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Source link: http://archive.mises.org/11001/the-dead-zone-the-implicit-marginal-tax-rate/

The Dead Zone: The Implicit Marginal Tax Rate

November 9, 2009 by

Everywhere, the government’s desire to be generous to the poor is destroying the positive incentives to work and to save that are so necessary for a well-functioning economy. FULL ARTICLE by Clifford F. Thies

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{ 32 comments }

yeager12 November 9, 2009 at 6:49 am

How can the poor work when there are no jobs?

geoih November 9, 2009 at 7:14 am

And you’re not including sales taxes, property taxes, fees for “services”, etc., or most importantly, inflation.

geoih November 9, 2009 at 7:16 am

Quote from yeager12: “How can the poor work when there are no jobs?”

I think the point is, why would they bother to work, jobs or no jobs. Of course, you could claim that is the goal.

Marek November 9, 2009 at 7:45 am

Great post,

I would imagine it would be even worse when including other indirect taxes on revenue, such as those ‘paid’ by the employers (which are in reality paid by the employees, as was arguing even Milton Friedman).

aisxray November 9, 2009 at 7:58 am

I always figured there was a super super secret formula that was keeping me from getting ahead….Now I know…

K Ackermann November 9, 2009 at 9:45 am

@aisxray – hahahaha. Yes, I came so close to making it big, except I had to cough up an extra $200 bucks for taxes.

What about the benefit derived from the poor? If it wasn’t for them, then I might be poor.

Every day I read the Help Wanted to a lucky blind kid that I see. I read it to him just to make him feel guilty for being alive. He has a choice.

K Ackermann November 9, 2009 at 10:23 am

66% of corporations operating in the US did not pay taxes between 1998 and 2005.

I bet many of them sold products to the poor, and I bet many of them used the court system etc.

We can look at it as supporting the corporations.

Mike November 9, 2009 at 11:00 am

“What about the benefit derived from the poor? If it wasn’t for them, then I might be poor.”

Please support.

billwald November 9, 2009 at 12:19 pm

Three observations. First, the working person is mostly concerned with marginal net income vs. increased working hours and increased responsibility. How much extra does he take home if he works an hour of overtime? If he takes a promotion is the extra pay worth the stress?

Second, anyone whose annual green fees plus bar bill is less than his taxable income is not rich. Rich people have capital gains and dividend payments, taxed at a maximum 15%. They collect medicare and social security but pragmatically don’t pay a payroll tax because they don’t work for wages.

It is expensive to pull down a high wage. A family that grosses $150K probably spends $120K and is a good manager if they save 10% of gross a year.

The person with $10 million invested assets can cash in $400K, pay $60K tax, and his pot will still grow faster than the inflation rate. The guy with $100 million invested assets doesn’t know how to spend his safe annual draw of $4 million on which he would pay $600K tax.

Third, our owners stir up class warfare between the low end middle class and the high end middle class. The guy making $20/hour thinks the guy with $250K gross income is rich. This poor slob has no numerical conception of RICH!

PirateRothbard November 9, 2009 at 12:52 pm

K Ackermann,

The fact that some corporations have managed to escape taxes does not mean our government is supporting them. It means they are lucky and didn’t have to pay the extortionist. No corporation or individual should have to pay taxes.

JL Bryan November 9, 2009 at 1:23 pm

“66% of corporations operating in the US did not pay taxes between 1998 and 2005.

I bet many of them sold products to the poor”

If such corporations were taxed more heavily, they would have to charge the poor more money for products and services. Since the poor have limited money, this would reduce their standard of living.

Also, if the corporations had to pay more taxes, they would have less money with which to hire employees. So more people would be unemployed, and therefore poor.

If you’re worried about improving the lot of the poor, you certainly wouldn’t want to decrease their job opportunities while increasing the price of things they need to buy.

Ohhh Henry November 9, 2009 at 1:43 pm

Creating a large underclass of government dependents is a boon to the people who are paid to assist those people. Up to a point, the bigger the underclass the more money they make.

But where is that point, where the tax base is so ravaged that it is no longer a benefit to the government class to create more hardship and put more people on the welfare rolls? I don’t know exactly where that point is or if the USA has passed it yet, but I think that at around the time that this point is reached there will be a meltdown marked by a rapid deterioration of the tax base and a sharp increase in nanny spending programs. The sawtooth at the left of Mr. Thies’ chart will move to the right and rapidly eat up the incomes of more and more Americans causing them to slip off the economic ladder into the abyss of food stamps, public housing, etc. However the currency will inevitably be devalued and the overall level of wealth and average standard of living will be drastically eroded. Many people will be surprised to learn that TANSTAAFL after all, not even for the people who gave themselves the job of giving everyone else a free lunch.

And then what? In a relatively small country with a relatively strong central government and weak or non-existent provincial and municipal governments like in Iceland or Argentina it is possible to keep the impoverished majority at bay and politically neutralized with the combination of a strong and centralized army and police force plus IMF money and other subsidies from abroad. But I don’t think the USA is sufficiently politically centralized and there isn’t enough money anywhere to fund the USA as the world’s largest IMF basket case.

