginal rates at the bottom of the income spectrum is one reason some argue that the Romney proposal could reduce work incentives, although the magnitude of the effect is debated by scholars and policy experts.

While the main focus of the Proposal has been on child benefits and how to improve it, marginal labor income rates should also be considered as they affect the incentives to enter and stay in the world of work and increase the labor supply at different income levels. These are among the various compromises policymakers should consider when changing social policy in the tax code.

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