VoxEU Column Labour Markets Taxation

Impacts of redistribution on the size and composition of the workforce

What has happened to marginal tax rates in the US? This column argues that marginal tax rates vary so much among different groups in the US that redistributive taxes have actually damaged and interfered with the incentives and make up of the workforce.

The US economy experienced an unusually deep and prolonged contraction, especially in its labour markets (Federal Reserve 2012). Employment and hours worked fell during 2008 and 2009 for many demographic groups, but disproportionately so among less skilled people, and among the unmarried. As of 2012, labour market activity still remained far below pre-recession levels. Over the same time frame, many facets of fiscal policy were changed, especially policies related to the distribution of safety net programme benefits.

Fiscal policymakers were of course watching the economy closely, and major safety net legislation was certainly a reaction to economic conditions. But unless behaviour is completely unresponsive to tax and benefit formulas, we cannot have a full understanding of the relationship between fiscal policy and the economy without quantifying marginal tax rates, their changes over time, and their differences across demographic groups.

Subsidies net of taxes changed

The quantitative incentive effects of many, if not all, of the safety net events since 2007 are complex and varied, and might therefore seem beyond the reach of simple analysis. But I have found that a large subset of these events – especially changes in rules for unemployment insurance and related programs, SNAP (food stamps), and Medicaid – can be characterised as changing means-tested transfers to individuals.

I have compared the total amount of subsidies net of taxes received if and when a person is not working to the total amount received (or paid) if and when the same person is working full time, expressed as a fraction of the amount produced when working full time. This measure is a marginal tax rate on the decision margin of working full time or not at all during a specific time interval. In this regard, my tax rate concept is reminiscent of the implicit tax rates used by Gruber and Wise (1999) and collaborators in their ‘tax force’ measures of the retirement incentives created by public pension and disability programs around the world.

The relationship between subsidies received when not working and the amount that could be earned when working full time varies by demographic group. A number of subsidies are set as specific dollar amounts (such as the SNAP maximum benefit, or the maximum unemployment insurance benefit), or as a specific bundle of services (as with Medicaid) regardless of how much the beneficiary might earn if he worked full time.

Unemployment insurance benefits below the maximum are, on the other hand, specified as a proportion of the amounts earned in prior employment. Subsidies received by both employed and non-employed people also depend on the income of others in the household, and therefore can vary significantly by marital status.

Figures 1 and 2 show some of the results, which are examined in more detail in my paper (Mulligan, forthcoming, 2013) for Tax Policy and the Economy and, for the middle skill groups, in The Redistribution Recession (Mulligan, 2012). The pre-recession marginal tax rate level reflects the amounts of subsidies and loan forgiveness available to persons who are not working or otherwise experiencing reduced incomes, accounting for imperfect program take-up.1  Changes in marginal tax rates occur only when a subsidy programme or tax rule changes.

Figure 1

Figure 2

Rates increase in 2008

All ten groups have the same qualitative time pattern: rates increase in 2008 as the unemployment insurance program increases allowable benefit duration, increase again in 2009 with the ARRA, decrease as ARRA provisions expire, and decrease with the payroll tax cut. All of the series end 2011 at a rate that significantly exceeds the rates in place when the recession began.

Marginal tax rates are greater for unmarried people than for married people at the same potential earnings. Holding marital status constant, marginal tax rates are greatest for the second-to-lowest earnings potential group, because that group has the least earnings potential among groups with little or no SNAP and Medicaid eligibility when working full time. The lowest earnings potential group’s marginal tax rate is not especially high despite its small denominator because many of its members can participate in Medicaid and SNAP regardless of how much they work.2

The left half of Table 1 displays marginal tax rate changes through calendar years 2010 and 2011, taking calendar year 2007 as the base year. Through 2010, marginal tax rate changes ranged from 5.0 percentage points for the highest potential married group to nearly ten percentage points for the second unmarried group in terms of earnings potential.

Table 1

Even with the (temporary) payroll tax cut in place in 2011, marginal tax rates were still significantly elevated above 2007 values. Ninety-six week unemployment benefit duration continued through 2011, and many of the SNAP expansions are indefinite.


My research shows that:

  • Wide swaths of the skill distribution saw their marginal tax rates increase by more than five percentage points in less than two years.
  • The relationship between incentive changes and skill varies by marital status.
  • Unemployment insurance and related expansions contribute to the patterns by skill level while food stamp expansions contribute to the patterns by marital status.

The fact that marginal tax rates rose so differently for various groups means not only that redistributive public policy depressed the labour market, but also that is has sharply, and arbitrarily, altered the composition of the work force in the direction of people who are married and more skilled.


Gruber, J & D A Wise (1999), Social Security and Retirement around the World. Chicago: University of Chicago Press (for NBER).
Herkenhoff, K F and L E Ohanian (2012), Foreclosure Delay and U.S. Unemployment. Retrieved July 26, 2012 from https://sites.google.com/site/kyleherkenhoff/z-list/foreclosure_delay_unemployment_3_19_12_edit.pdf
Herkenhoff, K F and L E Ohanian (2011), "Labor Market Dysfunction During the Great Recession". NBER working paper (17313).
Mulligan, C B (forthcoming, 2013). Recent Marginal Labor Income Tax Changes by Skill and Marital Status. (J. Brown, Ed.) Tax Policy and the Economy (18426).
Mulligan, C B  (2012). The Redistribution Recession. New York: Oxford University Press.
Yelowitz, A S (1995). "The Medicaid Notch, Labor Supply, and Welfare Participation: Evidence from Eligibility Expansions", Quarterly Journal of Economics , 11 (4), 909-39.

1 Collections of mortgages and unsecured consumer debts sometimes serve as an implicit tax on borrower incomes, because borrowers with more income are required to repay more (equivalently, borrowers with low incomes are forgiven more). Sometimes the taxes are not all that implicit, as with wage garnishment. Here I take a constant, and probably conservative, 3 percent of potential earnings based on Mulligan (2012) and refer readers to Herkenhoff and Ohanian (2011) and Herkenhoff and Ohanian (2012) for detailed analysis of the effects of underwater mortgages on the incentives to earn income.
2 The marginal tax rate’s numerator is the difference between the total amount of subsidies net of taxes received if and when a person does not work and the total amount received (or paid) if and when the same person were working full time: the causal effect of (not) working on subsidies net of taxes. The lowest skill group has a relatively small causal effect of working on net subsidies because they receive many of the subsidies even when working full time. See also Yelowitz (1995).

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