Marginal Tax Rates on Labor Income in the U.S. After the Tax Cuts and Jobs Act

February 20, 2020

Workers in the United States face federal individual income taxes and payroll taxes on their labor income. The individual income tax system is progressive, as tax rates rise as taxable income rises. The payroll tax system is regressive, as part of the payroll tax is subject to a wage cap that reduces the payroll tax faced by higher earners.

In addition to examining statutory tax rates, it is important to look at marginal tax rates on labor income, which is what would apply to earning one more dollar of income, and this can differ from the statutory rate. Examining marginal rates shows how workers may be discouraged to work additional hours and earn higher incomes. Higher marginal tax rates disincentivize additional work at the margin, which translates into lower productivity and economic growth.

The Tax Cuts and Jobs Act (TCJA) cut individual income tax rates and doubled the standard deduction from $12,000 to $24,000 in tax year 2018, which has risen to $24,800 for tax year 2020. However, workers face a wide range of marginal tax rates on their labor depending on their income level. The differences in marginal tax rates are driven by the graduated individual income tax schedule, payroll tax rates, and tax credits meant to offset tax liability, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). While half of the payroll tax is levied on employers statutorily, workers bear the full burden of the payroll tax in the form of lower wages.

The benefits of the EITC and CTC depend on a taxpayer’s filing status and their number of children. Taxpayers with multiple children and married taxpayers tend to receive more benefits under both credits than taxpayers without children and single taxpayers. Both credits have separate phase-in and phaseout rates, thresholds, and refundability rules, which create changing marginal tax rates as taxpayer income rises. Credit phase-ins and phaseouts help minimize large spikes in marginal tax rates but have the trade-off of creating multiple points where the marginal tax rate on labor changes rapidly as income rises.

Take, for example, two taxpayers filing jointly with two children. At low levels of income, the taxpayers face negative marginal tax rates as the EITC and CTC phase in (see Chart 1 and Table 1). As income rises above $15,000, the CTC and EITC phase-ins end, and the marginal tax rate rises above 0. Eventually, the taxpayers face a marginal tax rate of up to 46.36 percent when earning over $36,801 on the margin due to the phaseout of the EITC, the 15.3 percent payroll tax, and the 10 percent individual income tax.

Marginal tax rate on labor income up to $100,000 married filing jointly, two children, 2020, Marginal Tax Rates on Labor Income in the U.S. After the Tax Cuts and Jobs Act

Above $53,330 in income, the marginal tax rate evens out to equal the marginal individual income tax rate and the payroll tax. This falls slightly after the Social Security payroll tax wage cap, which drops the payroll tax rate from 15.3 percent to 2.9 percent on income above $137,700. Higher earners face a 0.9 percent additional Medicare tax on income over $250,000 and a 5 percent CTC phaseout on income above $400,000.

The EITC phaseout between incomes of $36,801 and $44,550 means these lower-income taxpayers face a higher marginal tax rate during the phaseout (46.36 percent) than high-income earners do (40.8 percent on income above $646,850). This is because as the EITC phases out at that income band, it raises the marginal tax rate on additional labor through a reduced EITC amount.

Table 1. Marginal Tax Rates on Labor Income, Taxpayer Married Filing Jointly with Two Children, 2020
Income Level Statutory Bracket Marginal Tax Rate Comments
$0 to $2,500 0% -24.7% EITC Phase-In at 40% of each dollar earned with 15.3% payroll tax
$2,501 to $14,800 0% -39.7% CTC phases in at 15% of each dollar earned
$14,801 to $21,166 0% 0.3% EITC phase-in ends and plateaus
$21,167 to $25,220 0% 15.3% Refundable CTC phase-in ends, payroll taxes no longer cancelled out (15.3%)
$25,221 to $36,800 10% 36.36% EITC phase-out of 21.06% of each dollar earned begins
$36,801 to $44,550 10% 46.36% 10% income tax paid on the margin above $36,800 as refundable CTC is fully phased-in
$44,551 to $53,330 12% 48.36% 12% individual income tax bracket
$53,331 to $105,050 12% 27.3% EITC fully phased-out
$105,051 to $137,700 22% 37.3% 22% individual income tax bracket
$137,701 to $195,850 22% 24.9% Social Security payroll tax wage cap – 2.9% Medicare payroll tax remains
$195,851 to $250,000 24% 26.9% 24% individual income tax bracket
$250,001 to $351,400 24% 27.8% 0.9% additional Medicare payroll tax on income above $250,000
$351,401 to $400,000 32% 35.8% 32% individual income tax bracket
$400,001 to $439,500 32% 40.8% 5% CTC phase-out
$439,501 to $480,000 35% 43.8% 35% individual income tax bracket
$480,001 to $646,850 35% 38.8% CTC fully phased-out
$646,851+ 37% 40.8% 37% individual income tax bracket
Source: Tax Foundation calculations using Congressional Budget Office (CBO) and Internal Revenue Service (IRS) data. Assumes one earner for calculating the Social Security payroll tax wage cap.

