Saturday, November 14, 2009

100+% Implicit Marginal Tax Rates = Economic 'Dead Zone'

If the government set up a system in which for every dollar above your current income you made they increased your taxes by more then a dollar, would you try earn extra money? The answer is no. Not only would you not try to earn extra money, you would try to make sure you did not. The government would actually be penalizing you for making the extra cash. It is a stupid, counter productive system, but one in which actually exists in this country. This 100+% implicit marginal tax rates has been dubbed the economic 'Dead Zone'. Technically speaking, it is not a 100+% tax, but the effect is the same, and obvious when charted.

Picture embedded below.


"The chart above (source, via Kling) illustrates this phenomenon. It shows income after taxes and transfers as a function of earned income. Notice that as earned income rises from about $15,000 to $30,000, income after taxes and transfers is roughly flat. Indeed, it could even fall. The bottom line: If you are poor, the government is inadvertently ensuring that you have little incentive to try to improve your condition."

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