Marginal Tax Rates And The Poor

Megan McArdle quite wisely says that it would make much more sense for people concerned about the supply-side impact of high marginal tax rates to focus on poor people than on high-income people. “Everyone I’ve spoken to about the problem seems to agree,” she writes “that the poor respond to these high marginal tax rates by either taking lower-paying jobs than they could, or working less–not in every individual case, but in aggregate.”

That’s my understanding as well. You can understand it qualitatively by the fact that poor people are often faced with tradeoffs where they could earn higher wages by accepting less pleasant work or weird hours or long commutes. What’s more, the kind of jobs where you can increase your income by simply choosing to work more hours are generally low-status. That’s not a universal rule. Journalists can choose to freelance more or less. But you’re mostly talking about, say, waitresses. And poor people face very high marginal tax rates:

I do think it’s worth emphasizing that the conjunction of the fact that low-income people are unusually response to marginal tax rates and that at some portions of the spectrum young people face infinite effective marginal tax rates tells us that conservatives are generally blowing the behavioral impact of taxes out of proportion. But this is very much where the emphasis out to be. The biggest culprit, as I understand it, is the way that Medicaid benefits phase out. In a normal country, everyone would pay somewhat higher taxes and would receive a more-or-less flat health care benefits package in exchange and this issue would be largely ameliorated.