Single filers with children also face marginal tax rate changes as their income rises. Marginal tax rates rise faster for single filers, as the EITC plateaus and phases out at a lower income level for them.

Marginal tax rate on labor income up to $100,000 single filer, one child 2020, Marginal Tax Rates on Labor Income in the U.S. After the Tax Cuts and Jobs Act

Table 2. Marginal Tax Rates on Labor Income, Filing Single with One Child
Income Level Statutory Bracket Marginal Tax Rate Comments
$0 to $2,500 0% -18.7% EITC Phase-In at 34% of each dollar earned with 15.3% payroll tax
$2,501 to $10,540 0% -33.7% CTC phases in at 15% of each dollar earned
$10,541 to $11,833 0% 0.3% EITC phase-in ends
$11,834 to $18,400 0% 15.3% Refundable portion of the CTC phase-in ends at $11,833. Non-refundable portion of CTC used from $12,401 to $18,400 to offset 10% income tax.
$18,401 to $19,330 10% 25.3% Non-refundable portion of the CTC fully phased in at $18,400. 10% income tax paid on the margin above $18,400.
$19,331 to $22,275 10% 41.28% EITC phase-out of 15.98% of each dollar earned begins
$22,276 to $41,756 12% 43.2% 12% individual income tax bracket at $22,275
$41,757 to $52,525 12% 27.3% EITC phaseout ends at $41,756.
$52,526 to $97,925 22% 37.3% 22% individual income tax bracket
$97,926 to $137,700 24% 39.3% 24% Individual income tax bracket
$137,701 to $175,700 24% 26.9% Social Security payroll tax wage cap at $137,700 – 2.9% Medicare payroll tax remains
$175,701 to $200,000 32% 34.9% 32% individual income tax bracket
$200,001 to $219,750 32% 40.8% 0.9% additional Medicare payroll tax on income above $200,000. 5% CTC phaseout begins.
$219,751 to $240,000 35% 43.8% 35% individual income tax bracket
$240,001 to $530,800 35% 38.8% CTC phase-out ends at $240,000
$530,801+ 37% 40.8% 37% individual income tax bracket
Source: Tax Foundation calculations using Congressional Budget Office (CBO) and Internal Revenue Service (IRS) data

Single filers without children receive no benefit from the CTC and limited benefits from the EITC, which phases in at a lower rate—7.65 percent—to help offset the employee-side of the payroll tax (see Chart 3 and Table 3). The marginal tax rate on labor rises from 7.65 percent on the first dollar of income to 32.95 percent for income earned between $12,401 and $15,820, where the EITC phaseout occurs and the 10 percent individual income tax bracket begins.

Marginal tax rate on labor income up to $100,000, single filer, no children 2020, Marginal Tax Rates on Labor Income in the U.S. After the Tax Cuts and Jobs Act

After the EITC is fully phased out, single filers without children experience rising marginal tax rates as they move up individual income tax brackets, although single filers see a drop in the marginal tax rate after the Social Security payroll tax wage cap kicks in above $137,700.

Table 3. Marginal Tax Rates on Labor Income, Taxpayer Filing Single with No Children
Income Level Statutory Bracket Marginal Tax Rate Comments
$0 to $7,030 0% 7.65% EITC Phases-in at 7.65% of each dollar earned with 15.3% payroll tax
$7,031 to $8,790 0% 15.3% EITC phase-in ends at $7,030
$8,791 to $12,400 0% 22.95% EITC phase-out begins at 7.65% of each dollar earned
$12,401 to $15,820 10% 32.95% 10% individual income tax bracket
$15,821 to $22,275 10% 25.3% EITC phase-out ends at $15,820.
$22,276 to $52,526 12% 27.3% 12% individual income tax bracket at $22,275
$52,526 to $97,925 22% 37.3% 22% individual income tax bracket
$97,926 to $137,700 24% 39.3% 24% Individual income tax bracket
$137,701 to $175,700 24% 26.9% Social Security payroll tax wage cap at $137,700 – 2.9% Medicare payroll tax remains
$175,701 to $200,000 32% 34.9% 32% individual income tax bracket
$200,001 to $219,750 32% 35.8% 0.9% additional Medicare payroll tax on income above $200,000.
$219,751 to $530,800 35% 38.8% 35% individual income tax bracket
$530,801+ 37% 40.8% 37% individual income tax bracket
Source: Tax Foundation calculations using Congressional Budget Office (CBO) and Internal Revenue Service (IRS) data

The many marginal tax rates on labor income create complexity in the tax code and disincentives to work at the margin, showing that there is an opportunity to simplify tax credits for low-income taxpayers. 

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