Share of Returns Filed by Low- and Moderate-Income Workers, by 

Marginal Tax Rate, Under 2012 Law

Percentage of Tax Returns

50

30

10

40

20

0

Below 0 0–9 10–19 20–29 30–39 40–49 50–59 60–69 70–79 80 or Above

Marginal Tax Rate (Percent)

Effects of Federal Income Taxes Only

Combined Effects of Federal and State 

Income Taxes, Federal Payroll Taxes, and 

Benefits from the Supplemental Nutrition 

Assistance Program

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Effective Marginal 

Tax Rates for 

Low- and 

Moderate-Income 

Workers

NOVEMBER 2012
CBO

Notes

Unless otherwise specified, all years referred to in this report are calendar years.

Numbers in the text and tables may not add up to totals because of rounding.

Pub. No. 4149
Contents

CBO

Summary iv

Introduction 1

Tax Credits and Transfers 1

Effective Marginal Tax Rates and Labor Market Decisions 2

Policy Implications 3

CBO’s Analytical Approaches 3

Factors That Contribute to Marginal Tax Rates: A Hypothetical Example 3

Federal Individual Income Taxes and Tax Credits 4

Federal Payroll Taxes 8

State Individual Income Taxes 8

Means-Tested Transfer Programs 9

BOX: ESTIMATED PROGRAM PARTICIPATION RATES USING SURVEY DATA 12

An Illustration of Marginal Tax Rates: Combining Taxes and Transfers 14

Simulating the Distribution of Effective Marginal Tax Rates 14

BOX: INCOME AFTER TAXES AND TRANSFERS 15

BOX: EFFECTIVE MARGINAL TAX RATES ASSOCIATED WITH LABOR FORCE ENTRY IN 2012 16

Effective Marginal Tax Rates Under 2012 Law 19

Overall Distribution 19

Distribution by Earnings Group 21

Distribution by Family Type 22

Effective Marginal Tax Rates Under 2013 and 2014 Law 23

Example of Effective Marginal Tax Rates in 2013 23

Example of Effective Marginal Tax Rates in 2014 27

Overall Distribution 27

Appendix A: Tax Provisions and Benefit Programs Affecting Effective Marginal Tax Rates 33

Appendix B: Distribution of Marginal Tax Rates by Earnings 39

List of Tables and Figures 43

About This Document 45

CBO

Summary

The effective marginal tax rate is the percentage of 

an additional dollar of earnings that is unavailable to a 

worker because it is paid in taxes or offset by reductions 

in benefits from government programs. In part, such rates 

are determined by income and payroll tax rates and 

other features of the tax system, such as tax credits and 

deductions, that depend on earnings. However, effective 

marginal tax rates are also determined by programs providing cash and in-kind benefits, referred to as transfers, 

that target assistance to people of reduced means. When 

lawmakers target assistance to people of limited means, 

that assistance declines as income rises. Because increases 

in earnings for low- and moderate-income workers can 

cause relatively large reductions in such assistance, this 

analysis of effective marginal tax rates (hereafter referred 

to as marginal tax rates) focuses on those workers.

The Congressional Budget Office (CBO) finds that 

working taxpayers with income below 450 percent of 

federal poverty guidelines (commonly known as the federal poverty level, so abbreviated as FPL) face a marginal 

tax rate of 30 percent, on average, under the provisions of 

law in effect in 2012. That estimate takes into account 

federal and state individual income taxes, federal 

payroll taxes, and the reductions in benefits from the 

Supplemental Nutrition Assistance Program (SNAP, 

formerly known as the Food Stamp program) that occur 

when earnings increase. (Poverty guidelines vary by 

household size; in 2012, the guideline for a household 

of four is $23,050.) Over the next two years, CBO 

estimates, various provisions of current law will cause 

marginal tax rates among this population to rise, on average, to 32 percent in 2013 and to 35 percent in 2014. 

CBO also finds that under provisions of law in effect 

between 2012 and 2014, marginal tax rates vary greatly 

across earnings ranges and among individuals within the 

same earnings range.

The increase in marginal tax rates that results from 

income and payroll taxes and from the phaseout of such 

means-tested transfers affects people’s decisions about 

work. In particular, when marginal tax rates are high, 

individuals tend to respond to the smaller financial 

gain from working by cutting the number of hours they 

work or by otherwise altering their participation in the 

workforce. 

Illustration of Changes in Taxes and 

Transfers as Earnings Increase

Because refundable tax credits and transfers increase the 

resources available to taxpayers, disposable income (that 

is, income after accounting for taxes and transfers) generally exceeds earnings from employment for low-income 

families. To illustrate the relationship between disposable 

income and earnings, CBO examined the disposable 

income of a hypothetical family—consisting of a single 

parent and one child—at different levels of potential 

earnings (see Summary Figure 1). CBO assumed that, 

when eligible on the basis of earnings, the family would 

receive transfers from Temporary Assistance for Needy 

Families, the Housing Choice Voucher Program, SNAP, 

and either Medicaid or the Children’s Health Insurance 

Program (CHIP). CBO also assumed that the family 

would have no other forms of income. In this illustration, 

disposable income grows more slowly than earnings 

because marginal tax rates are positive.

