Does It Pay to Work?

Policy Reports | Taxes

No. 258
Monday, March 31, 2003
by Jagadeesh Gokhale, Laurence J. Kotlikoff, and Alexi Sluchynsky


To accurately measure lifetime average and marginal net tax burdens, we have included in fine detail every major tax and transfer program affecting American households. What emerges is a picture of a fiscal system with six characteristics:

  • Our fiscal system is highly progressive over the bottom half of the income distribution. Couples working full-time and earning the minimum wage get back 32 cents in benefits (net of taxes) for every dollar they earn, while couples earning $64,000 (or three times the minimum wage) pay 30 cents in taxes (net of benefits) per dollar earned. Over the top half of the income distribution, the system is only mildly progressive.
  • Most of the progressivity in our fiscal system comes from means-tested spending programs rather than taxes, and these are concentrated at the bottom of the income ladder.
  • Workers at every income level face very steep lifetime marginal tax rates. Virtually all full-time American workers lose more than half of their earnings in taxes and forgone transfer benefits.
  • The very highest marginal net tax rates are imposed on the lowest-income earners, largely because of the withdrawal of means-tested transfers and tax benefits. Indeed, working couples in the bottom half of the income distribution keep only a third or less of the income they earn, on net.
  • If low-income household members work at all, our system strongly encourages them to work part-time rather than full-time. Couples earning 1.5 times the minimum wage actually reduce their standard of living if they work full-time rather than half-time.
  • The principal reason for very high marginal net tax rates for low-income households is the existence of means-tested tax and welfare benefits tied to children. For example, a 25-year-old couple with children, earning 1.5 times the minimum wage, gives up 60 cents for every dollar earned; the marginal net tax rate on the same couple drops to 14 percent at age 55, when they are well past the child-rearing years.

Overall, our system is very generous to those at the bottom of the income ladder. But the price of that generosity is an incentive structure that strongly discourages those with the lowest skills from participating in the labor market.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.

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