Cramchakle November 9, 2009 at 1:49 pm

I would like to see this concept turned into a simple online App where I can put in information about my own family, and it presents a curve customized to me. It might help me to better get mine back out of the system.

overtheedge November 9, 2009 at 2:07 pm

“66% of corporations operating in the US did not pay taxes between 1998 and 2005.

I bet many of them sold products to the poor”

Never forget the paraphrased “Laws of Thermodynamics”.

Everything is connected to everything.
Everthing has to go somewhere.
There ain’t no such thing as a free lunch. (TANSTAAFL)

These corporations that sold stuff to the (non-working) poor got paid out of public coffers. It is wealth redistribution, plain and simple. Advertising is a tax on the public and the consumers. Corporations are just a financial instrument that protects the owners from direct responsibility; nothing else.

I’m not condemning anyone other than the public. We permit it, vote for it and then whine about it.

So what is the answer?

Education. But this is fundamentally impossible without a grievious reset of the economy. Thrift can only be learned by the masses through the loss of safety nets. This isn’t permissible. The belief systems must be preserved.

So what to do? CYA

Wealth November 9, 2009 at 3:10 pm

Billwald,

I earn $30,000 a year and I manage to save $18,000 and I am a POOR manager (in all the meaning of that word), I could save even more money.

So if I would earn $250,000 a year, you would bet I would save at least $175,000. In just 8 years I would be rich.

They guy who earns $250,000 a year and complaints about being broke is a wreckless waste spender.

Wealth November 9, 2009 at 3:14 pm

Overtheedge,

Corporations can be large and owned by hundreads, thousands and even hundreads of thousands of people.

Therefore it’s reasonable to find ways to limit direct responsibility when nobody is really responsible anyways.

Corporations don’t pay taxes, the consumers and the workers do.

Any taxes forced upon corporations will be passed on to the consumers in the form of higher prices and passed on to the workers in the form of lower wages.

66% of corporations not paying their taxes is outrageous, I demand that 100% of corporations and 100% of individuals DON’T pay taxes.

earthshelterguy November 9, 2009 at 9:23 pm

No one to blame but the electorate? How about the Federal Reserve, whose fiat money makes these programs possible? Also, we are a Republic, not a Democracy. Our leaders are supposed to protect the rights of all citizens, not have some benefit by taking property by force from others. Read John Locke to see the difference between a right and a privilege.

aisxray November 9, 2009 at 10:39 pm

Billwald,
Being taxed on $250,000 a year and being broke is a real possibility for many small business owners.
Having a Sub-chapter S Corporation, where the company taxes are passed through to be paid by the individual is a real possibility. He’s not a wreckless waste spender, just a struggling small family business.

Bennet Cecil November 9, 2009 at 10:53 pm

The purpose of these government programs is to buy votes for statists. Their children and grandchildren will also vote for more government. The only solution is the natural consequences of faulty fiscal and monetary policies. High unemployment, high taxes and high inflation push voters to consider smaller government, lower taxes and stable money. This happened in 1980 and it will happen again.

Srikar Bongu November 10, 2009 at 12:11 am

Even though implicit marginal rates may be very high. How likely is it that the working poor are aware of their incentives? In which case their actions would just assume that working an hour would make them wealthier when in actuality it does not.

ryan November 10, 2009 at 4:46 pm

In addition to Srikar’s point, I also think there’s an implicit cost to a lot of the programs available to the poor. Usually they consist of waiting in lines, tons of paperwork, and face-to-face meetings with social workers, etc. if i can make 200 bucks without that hassle by working, it might be better than going through the hassle to receive 200 or even 220 bucks.

Bob Roddis November 13, 2009 at 6:13 pm

Anyone familiar with the “writings” of Matt Yglesias knows that he is an unreconstructed Keynesian/Krugmaniac who knows absolutely nothing about Austrian School theory (or economics, for that matter).

Yglesias has a link to this instant article here but “would like to see it replicated by someone who’s from someplace more credible than the Mises Institute.”

Chad November 15, 2009 at 7:51 pm

I recreated the chart in Georgia (as I live in Atlanta). I’m assuming it is similar rules. What’s the interval used to calculate the marginal rates? The only thing I can figure is that it must be pretty high. Calculating changes at $1,000 intervals create marginal rates in excess of 900% at two different points.

Maybe I am modeling this incorrectly. I have read the rules that Medicaid and PeachCare phase out at specific income amounts. In my model, you gain a $1,000 of benefits, you lose $9,000 and $12,000 of benefits at two points. For a single mother of two(the assumed household in the model), that is indeed a hell of marginal tax hike.

Whatever your conclusions, this seems to be a policy question about health insurance. From my analysis, the high rates are caused by losing Medicaid and PeachCare. There are tremendous disincentives to earn more for a single mother at those income limits.

If a mother of 2 is getting $30,000 of subsidies that are phased out by the time she is making $50,000 of income she will have to have higher marginal rates over that income range than a single man with no children.