The marginal tax rates in CBO’s illustration vary greatly 

as earnings increase. In some situations, marginal tax rates 

peak at high levels, but those high levels typically occur 

over relatively narrow spans of earnings before falling substantially. In addition, when a taxpayer’s income rises 

above the eligibility limits set for Medicaid or CHIP, 

the loss of health insurance benefits sharply increases 

marginal tax rates.
V EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Summary Figure 1.

Disposable Income for a Hypothetical Single Parent with One Child, by 

Earnings, in 2012

(Disposable income in dollars) (Percentage of FPL)

Source: Congressional Budget Office.

Notes: Disposable income is that which remains after accounting for taxes and transfers. The taxes considered in this illustration are federal 

and state individual income taxes and federal payroll taxes. The transfer programs considered in this illustration are TANF, Medicaid, 

SNAP, CHIP, and the Housing Choice Voucher Program.

In 2012, the federal poverty guideline (abbreviated as FPL) for a household of two is $15,130.

TANF = Temporary Assistance for Needy Families; SNAP = Supplemental Nutrition Assistance Program (formerly known as the 

Food Stamp program); CHIP = Children’s Health Insurance Program.

Distribution of Marginal Tax Rates

Marginal tax rates depend on taxpayers’ financial 

characteristics (such as income), their nonfinancial characteristics (such as the presence of children in the family), 

and whether they participate in means-tested programs. 

Survey data show that the majority of lower-income families do not receive means-tested transfers, either because 

they do not meet additional, nonfinancial eligibility 

requirements or because they are eligible but do not apply 

for benefits. Of those who receive transfers, the majority 

participate in only one program. 

To examine the distribution of marginal tax rates across 

households, CBO simulated tax liabilities and SNAP 

benefits using a sample of tax returns from 2006 supplemented with information from household surveys. The 

sample was restricted to nondisabled, working-age tax 

filers with earnings, and tax liability was simulated on the 

basis of the provisions of law in effect in 2012 and those 

scheduled to go into effect in 2013 and 2014. To capture 

the interaction of tax provisions and SNAP benefits, the 

analysis focused on taxpayers whose income was below 

450 percent of FPL. Benefits from SNAP were included 

in the analysis because it is a widely used program with 

cash-like benefits that can be calculated using information from household surveys; including additional 

programs would generally increase estimates of marginal 

tax rates.

Marginal Tax Rates Under 2012 Law

Some provisions of taxes and transfers, such as statutory 

income tax rates and federal payroll taxes, affect most 

workers. (Statutory income tax rates are specified in 

law and apply to the last dollar of earnings.) Other 

provisions, such as reductions in tax credits and SNAP 

benefits, affect fewer people but result in relatively high 

marginal tax rates for those affected.

0

10,000

20,000

30,000

40,000

50,000

60,000

0

50

100

150

200

250

300

350

400

450

Earnings (Dollars)

10,000 20,000 30,000 40,000 50,000 60,000

TANF:

Income

Limit

Medicaid:

Income Limit

for Parent

CHIP:

Income

Limit for

Free

Coverage

CHIP: Income Limit for

Reduced-Cost Coverage

0 50 100 150 200 250 300 350 400 450

Disposable Income

Earnings
SUMMARY EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS VI

CBO

Summary Table 1.

Contributions of Tax Provisions and SNAP Benefits to the Marginal Tax Rates of 

Low- and Moderate-Income Workers Under Provisions of Law in Effect in 2012, 

2013, and 2014

(Percentage points)

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns 

filed in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey 

and the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who 

had earnings in 2006, and whose adjusted gross income was below 450 percent of FPL. It was weighted to be representative of the

population of taxpayers.

The simulated marginal tax rates were based on taxpayers’ total compensation before their employers’ share of payroll taxes was

deducted.

CBO assumes that states expand Medicaid in 2014 as originally specified in the Affordable Care Act (ACA). The ACA comprises the

Patient Protection and Affordable Care Act (Public Law 111-148) and the health care provisions of the Health Care and Education

Reconciliation Act of 2010 (P.L. 111-152).

SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); FPL = federal poverty guidelines.

a. Accounts for the deductibility of state income taxes on federal income tax returns for people who itemize and, in 2014, cost-sharing 

subsidies implemented in the ACA. 

 Federal Individual Income Taxes. Under the federal 

income tax system, workers with income below 

450 percent of FPL face, on average, a marginal tax 

rate of 11 percent. 

 Federal Payroll and State Individual Income Taxes. For 

most low- and moderate-income workers, payroll 

taxes cause marginal rates to rise by about 12 percentage points. State income taxes contribute a modest 

amount to marginal rates, on average. 

 Reduction of SNAP Benefits. For recipients, the reduction in benefits that occurs as income rises adds an 

average of 25 percentage points to their marginal tax 

rates. However, CBO estimates that under 2012 law, 

only about 18 percent of taxpayers in the sample 

receive SNAP benefits. As a result, SNAP increases 

marginal tax rates for the group as a whole by only 

5 percentage points. 

