Effective Marginal Tax Rates, Part 2
Reality

This article concludes a two-part series on effective marginal tax rates (EMTRs) and the U.S. individual income tax system, examining particular items within the current system that cause the EMTR to deviate from the statutory rate structure and the impact of some recent proposals on EMTRs.

Research Fellow
Alex Brill
Resident Scholar
Alan D. Viard
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 taxes on the incentive to earn. The first article reviewed theoretical issues regarding the potential impact of tax policy on EMTRs and how to calculate EMTRs.[1] This article examines particular items within the current system that cause the EMTR to deviate from the statutory rate structure. Also, we explore how some recent proposals would affect EMTRs, and offer some general policy recommendations.

Current System

Basic features. The structure of the individual income tax includes the following major components: six progressive statutory marginal tax rates (10, 15, 25, 28, 33, and 35 percent), a system of allowable tax exclusions and deductions that reduce eligible taxpayers' taxable income (and hence their tax liability), and a system of tax credits that reduce tax liability directly. While an inspection of the income tax system demonstrates that average tax rates[2] rise as incomes rise, the same is not always true for marginal tax rates.[3] . . .

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

Notes

1. Alex Brill and Alan D. Viard, "Effective Marginal Tax Rates, Part 1: Basic Principles," Tax Notes, Sept. 8, 2008, p. 969, Doc 2008-18694, or 2008 TNT 175-45.

2. The average tax rate is federal income tax divided by income.

3. The marginal tax rate explored here is with respect to pretax wage income. We calculate it as the share of federal income paid in taxes from a $1 increase in wages. An alternative specification, which generally yields slightly higher rates, calculates the marginal rate with respect to taxable income.

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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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