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.
Alan D. Viard
For a complete listing of all On the Margin articles, please visit: www.aei.org/onthemargin/.
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. . . .
Alex Brill is a research fellow at AEI. Alan D. Viard is a resident scholar at AEI.