The combined effect of federal and state individual 

income taxes, federal payroll taxes, and the reduction of 

SNAP benefits results in an average marginal tax rate of 

30 percent among working taxpayers with income below 

450 percent of FPL (see Summary Table 1). Among taxpayers in this sample, about one-fifth face marginal rates 

below 20 percent and about half face rates of 30 percent 

or higher. 

Marginal tax rates vary across earnings levels, with the 

differences driven largely by provisions in the federal 

income tax system, particularly the earned income tax 

credit. Marginal tax rates also vary substantially for taxpayers with comparable earnings because of many other 

factors, such as their marital status or the presence of children. For taxpayers with earnings below 50 percent of 

FPL in 2012, 43 percentage points separate the 10th percentile and 90th percentile of marginal tax rates (see 

Summary Figure 2). 

10.8 11.7 13.4

12.1 13.7 13.8

2.6 2.6 2.6

4.6 4.5 4.2

-0.2 -0.2 0.8

30.0 32.4 34.8

Federal Individual Income Taxes

2012 2013 2014

Federal Payroll Taxes

State Individual Income Taxes

SNAP Benefits

 Among Tax Provisionsa

Average Marginal Tax Rate (Percent)

Cost-Sharing Subsidies and Interactions 
VII EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Summary Figure 2.

Range of Marginal Tax Rates Between the 10th and 90th Percentiles, by 

Earnings Group, Under 2012 Law

(Tax rate in percent)

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns 

filed in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey 

and the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who 

had earnings in 2006, and whose adjusted gross income was below 450 percent of federal poverty guidelines. It was weighted to be 

representative of the population of tax filers.

The simulated marginal tax rates include the combined effects of federal individual income taxes, state individual income taxes

(under provisions in effect in 2006), federal payroll taxes, and the reduction in SNAP benefits. The simulated marginal tax rates were 

based on taxpayers’ total compensation before their employers’ share of payroll taxes was deducted.

FPL = federal poverty guidelines; SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program).

Marginal Tax Rates Under 2013 and 

2014 Law

Under current law, the reductions in individual income 

taxes that were extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 

2010 will expire at the end of 2012. As a result, statutory 

income tax rates will increase in 2013 and certain refundable tax credits will shrink or be eliminated. In addition, 

the temporary reduction in payroll taxes in effect in 2012 

will end. Consequently, for the taxpayers in this sample, 

the marginal tax rates arising from the combined effects 

of tax provisions and SNAP benefits will increase from 

30 percent in 2012 to 32 percent in 2013, on average. 

Under provisions of law that are scheduled to go into 

effect in 2014, some people will become eligible for 

refundable tax credits to help cover the cost of health 

insurance. The value of the credits will decline as income 

rises. CBO estimates that 11 percent of taxpayers in the 

sample will receive premium assistance credits in 2014, 

which will increase their marginal tax rates by an average 

of 12 percentage points. Those credits will increase 

marginal rates under the federal income tax system to 

13 percent and, along with new subsidies for cost sharing 

under health insurance policies, raise the marginal tax 

rate from 32 percent in 2013 to 35 percent in 2014, on 

average, for taxpayers in the sample. However, the scheduled changes to tax law will not significantly change the 

variation in marginal tax rates within and across earnings 

levels.

0–49 50–99 100–149 150–199 200–249 250–299 300–349 350–399 400+

-10

0

10

20

30

40

50

60

70

Earnings as a Percentage of FPL
CBO

Effective Marginal Tax Rates for 

Low- and Moderate-Income Workers

Introduction

Under the current system of taxes and government benefit programs, as workers’ earnings increase, the amount of 

taxes they owe typically rises and the amount of cash and 

other benefits they receive typically falls. The combination of increased taxes on earnings and reduced benefits 

determines effective marginal tax rates—specifically, the 

portion of an additional dollar of earnings that is paid in 

taxes or that is offset by a reduction in benefits. Those 

effective marginal tax rates affect people’s incentives to 

work. In particular, and all else being equal, people tend 

to work fewer hours when effective marginal tax rates are 

high. Such behavioral responses, in turn, affect the overall 

supply of labor in the economy.

In this report, the Congressional Budget Office (CBO) 

explores the numerous factors that contribute to effective 

marginal tax rates (hereafter referred to as marginal tax 

rates). The agency simulates the distribution of marginal 

tax rates among low- and moderate-income workers—a 

group for whom changes in earnings can cause relatively 

large changes in assistance provided through the tax 

system and government programs. The analysis covers 

marginal tax rates under provisions of law in effect in 

2012 as well as marginal tax rates that incorporate provisions of current law that are scheduled to go into effect in 

2013 and 2014. 

Tax Credits and Transfers

Factors within both the tax system and the transfer system affect marginal tax rates. Because the receipt of 

various types of assistance depends on many different 

considerations, individuals with similar income can have 

very different marginal tax rates. 

Statutory individual income and payroll tax rates (the 

rates specified in law that apply to the last dollar of earnings) initially determine the portion of additional income 

that workers owe in income and payroll taxes, but other 

features of the tax system alter those portions. In particular, assistance provided to low- and moderate-income 

workers through refundable tax credits, especially the 

earned income tax credit (EITC) and the child tax credit, 

also contribute to marginal tax rates because the amount 

of those credits depends on recipients’ income. These tax 

credits offset other tax liability, and eligible individuals 

receive money back from the government if the value of 

the credit is greater than the amount of other tax they 

owe.

