Economists care about decisions at the margins. We ask questions like the cliché “when will producers make more guns and less butter?” The answer is that economic actors will seek opportunities where marginal costs are lower, or marginal benefits are higher, or some combination of the two.
By that same token, marginal income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates affect the decision of employees as to whether they will seek additional responsibilities at work in exchange for higher incomes. As marginal rates increase in progressive income tax codes, take-home pay is less for each dollar, and the incentive to work is less. We have good empirical data that backs up this theoretical claim.
Vermont just introduced a bill that has a sneaky little trick to raise taxes on the high income earners without raising statutory marginal rates. After you cross a threshold, all your prior income is subject to higher rates. From the bill:
[…]for a taxpayer with taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. in the highest bracket, the tax shall be calculated as if all of his or her income in the lowest bracket was taxed at the rate in the next highest bracket and the remainder of his or her income was taxed under the remaining brackets and rates as specified.
According to Art Woolf, an economist in Vermont writing in the Vermont Economy Newsletter (subscription required):
If you earn a dollar over $397,150, your Vermont income tax bill will increase by about $1,800. That’s a marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. of 180,000 percent, probably the highest in the world.
That’s a pretty substantial marginal cost.
More on Vermont here.
Follow Scott Drenkard on Twitter @ScottDrenkard.Share