Vermont Bill Creates Marginal Rate of 180,000 Percent
April 11, 2013
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 tax 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 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 rate of 180,000 percent, probably the highest in the world.
That’s a pretty substantial marginal cost.
More on Vermont here.
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