Association for Public Policy Analysis & Management

Effective marginal tax rates arise when earnings increase, and the ensuing reduction of program benefits act as a tax (e.g. reduced child care subsidy, TANF [Temporary Assistance for Needy Families], and rental assistance). A very high effective marginal tax rate means almost all new earnings are subsumed by reduced benefits, which may discourage additional work or higher wages. This work examines marginal tax rates faced by low-income families.

Method. Our analysis relies on the TRIM3 (Transfer Income Model) microsimulation model with calendar year 2014 data from the Current Population Survey. Analysis households (n = 63,493) had a householder or spouse between ages 18 to 64 without disabilities. In separate iterations, earnings increases of $2,000, $5,000, and $10,000 were simulated for each household. The following benefit programs were modeled: TANF, SNAP (Supplemental Nutrition Program), CCDF (Child Care Development Fund), housing assistance, Medicaid/CHIP (Children’s Health Insurance Program), federal incomes taxes and credits (including the Earned Income Tax Credit and Child Tax Credit), state income taxes and credits, payroll taxes, Supplementary Security Income (SSI), Women Infants and Children (WIC), Low Income Heating and Energy Assistance Program (LIHEAP), child support, and unemployment insurance. Administrative data were used to correct for underreporting of programs and benefit levels, with the exception of Medicaid/CHIP.

Results. Among households with children just above poverty, the median marginal tax rate is high (51 percent) after a $2,000 earnings increase; rates remain high (never dipping below 42 percent) as incomes approach 200 percent of poverty. Households with children are more likely to face high marginal tax rates than households without children. Among households with children below 200 percent of poverty, the most common combination of benefits is SNAP + EITC + Child Tax Credits + Medicaid/CHIP, and these three million households experience a median marginal tax rate of 42 percent (after a $2,000 earnings increase).

Among households receiving CCDF (Child Care Development Fund) subsidies, we find that marginal tax rates are highest for CCDF households just above poverty. For households between 100 to 149 percent of poverty, a $5,000 earnings increase is associated with a median marginal tax rate of 73 percent, leaving families with a net increase of only $1,350. With respect to the “child care cliff,” only three percent of CCDF households would lose their entire subsidy following a $2,000 earnings increase. However, among families with incomes between 100 and 199 percent of poverty, a larger earnings increase of $10,000 would cause 37 percent of these families to lose their entire subsidy. Among CCDF households, the most common combination of additional programs is EITC + Child Tax Credit + SNAP + Medicaid/CHIP, and these 259,000 CCDF households experience a median marginal tax rate of 51 percent (after a $2,000 earnings increase).