The Clash of Generations by Laurence J. Kotlikoff & Scott Burns

Author:Laurence J. Kotlikoff & Scott Burns [Kotlikoff, Laurence]
Language: eng
Format: epub
ISBN: 9780262300797
Publisher: The MIT Press
Published: 2012-04-09T04:00:00+00:00

When we raise the couple’s earnings to $150,000, the tax bracket is 46 percent. At $500,000, it’s 44 percent. At the other extreme, at $10,000 in earnings, the marginal tax bracket is minus 14 percent. So the marginal tax rate starts negative, immediately rises dramatically, then falls dramatically, rises dramatically again, and then falls again, albeit slightly.7

If this same couple were sixty years old in 2005, they’d be in a 51 percent (not a negative 14 percent) bracket at $10,000 in earnings, a 36 percent (not a 42 percent) tax bracket at $30,000 in earnings, a 36 percent (not a 24 percent) bracket at $50,000 in earnings, a 48 percent (not a 46 percent) bracket at $150,000 in earnings, and a 45 percent (not a 44 percent) bracket at $500,000.

Why is government (federal and state combined) placing the thirty-year-old married couple who is earning $30,000 in a 6 percentage point higher tax bracket than the thirty-year-older version of the same couple? And why is it sticking the sixty-year-old $50,000 couple in a 12 percent higher tax bracket than the corresponding thirty-year-younger version? We doubt Dave Camp, chairman of the House Ways and Means Committee, has an answer, because this discriminatory treatment will surely be as new to Dave as it will be to Nancy Pelosi.

Whether the public itself correctly perceives the marginal taxes it faces is an interesting question. If not, people may be working much less or much more than they would if they really understood the work incentives they face. Either way, there’s potentially a significant economic cost arising from such mistakes.

Who Said the United States Is a Low-Tax Country?

For my (Kotlikoff) coauthor and me, students of public finance for our entire professional careers, discovering precisely what the tax-transfer system really looks like, in all its combined glory, was both exciting and somewhat surprising. Leaving aside the anomalies, our tax-transfer system puts virtually all American workers into 35 to 45 percent tax brackets. This means that on every extra dollar earned, typical American workers, including virtually all welfare recipients, pay the government 35 to 45 cents in extra taxes net of what they receive back (which is typically negative) in extra benefits.

For the poor (except those making less than $10,000 per year), the generally high marginal tax brackets primarily reflect the 15.3 percent (employer plus employee) FICA tax plus the loss, on extra dollars earned, of two things—tax credits and welfare payments, including food stamps, Medicaid, and other benefits. For the middle class, the generally high marginal tax brackets reflect the FICA tax and middling-level federal marginal tax rates. And for the rich, the generally high marginal tax brackets reflect their position in the highest (35 percent) bracket of the federal income tax. The two Medicare taxes, at 0.9 percent and 3.8 percent, effectively erase the much reviled Bush tax cuts for the wealthy of 2004.

Taxing Our Saving

Our tax and transfer system does more than penalize work. It also discourages saving.

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