Likewise, assistance provided to low- and moderateincome families through transfer programs such as the 

Supplemental Nutrition Assistance Program (SNAP, 

formerly known as the Food Stamp program), which 

provides benefits for purchasing food, and Temporary 

Assistance to Needy Families (TANF), which provides 

cash and in-kind assistance such as child care, also 

contributes to marginal tax rates. To ensure that such 

assistance targets individuals and families of low and 

moderate income, transfer benefits are usually meanstested—they phase out as income approaches a certain 

threshold or cease entirely once that threshold is reached. 

The rate at which benefits are reduced—the marginal rate 

of benefit reduction—is an implicit tax on income that 

adds to the marginal tax rate. Programs that cut off assistance when income exceeds a threshold produce a spike 

in marginal tax rates at income levels near the threshold 

when the loss in benefits is large relative to the increment 

of income.

Receipt of assistance is determined by eligibility for transfer programs and by participation in them. Eligibility 
2 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

depends on financial characteristics (such as income and 

assets) as well as nonfinancial characteristics (such as the 

presence of children in the family). Specifically, transfer 

programs vary in the way they account for income from 

different sources, the way they set the maximum amount 

of income a household can have and still be eligible, and 

the level of income at which benefits are no longer available. Participation depends on the amounts involved, the 

complexity of the application process, and other factors.

Effective Marginal Tax Rates and Labor Market 

Decisions

A person’s marginal tax rate influences many different 

decisions about working: whether to increase or decrease 

the number of hours worked, bargain for wages or nontaxable fringe benefits, get or quit a second job, or enter 

or leave the labor force. For people who are already 

working, an increase in marginal tax rates on additional 

earnings lowers the financial gain from working additional hours, which in turn has two effects:

 Hours worked tend to fall from their initial level 

because other uses of time become relatively more 

attractive; and 

 Hours worked tend to increase from their initial level 

because the amount of additional disposable income 

(income after accounting for taxes and transfers) 

available to reach consumption and saving goals is 

lower. 

Because those two effects work in opposite directions, the 

net effect depends on which one dominates.

On balance, in CBO’s judgment, increases in marginal 

tax rates on earnings tend to decrease the supply of labor 

by inducing people already in the workforce to put in 

fewer hours or to be less productive.1

 The responsiveness 

of labor supply to tax changes varies across groups. On 

average, working-age men are not very responsive to 

changes in marginal tax rates. Married women, who 

tended in the past to be the lower earner in the household, typically decreased their hours of work—on 

average—when marginal tax rates rose. In recent decades, 

their decisions about decreasing or increasing the number 

of hours worked have become more similar to those made 

by men.2

Marginal tax rates that result from a relatively large 

increase in income are relevant to the decision to enter 

the workforce. For instance, because the earned income 

tax credit increases disposable income for all eligible 

workers, the ability to qualify for the credit makes work 

more appealing. Studies have found that expansions of 

the EITC between 1986 and 1996 significantly increased 

the movement of single mothers into the workforce but 

had little effect on the number of hours they worked.3

If taxpayers misperceive their marginal tax rate, however, 

changes in their actual marginal tax rate may not have 

much effect on their decisions about how much to work. 

The income tax system does not make marginal tax rates 

readily apparent, and complex rules and interactions 

between the tax and transfer systems tend to further 

obscure those rates. Moreover, the average taxpayer may 

not fully understand how benefits are linked to income 

because of various exemptions and deductions and 

because of nonfinancial criteria for qualifying for a program. Some researchers posit that taxpayers use their 

average tax rate (their total taxes divided by their total 

income), which is typically lower than their marginal tax 

rate, when making decisions about their level of participation in the workforce.4

 Alternatively, taxpayers may rely 

on a rule of thumb to approximate the relationship 

between earnings and disposable income. In light of the 

difficulty people face when determining their marginal 

tax rate, the disincentives to work caused by high marginal tax rates may be partially mitigated. 

1. See Congressional Budget Office, How the Supply of Labor 

Responds to Changes in Fiscal Policy, Background Paper (October 

2012); and Robert McClelland and Shannon Mok, A Review of 

Recent Research on Labor Supply Elasticities, Congressional Budget 

Office Working Paper 2012-12 (October 2012).

2. See Michael P. Keane, “Labor Supply and Taxes: A Survey,”

Journal of Economic Literature, vol. 49, no. 4 (2011), pp. 961–

1075; Francine D. Blau and Lawrence M. Kahn, “Changes in the 

Labor Supply Behavior of Married Women: 1980–2000,” Journal 

of Labor Economics, vol. 25 (2007), pp. 393–438.

3. See Nada Eissa and Hilary W. Hoynes, “Behavioral Responses to 

Taxes: Lessons from the EITC and Labor Supply,” in James M. 

