27 November 2012

Wrinkly Tax Codes

Asymmetric Information | Megan McArdle | More On That Wrinkly Tax Code

Reader Mark writes in to highlight some of those EITC problems I spoke of earlier:
Now, if the GOP would like to cement a generation of voters that would keep them in office and make them competitive in places like OH, NY and PA, end the injustice of the current tax code and make it easy to be a citizen instead of having that sinking feeling that you are both getting hosed and probably a felon at the same time.And guess what, it’s the right thing to do. Too bad the donor base is addicted to tax breaks and crony capitalism instead of the good of the nation.
If given the choice between the current tax code and one where I would pay more dollars but not simultaneously feel like I'm being cheated and being forced to worry about the IRS claiming I'm a felon, I would take the latter.

I don't care if the Red Team or the Blue Team does this. I'll consider backing whoever allows me out of a tax system that makes me feel simultaneously afraid of being a sucker and of being caught breaking laws I didn't know existed.

PS McArdle concludes with:
This is an enormously tough problem with the EITC. I support the idea that our tax code should support low-wage work. But the phase-outs create large income ranges where raising your salary doesn't make you noticeably better off--may even make you worse off.
In a later post she says the following:
This is a basic problem wtih means testing. But it's not necessarily an argument against means testing so much as it is an argument for very long phaseout periods--and especially, for staggering the phaseouts so that they don't all hit in the same income range. This is why the poor can face marginal tax rates that exceed 100%: hit a certain income range, and your EITC, Medicaid, food stamps, and other forms of assistance all start to phase out at once.
We can try to smooth out these cutoffs, stop using step functions, distribute them across a range of incomes rather than stacking them all together, make phase-outs more gradual, make rates differentiable, but at the end of the day there's no way to have both generous benefits and low marginal rates for low income people. There are plenty of ways to make this system a little more reasonable — and we should take them — but when all is said and done that's a circle that can't be squared. Every time you raise benefits for the $0 income person you make the marginal rates of low income people higher as well.


  1. "I would take the former" - ... I think you mean the latter?

    I once said this: https://twitter.com/random_eddie/status/88408004734627840

    i.e. "ditto"

  2. Ahhh. Yes. Consider that fixed.