Higher Marginal Tax Rates

The big news this morning is that the Senate Health Reform bill passed the House of Representatives. (The House also claims that the Senate will pass a series “fixes” to make the final statutes be more like their own health bill, but of course the House cannot force the Senate to do anything.)

Both the Senate and House health bills are examples of the kinds of work disincentives (see also here) created by our own government that made employment fall so much more during this recession than it had to, and guarantees that the ratio of employment to population will for decades remain below what it was before President Obama took office. The basic problem is that people keep less of their income at the margin because not only does earning income cause them pay more state, local, and federal tax, but it also causes them to lose government health benefits.

The chart below displays estimates of marginal tax rates for various income groups, under three laws (the chart was made in January, so “current law” meant neither House nor Senate bill). This chart comes from a Cato Institute study, and was displayed on the Kaiser Foundation’s web site.

I do not yet understand why the marginal tax rate hikes from the plans are significantly greater in this chart than shown in the WSJ, which cited the study above. The WSJ chart is below (has Senate plan only), and at first glance seems more credible to me (but I am checking into the differences and will post better-than-first-glance conclusions later). But both charts agree that marginal tax rates will be significantly higher.

An important part of my interpretation and forecasting of the macroeconomy was the assumption that higher marginal tax rates were here for the long term — I have to thank lawmakers for making my forecasts come true!

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About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

Visit: Supply and Demand (in that order)

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