Poterba, ed., Tax Policy and the Economy, vol. 20 (Cambridge, 

Mass.: National Bureau of Economic Research, 2006), pp. 73–

110; and Bruce D. Meyer and Dan T. Rosenbaum, “Welfare, 

the Earned Income Tax Credit, and the Labor Supply of Single 

Mothers,” Quarterly Journal of Economics, vol. 116, no. 3 (2001), 

pp. 1063–1114.

4. See Jeffrey B. Liebman and Richard J. Zeckhauser, Schmeduling 

(draft, Harvard University, October 2004), www.hks.harvard.edu/

jeffreyliebman/schmeduling.pdf.
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 3

CBO

Policy Implications

Because tax credits and benefits from transfer programs 

increase taxpayers’ resources, both forms of income assistance make individuals and families better off. However, 

the phasing out of that assistance adversely affects incentives to work.5

 As a result, lawmakers face difficult choices 

when targeting benefits to low- and moderate-income 

families. One choice relates to phaseout rates—specifically, whether benefits should be phased out gradually 

over a broad income range or more quickly over a narrower income range. The former approach would affect 

more families but allow for lower marginal rates of 

benefit reduction. The latter approach would increase 

marginal tax rates more significantly for a smaller number 

of families in a narrower income range. Another choice 

concerns the maximum amount of the assistance, which 

also influences marginal tax rates. Over the same income 

range, phasing out a larger benefit leads to a higher marginal tax rate than does phasing out a smaller benefit.

CBO’s Analytical Approaches

CBO used two methods to analyze the marginal tax rates 

that low- and moderate-income workers face. First, to 

provide context for its main analysis, CBO illustrated 

how interactions between several widely applicable tax 

provisions and the phaseout of transfer benefits would 

affect the marginal tax rate of a hypothetical taxpayer. 

The illustrative example describes the marginal tax rate 

faced by a taxpayer with a specific set of characteristics—

emphasizing, in particular, the marginal rates of a taxpayer who participates in multiple transfer programs. 

However, stylized examples provide little information 

about the marginal tax rates that actual households face 

or how many households fall into each income range. In 

addition, many households do not participate in transfer 

programs for which they are eligible; households that do 

not receive transfers will face lower marginal tax rates 

because they are unaffected by phaseouts in benefits.

To provide information about the distribution of 

marginal tax rates across the population of low- and 

moderate-income workers—the main portion of CBO’s 

analysis—the agency simulated tax liabilities using a sample of returns. Unlike the stylized example, the results 

presented in this part of the report were based on benefits 

from only one transfer program—SNAP—along with 

most of the tax provisions that affect people’s marginal 

federal and state income tax rates. The restriction to 

SNAP benefits was necessary because of data limitations 

regarding other benefit programs. Although the majority 

of low- and moderate-income workers do not participate 

in multiple means-tested transfer programs, workers who 

participate in multiple programs would tend to have 

higher marginal tax rates than shown in this part of the 

analysis.

Factors That Contribute to Marginal 

Tax Rates: A Hypothetical Example

Many factors determine marginal tax rates and a 

taxpayer’s resulting disposable income, including: 

 Federal individual income taxes and tax credits,

 Federal payroll taxes,

 State individual income taxes, and

 Means-tested transfer programs. 

This section illustrates how these various factors, in 

combination, would affect a hypothetical single parent 

with one child under the provisions of law in effect in 

2012. Families headed by single parents are used in this 

stylized example because they are more likely than other 

families to participate in means-tested transfer programs. 

(Examples of the marginal tax rates that would apply to a 

hypothetical family consisting of a married couple with 

two children or a single person with no children are 

provided in supplemental material accompanying this 

report.6

) 5. CBO accounts for the effect of marginal tax rates on the nation’s 

labor supply in its analyses. See Congressional Budget Office, 

The Economic Impact of the President’s 2013 Budget (April 2012), 

for a discussion of the effects of health insurance subsidies on the 

labor supply; and Congressional Budget Office, The Effect of Tax 

Changes on Labor Supply in CBO’s Microsimulation Tax Model, 

Background Paper (April 2007).

6. See Congressional Budget Office, “Illustrative Effective 

Marginal Income Tax Rates for Married and Single Taxpayers,” 

supplemental material for Effective Marginal Tax Rates for Lowand Moderate-Income Workers (November 2012).
4 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Table 1.

Statutory Federal Individual Income Tax Brackets, by Income Range, 2012

(Dollars)

Source: Congressional Budget Office.

Note: Statutory income tax brackets apply to everyone with taxable income (that is, total income from all sources minus the allowable 

adjustments, exemptions, and deductions a taxpayer can claim).

a. A head of household is an unmarried individual who covers most of the cost of maintaining a household for his or her dependents.

In this report, the Congressional Budget Office measures 

the marginal rate as the change in tax liability and transfer benefits associated with a $100 increase in annual 

earnings. That rate is calculated for taxpayers whose 

income falls below 450 percent of the federal poverty 

guidelines (commonly known as the federal poverty level, 

so abbreviated as FPL). In 2012, those guidelines were 

$11,170 for a household of one, $15,130 for a household 

of two, and $23,050 for a household of four. Although 

most means-tested programs set income eligibility limits 

well below 450 percent of FPL, eligibility for some tax 

credits extends to taxpayers with higher incomes. 

