But the marginal tax rate that someone owes is not the same as the average tax rate that they owe. Those with low incomes can often face a situation where, as their income rises, the amount that the receive from the Earned Income Tax Credit declines. There are other non-tax programs like Food Stamps, Medicaid, Temporary Assistance to Needy Families (welfare), and Children's Health Insurance Program (CHIP) that phase out as income increases. Thus, for each marginal $1 that someone with a low income earns, the gradual withdrawal of these benefits means that their after-tax income rises by less than $1. In addition, even those with low incomes pay Social Security and Medicare payroll taxes.
The Congressional Budget Office has taken on the tax of calculating "Effective Marginal Tax Rates for Low- and Moderate-Income Workers." Here's an illustrative figure showing before-tax and after-tax income for a hypothetical single parent with one child. Before-tax income is just a straight line for illustrative purposes. The line for after-tax income shows what after-tax income would be for this family, given the before-tax level of income. For example, with a before-tax income of zero, after tax income would be approximately $20,000, due to various transfer payments. At a before-tax income of about $27,000, after-tax income is also about $27,000: that is, $27,000 is the break-even point where the subsidies available from the government at that income level are equal to the taxes being paid at that income level. In general, the after-tax income line has a flatter slope that the before-tax line, which is telling you that when you earn $1 of before-tax income, the gain to after-tax income is less than $1--even for those with low and moderate income levels.
The first graph is more-or-less real data, but for a hypothetical family. A second graph looks at the actual marginal tax rates by household income level. At any given income level, of course, there is actually a range of marginal tax rates, depending on how many people are in the family, what programs they are eligible for, even state they live in (because benefit levels for many programs will vary by state). Thus, there will be a range of different marginal tax rates for households at any given income level. The graph shows the range of marginal tax rates for any given income level, ranging from the 10th percentile of marginal tax rates up to the 90th percentile. Earnings on the horizontal axis are shown as a percentage of the federal poverty line (FPL).
Two main patterns jump out at me from this graph. One pattern is that there is an enormous range of marginal tax rates at very low income levels, at and below the poverty line. This range of marginal tax rates reflects the enormous diversity in types of households in poverty, and what sort of government assistance each family is eligible for. The other pattern is that for those from about 200% of the poverty line up to about 600% of the poverty line, a sizeable proportion of households are facing marginal tax rates--considering federal income and payroll taxes, along with food stamps--in the range of 30-40%.
These high marginal tax rates on those with low and moderate levels of income raise some questions for those on all sides of the tax debates. For those who don't believe that high marginal tax rates have much affect on incentives to work at higher income levels, like households earning $250,000 or more per year, consistency would seem to suggest that they shouldn't worry too much about incentives to work at lower income levels, either. For those who express a lot of concern about how high marginal tax rates would injure incentives to work for those at the top income levels, consistency would seem to suggest that they express similar concern over lower marginal tax rates for those at the lower and moderate income levels, too--which means making programs like the Earned Income Tax Credit, food stamps, welfare, and others more generous, so that they can be phased down more slowly as people earn income.