Moffitt, Robert A.
January 1979
Journal of Human Resources;Winter79, Vol. 14 Issue 1, p122
Academic Journal
This article presents estimates of the cumulative tax rates and guarantees facing low-income families in the U.S. The estimates take into account several important factors that have been ignored in most previous studies. As is often asserted in the popular press, there may be a high rate of error in the computation of benefits. Whether the error tends to increase or decrease benefits, and whether it varies by income, is not predictable a priori. Welfare programs often allow recipients a number of deductions that increase benefits. Since the deductions are likely to increase with income, their effect should be to lower the tax rate on income. Welfare programs usually tax each other's benefits and reimburse positive tax payments. The result is to lower the cumulative tax rate and the guarantee. As a result of all three of these factors, cumulative effective tax rates and guarantees may differ substantially from those usually calculated. Structural tax rates may differ from effective tax rates for several reasons. The existence of deductions for work-related expenses, taxes, shelter cost, and other costs are probably affected by income, thus affecting the tax rate. Each deduction can be regressed upon income to determine the magnitude of the relation.


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