Federal Individual Income Taxes and Tax Credits

To determine federal income tax liability, a taxpayer first 

adds together income from all taxable sources. Although 

most types of income are taxable, some (such as public 

assistance) are not taxed and others (such as Social Security) are only partially taxed. Next, a taxpayer subtracts 

allowable adjustments, exemptions, and deductions to 

determine taxable income; applies the schedule of statutory tax rates to calculate the amount of tax owed; and 

then reduces that tax liability by any credits for which the 

taxpayer is eligible. For any taxpayer, the portion of taxable income that falls within a given bracket faces the 

tax rate for that bracket (see Table 1). 

A taxpayer’s personal and financial characteristics alter tax 

liability and affect the marginal tax rate. Marital status 

matters because statutory rates apply at different income 

levels depending on whether a taxpayer files as single, 

head of household, or married. (A head of household is 

an unmarried individual who covers most of the costs of 

maintaining a household for his or her dependents.) The 

number of dependents determines the number of personal exemptions and, if those dependents are children or 

meet certain other criteria, eligibility for various credits. 

Tax liability also depends on whether the taxpayer incurs 

certain expenditures because some, such as interest paid 

on a mortgage or charitable contributions, can be itemized and deducted from taxable income.

Although many provisions in the individual income tax 

system affect marginal tax rates, some apply to a relatively 

narrow group of taxpayers, whereas others are wider in 

scope. The broadest set of provisions is the statutory 

income tax rate brackets. In addition to the statutory rate 

brackets, many deductions and credits apply only over 

specified income ranges. For taxpayers in those ranges, 

the phasing in and out of those items causes the marginal 

rate for a taxpayer to differ from his or her statutory rate. 

In such cases, marginal tax rates equal the sum of the 

taxpayer’s statutory rate and all applicable phase-in or 

phaseout rates. 

The provisions that have the greatest effect on low- and 

moderate-income taxpayers with children are the EITC 

and the child tax credit. The alternative minimum tax 

(AMT)—another way of computing federal income tax 

liability, with its own definition of taxable income and 

rate structure—also affects marginal rates for some lowerincome taxpayers, such as those with many dependents. 

(The detailed features of the two credits and the AMT are 

described in Appendix A.)

Tax Rate

(Percent)

10 0 to 8,699 0 to 12,399 0 to 17,399

15 8,700 to 35,349 12,400 to 47,349 17,400 to 70,699

25 35,350 to 85,649 47,350 to 122,299 70,700 to 142,699

28 85,650 to 178,649 122,300 to 198,049 142,700 to 217,449

33 178,650 to 388,349 198,050 to 388,349 217,450 to 388,349

35 388,350 and above 388,350 and above 388,350 and above

Single Head of Householda Married, Filing Jointly

Status of Tax Filer
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 5

CBO

Figure 1.

Dollar Amount of Child-Related 

Tax Credits for a Hypothetical 

Single Parent with One Child, by 

Earnings, in 2012 

(Credit in dollars)

Source: Congressional Budget Office.

Notes: This figure illustrates the effects of two tax credits—the 

earned income tax credit and the child tax credit—on the 

resources of a taxpayer who has one qualifying child and 

who files as a head of household in 2012. (A head of household is an unmarried individual who covers most of the cost 

of maintaining a household for his or her dependents.)

EITC = earned income tax credit.

For simplicity, CBO assumed in this illustration that all 

taxable income comes from wages and that the taxpayer 

has itemized deductions equal to 18 percent of his or her 

earnings.7

 Forty percent of those deductions are assumed 

to be state and local taxes (which are not deductible 

under the AMT), and the other 60 percent are attributed 

to charitable contributions and mortgage interest (which 

are deductible under the AMT). CBO chose to include 

only some of the most common features of the tax code 

in the illustrative example; making assumptions about 

retirement savings or tuition payments for a student in 

college could lead to much more complex examples.

For a single parent with one child who files as a head of 

household and is eligible for the EITC and the child tax 

credit, those credits increase after-tax income because the 

amount that the credits exceed his or her tax liability is 

refunded. However, the phase-in and phaseout of the 

EITC and child tax credit lower and raise marginal tax 

rates substantially. At low levels of income, each additional $100 of earnings increases the EITC by $34 (see 

Figure 1). As the taxpayer’s income increases, he or she 

can claim the child tax credit as well, and each additional 

$100 of earnings increases total refundable credits by 

$49. At higher levels of income, the taxpayer receives the 

full amount of both credits. Once the taxpayer’s income 

exceeds $17,090, each additional $100 of income reduces 

the EITC by about $16; he or she receives the maximum 

child tax credit until income exceeds $75,000, at which 

point the credit phases out.

As a result of these credits, taxpayers with children face 

considerable variation in their marginal tax rates, particularly at lower income levels (see the first panel of 

Figure 2). At low levels of income, a single parent with 

one child faces negative marginal tax rates as the EITC 

and child tax credit phase in; that is, an additional dollar 

of earnings adds more than one dollar to income after 

accounting for taxes. As the taxpayer’s income increases, 

he or she enters the EITC plateau—the income range 

between the two thresholds, where the taxpayer receives 

the maximum benefit—and the marginal tax rate rises. 

