Comments on Hassett and Moore, “How Do Tax Policies Affect Low-Income Workers?”

1. Comments on Hassett and Moore, “How Do Tax Policies Affect Low-Income Workers?” John Karl Scholz Economics Department and IRP University of Wisconsin – Madison June 10, 2005

2. General Thoughts on the Paper • This is a well-executed, nicely written paper. • I believe the primary results: • That federal income tax payments for low-income families with children have fallen fairly steadily since 1986. • The Wall Street Journal editorial page refers to working poor households with low federal income tax liabilities as “Lucky Duckies” • There has been an upward trend in sales and excise taxes for all low-income families and individuals. • Overall tax payments for low-income families with children have fallen since 1993.

3. Three Specific Comments About the Work • Average (and marginal) tax burdens are understated by ignoring (until Figure 24) the employer share of payroll taxes. • The effective payroll tax rate is 14.2% (.153/1.0765). • (I think) it is widely believed that the incidence of the payroll tax falls fully on workers. • Considerations when assessing the top line of Figures 1-12 – the “skylines:” • Participation in AFDC/TANF and food stamps is below 100 percent among eligibles. • The 2004 rules are sufficiently varied as to make the 2004 line “with benefits” uninterpretable for families with children. • Childless households can at most (generally), only get food stamps in 3 out of 36 months.

4. Three Specific Comments About the Work, continued… • There is considerable heterogeneity that is missed in the paper (which likely improves expositional clarity). • 54 percent of single parents (with a high school degree or less) have 1 child (the representative single-parent family has 2). • Since the EITC and refundable child credits increase with the number of children, typical tax liabilities of single parents will be higher. • The median income of married couples with children (and a high school degree or less) is $36,600 (the mean is $42,200). • Tax burdens increase with income – particularly the federal income liabilities. • There is wide variation across states in sales and individual income tax rates. • Several states have no sales tax. Mississippi, for example, is 7 percent with no exemption for food. • There is a wide range of state income taxes.

5. Stepping Back: How Do Tax Policies Affect Low-Income Workers? • The paper focuses on an important aspect of tax policy: distributional considerations. • But taxes likely affect other aspects of behavior, including work, saving, and perhaps family formation. • Not all MTR’s are created equally. • It takes a great deal of knowledge for a taxpayer to understand how incremental labor supply decisions in December will affect income tax calculations in April. • It takes less to understand that there is some “work bonus” as part of the income tax. • Very high rates associated with benefit programs presumably do discourage work. Time limits or “workfare” requirements may be a sensible way to address negative incentives.

6. How Do Tax Policies Affect Low-Income Workers, continued? • Work • There is a good deal of evidence (Meyer and Rosenbaum; Grogger; Hotz and Scholz) that the EITC subsidy positively affects employment. • Saving • I tend to be skeptical that tax incentives for saving “work.” • But recent evidence on low-income working families suggests that the presence of incentives facilitates “financial education,” which in turn, may affect behavior. • Marriage • At different times there has been considerable attention paid to the fact that the tax system is not “neutral” with respect to marriage. • I don’t know of convincing evidence that people respond in important ways to these incentives. But it is an issue that surely will be raised in future policy discussions. So good work on the topic will receive attention.