The Marginal Net Taxation of Americans’ Labor Supply

50 Pages Posted: 18 May 2020 Last revised: 3 Jul 2023

See all articles by David Altig

David Altig

Federal Reserve Bank of Cleveland; Federal Reserve Banks - Federal Reserve Bank of Atlanta; University of Chicago - Booth School of Business

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Elias Ilin

Federal Reserve Banks - Federal Reserve Bank of Atlanta; Boston University

Yifan Ye

Boston University

Date Written: May 2020

Abstract

The U.S. has a plethora of federal and state tax and benefit programs, each with its own work incentives and disincentives. This paper uses the Fiscal Analyzer (TFA) to assess how these policies, in unison, impact work incentives. TFA is a life-cycle, consumption-smoothing program that incorporates cash-flow constraints, retirement hazards, all major federal and state fiscal policies, and welfare-program-specific takeup rates. We use TFA in conjunction with the 2019 Survey of Consumer Finances to calculate Americans’ remaining lifetime marginal net tax rates (LMTR). Our findings are striking. Over half of working-age Americans face LMTRs exceeding 40 percent. One in four households in the bottom lifetime resource quintile face LMTRs above 50 percent. One in ten face rates above 70 percent, effectively locking them out of the labor force and into poverty. The richest 1 percent also face extremely high LMTRs with a 57.9 percent median rate. We find remarkable dispersion in both LMTRs and current-year marginal tax rates, not only across, but within states, age cohorts, and resource quintiles. Among those in the bottom quintile, 5.1 percent face LMTRs exceeding 100 percent; 4.5 percent face negative rates. Based on simplified excess burden calculations, eliminating the dispersion in marginal lifetime net taxation would produce efficiency gains of up to 24.1 percent of labor income for households in the bottom quintile where MTR dispersion is greatest.

Suggested Citation

Altig, David and Altig, David and Auerbach, Alan Jeffrey and Kotlikoff, Laurence J. and Ilin, Elias and Ye, Yifan, The Marginal Net Taxation of Americans’ Labor Supply (May 2020). NBER Working Paper No. w27164, Available at SSRN: https://ssrn.com/abstract=3603794

David Altig (Contact Author)

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Alan Jeffrey Auerbach

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Laurence J. Kotlikoff

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Elias Ilin

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Boston University

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Yifan Ye

Boston University ( email )

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