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Study Finds Low-Income Americans Can Face Effective Tax Burdens of Up to 70 Percent

By:
Chris Gaetano
Published Date:
Oct 15, 2020
A recently released study, led by the Atlanta Federal Reserve Banks's research director, has found that one in four low-income Americans, when taking into account the benefits they lose when their incomes go up (e.g. SNAP, Medicaid), face lifetime marginal tax rates of 70 percent, "effectively locking them into poverty." This is higher that even the median lifetime marginal tax rate of the highest 1 percent of earners, which is roughly 50 percent. Of the remaining three out of four low-income workers, half face a lifetime marginal tax rate above 45 percent.

The study was led by Atlanta Fed Research Director David Altig and published by the National Bureau of Economic Research. It used what is called the "remaining lifetime framework," which measures, essentially, the amount by which an extra $1,000 in current labor earnings raises someone's present values of expected remaining lifetime net taxes. In addition, the study considered an annual $10,000 increase in earnings through people's’ retirement age. (the study used data from its own Survey of Consumer Finance for this analysis).

By using a great deal of math, the researchers concluded that the median marginal remaining lifetime net tax rate across all households, regardless of age or resource position, is 43.2 percent. However, within this general average rests great variation, depending on income and other circumstances. Overall, though, the study found that the distribution follows a U-shaped pattern—that is, high on both ends but lower in the middle, although the study added that once one moves from the top 5 percent to the top 1 percent, the lifetime net tax actually goes down.

The report said that "the potential poverty trap arising under our fiscal system is highlighted by [those in the 75th percentile in terms of lifetime marginal taxes] for the bottom quintiles at every age group. "Moving from the youngest to the oldest cohorts, these values are 67.4 percent, 75.9 percent, 69.3 percent, 76.5 percent, 74.4percent, and 73.9 percent," it found. "Hence, one in four of our poorest households, regardless of age, make between two and three times as much for the government than they make for themselves in earning an extra $1,000."

To bring this into more concrete terms, the study gave the example of an unmarried father in Wyoming with four children, whom they called "John."

"John has a high school degree and earns $57,432 per year. ... John receives $23,921 in CCDF childcare support and a $40,337 [Affordable Care Act] subsidy to cover his family’s medical expenses. The $1,000 assumed earnings increase causes the loss of his entire childcare subsidy, which has a present value cost of$149,197," said the Fed study, noting that Wyoming requires that income for a family of six be below $58,032 to be eligible for the childcare assistance.

The paper said that a lot of this effect is due to "arcane" provisions in the myriad government aid programs, especially the difference in how they treat income thresholds.

"Earn $1 too much two years back, and your Medicare Part-B premiums will rise by close to $800," the report found. "Earn $1 too much, and, depending on the state, lose thousands of dollars in your own or your family’s Medicaid benefits. Hold $1 too much in assets and forfeit thousands in Supplemental Security Income," the report pointed out. Conversely, "Earn $1 beyond Social Security’s earnings ceiling and watch your Social Security payroll tax drop to zero. Earn $1 too much and flip on to the Alternative Minimum Tax (AMT), reducing your marginal income-tax bracket from a rate as high as 37 percent to 28 percent. Earn $1 too much and lose 22 cents, in the Earned Income Tax Credit."