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Tax Rates Mean Extra Work Doesn't Pay

Lower-Income Workers Are Hit Especially Hard, According to New NCPA Study

DALLAS, April 16 /PRNewswire-USNewswire/ -- The U.S. tax and welfare systems impose the greatest penalties on low-income workers when they work extra hours to get ahead, according to a study published today by the National Center for Policy Analysis.

"The impact on low-income workers and their families is especially brutal," said NCPA Senior Fellow Laurence Kotlikoff, Boston University professor and author of the study. "They can and often do wind up earning pennies on the dollar."

The study concludes that effective marginal tax rate, the rate of taxation for each additional dollar earned, is higher for all workers but substantially higher for lower-income workers than higher-income workers. The study also shows that much of the higher marginal tax rates for lower-income Americans are caused by the loss of eligibility for government transfer programs, especially Medicaid.

-- For 30-year-old couples earning $20,000 the marginal tax rate is 42.5 percent, but for those earning $50,000 per year it's nearly half that -- 24.4 percent.

-- At age 45, couples earning $30,000 per year face a 41.8 percent marginal tax rate; the rate for those earning $200,000 is 35.9 percent.

In addition, single-parent households who qualify for more benefit programs than couples face even higher high marginal tax rates beginning at lower incomes. For example:

-- A 30-year-old single parent earning $10,000 per year pays 72.3 cents of every additional dollar earned in taxes due to the loss of welfare benefits. If the same parent earned $200,000 he or she would pay only 36.9 cents of each additional dollar in taxes.

-- At 45 years of age, the single parent earning $20,000 pays 42.9 cents in taxes of every additional dollar earned.

-- At 60, the single parent earning $10,000 pays 50.9 cents in taxes for each additional dollar earned. But if he or she were earning $200,000, they'd pay 43.2 cents in taxes.

"Any American trying to move up the income ladder should be rewarded, not punished with astronomical taxes," Kotlikoff added. "The bottom line is that not only are we penalizing the workers who need extra income, we are punishing them when they need it most."

The study can be accessed at

The NCPA is an internationally known nonprofit, nonpartisan research institute with offices in Dallas and Washington, D. C. that advocates private solutions to public policy problems. We depend on the contributions of individuals, corporations and foundations that share our mission. The NCPA accepts no government grants.

SOURCE National Center for Policy Analysis
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