Effective Marginal Tax Rates, Part 1
Basic Principles

Different types of tax provisions shape effective marginal tax rates on the earning of income, and some basic principles should govern the roles of these provisions. In a companion article to be published in October, these principles will be applied to critique provisions of the current U.S. tax system and certain proposals. This article launches AEI’s "On the Margin" column in Tax Notes.

Research Fellow
Alex Brill

Resident Scholar
Alan D. Viard

Public debate about the tax system often focuses on the level of tax payments by different individuals and groups. Particular attention is often paid to an individual's average tax rate, defined as the individual's total taxes as a share of his income. The average tax rate is important for an assessment of how the tax system redistributes resources across different members of society. Lawmakers have generally ensured that average tax rates rise with income to achieve a progressive distribution of the tax burden.

The incentive effects of the tax system depend, however, on marginal rather than average tax rates. The marginal tax rate on an activity is the increase in tax that arises when an additional dollar of the activity occurs. In this article, we focus on a particular marginal rate, namely the effective marginal tax rate (EMTR) on income. The EMTR is the change in tax liability that occurs when an additional dollar of income, here taken to be labor income, is earned. In an income tax system, the EMTR measures the impact of the tax system on the incentive to earn income. To minimize disincentives, it is desirable to keep EMTRs low for all taxpayers. As discussed below, however, policymakers face an important trade-off between progressivity and incentives. . . .

Download file The full text of this article is available here.

Alex Brill is a research fellow at AEI. Alan D. Viard is a resident scholar at AEI.

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
  • Assistant Info

    Name: Veronika Polakova
    Phone: 202-862-4880
    Email: veronika.polakova@aei.org

 

Alex
Brill
  • Alex Brill, a former policy director and chief economist of the House Ways and Means Committee, also served on the staff of the President's Council of Economic Advisers (CEA). In Congress and at the CEA, Mr. Brill worked on a variety of economic and legislative policy issues, including dividend taxation, the alternative minimum tax, international tax policy, social security reform, defined benefit pension reform, and U.S. trade policy.

    At AEI, Mr. Brill studies the impact of tax policy in the U.S. economy; the fiscal, economic, and political consequences of stimulus legislation; health care reform, pharmaceutical spending, unemployment insurance reform; and financial innovation and technology.
  • Phone: 202-862-5931
    Email: alex.brill@aei.org
  • Assistant Info

    Name: Veronika Polakova
    Phone: 202-862-4880
    Email: veronika.polakova@aei.org

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