Unexpectedly Intriguing!
November 11, 2009

Implicit Marginal Tax Rates Via Warren Meyer, we thought the the chart Clifford F. Thies created for his post The Dead Zone: The Implicit Marginal Tax Rate over at the Mises Institute was cool (see right).

But why does it look like this? Why do the government's implicit marginal tax rates go so far out of their way to affect people and households with low annual incomes?

Then another neat question came to us? How do these implicit marginal tax rates compare to how income is distributed in the United States? Fortunately for us, that's something we've already worked out. The chart to the left shows what we found when we answered that question back in May 2008:

2005 Approximate Aggregate Household Income vs Household Adjusted Gross Income In the chart to the left, we see that aggregate household income first rises, then falls as income increases, with households at lower incomes collectively earning as much as the households at higher incomes. For example, we can directly observe that households with annual earnings of $20,000 amass the same amount of aggregate income as those with annual earnings of $80,000.

The difference is the number of households at each income level. To get the same aggregate income level as the households with adjusted gross incomes of $80,000, there would have to be four times as many households earning $20,000.

Looking between these two income amounts, we see the peak in aggregate household income would appear to closely correspond to where the greatest level of implicit marginal taxation occurs. Here's an overlay of the two charts so we can directly observe where the implicit marginal tax rates fall with respect to household aggregate income:

Overlay of Implicit Marginal Tax Rates and Aggregate Household Income by Annual Household Adjusted Gross Income

We find that the level of implicit marginal tax rates with respect to earned income look the way they do because of how most of the money earned each year is distributed among U.S. households. With a progressive income tax structure, implicit taxation through the phase-out of welfare and other income-based tax benefits and credits at lower income levels is the method by which the government would appear to shift the implicit tax burden to more closely center on the mass of money aggregated in households with annual earnings between $19,000 and $46,000.

As household income levels rise, progressive income tax rates take over. We should note these higher explicit marginal income tax rates actually begin kicking in well below $46,000, contributing to the higher implicit marginal rates of taxation observed at these income levels. The difference is that the effects of the explicit marginal income tax rates upon a household's annual income are much more transparent.

And no, it's not something that happened by accident. Shifting the implicit tax burden this way is something that takes a lot of scheming....

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