Once the taxpayer begins receiving the maximum benefit 

available through the child tax credit—at $9,700 of 

income—the credit no longer adds to his or her marginal 

tax rate. The marginal tax rate remains at zero until he 

or she reaches the “income tax threshold”—the level at 

which the filer incurs a positive income tax liability 

before claiming tax credits. For a single parent, this 

occurs once his or her income exceeds $16,300—the 

total of the standard deduction, personal exemption, 

and dependent exemption. However, the taxpayer’s EITC 

and child tax credit exceed his or her tax liability, so the 

taxpayer still does not owe taxes. But because the taxpayer’s refund is reduced by his or her tax liability, the 

marginal tax rate is 10 percent (the statutory rate at that 

income level).

When the taxpayer’s income enters the EITC phaseout 

range, each additional $100 of earnings reduces the credit

7. Taking into account all taxpayers who itemized in 2010 (the 

most recent year for which data are available), itemized deductions 

averaged 21 percent of their earnings that year; however, CBO 

assumed a slightly lower ratio for taxpayers whose income was 

below 450 percent of FPL. CBO also assumed that the additional 

$100 in earnings would not increase a taxpayer’s expenditures on 

goods or services that could be itemized.

10,000 20,000 30,000 40,000 50,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Earnings (Dollars)

EITC and Child Tax Credit

EITC
6 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Figure 2.

Marginal Tax Rates for a Hypothetical Single Parent with One Child, by 

Earnings, in 2012

(Tax rate in percent) (Percentage of FPL)

Under the Federal Individual Income Tax System

Under the Tax System, Including State Individual Income Taxes and Federal Payroll Taxes

Source: Congressional Budget Office.

Notes: This example assumes that the taxpayer files as a head of household (an unmarried individual who covers most of the cost of 

maintaining a household for his or her dependents), has one child, and qualifies for both the EITC and the CTC; that all income is 

from wages, salaries, or net earnings from self-employment (otherwise described as earnings); and that the taxpayer has itemized 

deductions worth 18 percent of income and claims the greater of those deductions or the standard deduction. (Forty percent of the 

itemized deductions are assumed to be state and local taxes, and the rest are charitable contributions and mortgage interest.)

Statutory income tax brackets apply to everyone with taxable income (that is, total income from all sources minus the allowable

adjustments, exemptions, and deductions a taxpayer can claim).

In the second and fourth panels, state taxes are assumed to be 3.07 percent of taxable income. The simulated marginal tax rates were 

based on taxpayers’ total compensation before their employers’ share of federal payroll taxes was deducted. 

Continued

0 10,000 20,000 30,000 40,000 50,000 60,000

-60

-40

-20

0

20

40

60

80

100

Earnings (Dollars)

0 50 100 150 200 250 300 350 400 450

EITC

Phase-In

(-34%)

EITC Phase-In and

Refundable CTC

(-49%)

EITC Plateau and

Refundable CTC

(-15%)

EITC Plateau (0%) 10% Statutory Bracket

EITC Phaseout and

10% Statutory Bracket

(25.98%)

EITC Phaseout and

15% Statutory Bracket

(30.98%)

15% Statutory Bracket

26% AMT Rate

0 10,000 20,000 30,000 40,000 50,000 60,000

-60

-40

-20

0

20

40

60

80

100

Earnings (Dollars)

0 50 100 150 200 250 300 350 400 450

State Tax Entry

Threshold

Begin Itemizing

State Taxes

Federal Income Taxes

Plus Federal Payroll Taxes

Plus Federal Payroll and

State Income Taxes
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 7

CBO

Figure 2. Continued

Marginal Tax Rates for a Hypothetical Single Parent with One Child, by 

Earnings, in 2012

(Tax rate in percent) (Percentage of FPL)

Under the System of Transfers

Under the System of Taxes and Transfers

Notes (continued):

In the third and fourth panels, transfer benefits are computed using stylized program rules based on those in effect in the Commonwealth of Pennsylvania. SNAP gross income limits are 160 percent of the federal poverty guidelines, and the taxpayer can claim the 

standard deduction as well as deductions for earnings and housing costs. (Pennsylvania does not apply a net income test to SNAP.) 

Monthly housing costs are assumed to be $559. Median family income and fair-market rents for housing vouchers are set to $27,563 

and $559, respectively. The TANF benefit is the difference between $316 and net income (income minus 50 percent of earnings). 

Pennsylvania disregards $120 of earnings and 50 percent of the remainder to calculate Medicaid eligibility. The dotted lines indicate 

income limits for Medicaid and CHIP where taxpayers face “cliffs.” Similar spikes in marginal tax rates when the taxpayer loses

eligibility for TANF and SNAP are not illustrated.

FPL= federal poverty guidelines; EITC = earned income tax credit; CTC = child tax credit; AMT= alternative minimum tax; 

SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); TANF = Temporary Assistance for 

Needy Families; CHIP= Children’s Health Insurance Program.

