The Skyline Tax
Hassett, Diana Furchtgott-Roth and Kevin
The Skyline Tax by Diana Furchtgott-Roth and Kevin Hassett Suppose you're the hard-working head of a household of four. Should you put more energy into earning? The decision will hinge partly on...
...It's true that marginal tax rates have never been uniform...
...The price we pay for our social safety net is higher marginal tax rates at income levels where entitlement programs are deemed unnecessary...
...It reaches a high of 40.5 percent at $80,000, when the education credits phase out...
...At $100,000 the rate falls to 28 percent, before rising again with the phaseout of the child credit...
...But the Taxpayer Relief Act raises such distortions to a fine art...
...At an income level of $20,000, a family of four faces a 21 percent marginal tax rate, as its EITC phases out...
...Next year's $400 child credit, for example, phases out between $110,000 and $118,000 of income...
...Low marginal income-tax rates encourage effort and earning...
...High tax rates resulting from the phaseouts will blunt the incentive to move up the income scale...
...There are even those who favor regressive taxes (on tobacco, alcohol, and gasoline...
...Yes, some gain from the new provisions, but everyone would be better off if the new provisions were eliminated and we had lower, flatter, rates—not a New York City skyline tax, but a seashore tax...
...With higher rates, people think twice about investing their energy in extra work...
...Whatever the particulars of their situation, almost all families will face one view or another of the New York City skyline, as they pick and choose from a kaleidoscope of tax preferences...
...When our typical family of four is making $80,000, each new dollar earned is taxed at a basic 28 percent...
...Thus, its effective marginal tax is 12.5 cents plus 28 cents—for a marginal tax rate of 40.5 percent...
...But suppose the family is taking advantage of the Hope Scholarship and the Lifetime Learning Credit, which phase out between $80,000 and $100,000...
...Elected officials may get some speechmaking advantage from the Hope Scholarship Credit, but they are sacrificing sound policy for soundbites...
...If the wife earns $20,000, her family's marginal tax rate will exceed 40 percent—54 percent with payroll and state taxes...
...Taxpayers are typical families of four with one child in college, making between $10,000 and $120,000...
...The decision will hinge partly on how much of any new income you will keep after paying taxes...
...At $30,000, the new credits cancel out any tax liability and the income-tax rate drops to zero...
...With a husband earning $70,000, a working wife will quickly push the family into a higher tax bracket...
...By contrast, the Taxpayer Relief Act of 1997 creates a crazy-quilt of marginal tax rates that only an accountant could love...
...Diana Furchtgott-Roth is a resident fellow at the American Enterprise Institute and a member of the advisory board of the Independent Women's Forum...
...The family's tax credits will decrease by 12.5 cents for each extra dollar earned...
...The earned income tax credit (EiTC), the new child and education credits, and the new savings incentives are available to taxpayers over different income ranges...
...And each of the phaseouts will require a different worksheet in the tax return, increasing headaches—and reliance on professional preparers...
...While this constellation of tax rates is so absurd it is almost humorous, one group most assuredly is not laughing...
...But no one has ever argued for a New York City skyline tax...
...It's obvious that more careful thought has gone into the marketing of these tax provisions than into the provisions themselves...
...The rate then rises rapidly thanks to phaseouts of the deductible IRA and the student-loan deduction...
...Second earners, most of them women, fare very badly under this allegedly family-friendly bill...
...Consider some highlights...
...And one example of anomalous marginal tax rates is already familiar: the "bubble" created by the 1986 Tax Reform Act when the tax rate rose from 28 to 33 percent, then dropped back to 28 percent...
...Which depends on your marginal tax rate—the percentage of the last dollar earned that must be paid in tax...
...Kevin Hassett is a resident scholar at the American Enterprise Institute...
...If the family were lucky enough to have three children in college, it would face a marginal rate of 53 percent—more like 66 percent when typical state and payroll taxes are added...
...The graph bears a striking resemblance to the New York City skyline, with many peaks and troughs...
...Now, some people want a flat tax and some want progressive taxes...
...This bizarre arrangement is a result of the way various tax breaks kick in and phase out...
...This rule is family-friendly only to the extent it keeps women in the kitchen cooking dinner...
...The graph on the next page shows marginal tax rates under the new tax bill...
Vol. 3 • September 1997 • No. 3
