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Give Families’ Second Earners a Break

Author: Peter R. Orszag, Adjunct Senior Fellow
December 3, 2013
Bloomberg.com

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Conservatives who worry about the ill effects of marginal tax rates on high earners rarely discuss the even higher marginal tax rates that some low- and moderate-income families face. A low-income single parent can experience a marginal rate as high as 95 percent -- for each dollar earned, the person takes home only 5 cents. And for married parents, the marginal rate for the family's secondary earner can be almost as high.

This happens mostly because various means-tested benefit programs are phased out as income increases. A secondary earner who raises the family's income to $30,000 from $15,000, for example, will trigger a decline of about $1,500 in the family's Earned Income Tax Credit and a drop in food stamp benefits of almost $3,000. Factor in the child-care costs necessary for the second parent to work, and the family will take home less than 40 cents of each additional dollar earned.

If we care about encouraging work incentives, these high marginal tax rates for low-income families deserve as much, if not more, attention than the rates for the biggest earners.

One way to boost work incentives for secondary earners is to create a new tax break for them. This is what University of Maryland economists Melissa Kearney and Lesley Turner have proposed. (Kearney is also the new director of the Brookings Institution's Hamilton Project.) They recommend a deduction of up to 20 percent of a secondary worker's earnings.

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