I hope this post qualifies as intelligent and civil.

Thanks.

Chad November 15, 2009 at 7:56 pm

I’m a dummy. I reread the article after posting and it says clear as day $10,000 changes.

Well, my post was at least civil, IMO.

Dan Murray November 22, 2009 at 10:22 am

I think I’m going to take a stab at analyzing this for several State along with a friend of my. We’ll publish to the web when we have something.

Nathanael December 14, 2009 at 7:19 pm

I’m not sure why you keep condemning “liberals”. Or why you keep conflating the problem of *bad marginal rates* with “taxes”.

There’s a strong liberal contingent who would like nothing more than a negative income tax (or government check to everyone every year, like the Alaska Permanent Fund — so people could refuse jobs if they wanted to), would like to have all government programs open to all (no means testing), and so forth.

Having taxation be *progressive*, so that effective marginal rates go *up* as your income goes up, is a core liberal plank.

But we get called names if we try to support these policies, which would solve *ALL* the problems you describe. Usually we’re called “socialists”, without any explanation as to why this is bad.

It is the right-wingers who consistently stop programs like “Medicare for all” or the negative income tax, demanding that money go only to the “deserving poor”…. out of some bizarre belief system having little or nothing to do with economics.

It is fair to criticize wooly-headed members of Congress who want to be liberal but are willing to accept means-testing when that’s the only way right-wingers will vote for a program. It is not reasonable to criticize all liberals for a problem which most liberals are more offended by than you are.

Nathanael December 14, 2009 at 7:24 pm

“If such corporations were taxed more heavily, they would have to charge the poor more money for products and services. Since the poor have limited money, this would reduce their standard of living.”

Bullshit. And that’s a civil response to that. Most such corporations are making *profits*. Large profits. Real *economic profits*. Taxing them more heavily would reduce their *profits*.

They would charge the same amount, because if they charged more, the poor would simply do without their products entirely rather than buying them, and that would make them even less money.

Now, corporations which have a monopoly or cartel position in selling essentials can charge much more (monopoly prices) and they *would* raise their prices…. except that they are *already* raising their prices to the maximum they can get away with, so again an increase in taxes would cut into their profits.

Your argument only applies to companies not making economic profits. This is not the case for giant multinationals for the most part. Admittedly the profits generally go directly into the execs’ pockets….

Nathanael December 14, 2009 at 7:27 pm

“Billwald,
Being taxed on $250,000 a year and being broke is a real possibility for many small business owners. ”

Only if you’re incompetent. Unlike individuals, businesses are taxed on *net* income, not gross income…. if you are taxed on $250,000/year in your business, you actually got $250,000 to play with personally.

Now it’s different if you’re in a partnership or S corp and the partnership earned the money but *didn’t actually pay it out*, but then your problem lies with your *partners* for failing to distribute money which they could have. Be careful who you go into business with.

Nathanael December 14, 2009 at 7:33 pm

“so people could refuse jobs if they wanted to”

FYI, before people react to this in a typical knee-jerk right-wing manner, the point of this is that the current “negotiation” between employer and employee gives the employer most of the power, because the employee is afraid of starvation and homelessness.

If the employee can say “That’s not a decent offer, make me a better offer or forget it”, then the employer has to come back and make a better offer. A guaranteed minimum income sufficient to very basic needs eliminates the element of *duress* from the transaction and makes the market work.

Shay December 14, 2009 at 10:06 pm

Not everyone works in order to pay for basic needs. Such people are put out of work by minimum wage laws. And it’s not duress for a buyer to hold his ground on how much he’s willing to offer a seller for something.

Jeff February 3, 2010 at 9:11 pm

Counting Medicaid as a 9,000 dollar value (essentially a quarter of that poor family’s income) is a gross distortion the program’s value. As an economics student who grew up with both parents being physicians, Medicaid is fairly worthless. Many doctors will send you elsewhere because it’s not worth it to keep the light’s on if the patient’s going to pay you 15 dollars an hour. You could make that at McDonalds without the fancy degree.

And what if the family doesn’t need to go to the hospital? Sure there’s simple prescription medicine, but I doubt they’re consuming 9,000 dollars worth a year. Just because it costs the government 9,000 dollars to provide the care, mostly because of bureaucratic inefficiency, does not mean that medicaid is valued at 9,000 dollars by the family. I’m sure they would much rather have that money to pay for higher quality food, living arrangements, or education.

I also take issue with your use of the upper bounds of assistance for nearly every example. It is unlikely that a person would receive 10,000 dollars in assistance if they make 30,000 dollars.

J. Murray April 25, 2011 at 4:49 pm

That’s roughly, at the time of this article, the average payment from Medicaid per beneficiary. Medicaid costs some $15,000 per recipient, $9,000 of that going to direct reimbursements. It’s a fair classification because those of lower income brackets overwhelmingly use hospitals for primary care functions whereas the rest of us go to a guy in a strip mall office who is just as qualified but doesn’t have to pay insane overhead.

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