Liberals Agree: Phase-Outs are Marginal Tax Increases

This is more of a note to self.

I’ve found that folks who self-describe as liberal often roll their eyes when you explain that means-tested subsidies distort incentives and that because there is a phase-out the programs can create high effective marginal tax rates.

This article provides the left’s argument against means testing social security. In one paragraph we find two liberal paragons very strongly making the above point:

It’s interesting how conservatives constantly argue that raising tax rates distorts the economy and produces disincentives to work. Joseph Stiglitz pointed out to me that means-testing has just the effect conservatives say they are against: “The phase-out is an effective increase in the marginal tax rate. So if your income goes up and you lose benefits, that’s a disincentive for working. Every means-testing has that adverse effect.” Dean Baker further pointed out that very high effective marginal tax rates give people enormous incentives to game the system.

And, yes, the ACA (Obamacare) can create high effective marginal tax rates on middle income workers. Once people understand it and get comfortable that it’s not going to get overturned or radically changed I think we’re going to see some interesting changes in behavior. Stay tuned for a drop in reported income among low-middle income households…

This entry was posted in Logic and Frameworks, Note to Self, Policy and Tax and tagged , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s