10,000 20,000 30,000 40,000 50,000 60,000

0

20

40

60

80

100

50 100 150 200 250 300 350 400 450

Earnings (Dollars)

Medicaid: Income

Limit for Parent

CHIP: Income Limit

for Free Coverage

CHIP: Limit for

Increases in

Cost Sharing CHIP: Income Limit for 

Reduced-Cost Coverage

SNAP

Housing Vouchers

TANF

Combined Effects

0 10,000 20,000 30,000 40,000 50,000 60,000

-60

-40

-20

0

20

40

60

80

100

Earnings (Dollars)

0 50 100 150 200 250 300 350 400 450

Medicaid: Income

Limit for Parent

CHIP: Income Limit for

Free Coverage

CHIP: Income Limit for

Reduced-Cost Coverage

Plus Transfer Programs

Federal Income, Payroll,

and State Income Taxes
8 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

by $15.98, thus adding 15.98 percentage points to 

marginal tax rates. Initially, the taxpayer faces a 

25.98 percent marginal rate from the combination of the 

10 percent statutory rate and the phaseout of the EITC. 

When income reaches $28,700, the taxpayer enters the 

15 percent tax bracket and faces a 30.98 percent marginal 

rate.

After the EITC phases out completely, marginal rates 

under the individual income tax system drop to the statutory rate—15 percent. Under current law in 2012, when 

income exceeds $64,500 (at 426 percent of FPL), the taxpayer is subject to the AMT and faces a marginal tax rate 

of 26 percent. If the higher AMT exemption in existence 

in 2011 (it expired at the end of that year) applied in 

2012, the taxpayer would not become subject to the 

AMT until his or her income rose above 450 percent 

of FPL.

Federal Payroll Taxes

Most income from wages and self-employment is subject 

to payroll taxes that help fund Social Security’s Old-Age, 

Survivors, and Disability Insurance (OASDI) program 

and Medicare’s Hospital Insurance (HI) program. 

Employers and employees each pay a portion of the 

OASDI tax on earnings up to a certain amount 

($110,100 in 2012) and a 1.45 percent HI tax on all 

earnings. For 2012, the employee’s share of the OASDI 

tax has been temporarily reduced to 4.2 percent; it is 

scheduled to return to 6.2 percent starting in 2013. The 

employer’s share of the OASDI tax is 6.2 percent of 

wages. Economists generally agree that the employer’s 

share of payroll taxes is passed on to workers in the form 

of lower compensation. CBO followed that assumption 

and treated payroll taxes as if employees paid both shares. 

Because Social Security taxes are linked to benefits, 

including them in a calculation of marginal tax rates is 

problematic. Payroll taxes reduce returns from working 

just as income taxes do; as such, they should affect people’s decisions about how much to work. However, 

earning more and paying more in Social Security taxes 

(up to the taxable maximum) would entitle workers to 

higher Social Security benefits. (In some cases, benefits 

are only loosely based on one’s work record—for 

instance, married or widowed beneficiaries can receive 

benefits based on their spouses’ work history.) The net 

effect—the true “tax”—is the portion of the OASDI tax 

not offset in the future by increased benefits. However, 

CBO did not attempt to divide the tax into its gross 

and net components; instead, for simplicity, this report 

presents marginal tax rates with and without payroll 

taxes. Marginal tax rates that include payroll taxes are 

based on an additional dollar of compensation measured 

before the payment of an employer’s share of payroll 

taxes.

The proper treatment of the HI tax is less ambiguous. 

Under the Medicare program, once workers have earned 

credit for 40 quarters of contributions, they are eligible to 

start receiving benefits at age 65. In 2012, workers receive 

a credit for each $1,130 in earnings and can accumulate 

up to four credits per year. Because workers receive no 

benefits for earning above $4,520 per year, any amount 

beyond that is a tax. Once workers have accumulated 

40 quarters, any additional HI tax paid over their lifetime 

does not affect benefits. Thus, the HI portion of payroll 

taxes is much closer to a pure tax than is the OASDI 

portion.

For a single parent whose income is less than 450 percent 

of FPL, the assumption that the worker pays both shares 

of payroll taxes requires calculating the marginal payroll 

tax rate on an additional dollar of compensation measured before the payment of the employer’s payroll taxes.8

As a result, payroll taxes increase the marginal rate by 

12.4 percentage points throughout the income range (see 

the second panel of Figure 2).Because the phase-in of the 

EITC more than offsets the payroll tax and subsidizes 

each additional dollar of earnings, the marginal rate does 

not jump to 12.4 percent until the taxpayer enters the 

EITC plateau. 

State Individual Income Taxes

Most states (and some localities) levy income taxes. And 

most conform, to varying degrees, to federal definitions 

of income and deductions but apply their own rate schedule. State income tax rates tend to be much lower and less 

varied than federal rates, with top statutory rates rarely 

exceeding 10 percent. Twenty-five states and the District 

of Columbia also have a version of the EITC, typically 

structured as a percentage of the federal EITC. In 2010, 

total collections of state income taxes were about onethird the size of federal income tax collections. 

State taxes interact with the federal marginal tax rate if 

the taxpayer itemizes deductions: When a taxpayer earns 

more, deductible state income taxes increase, so federal 

taxable income rises less than earnings, reducing the 

8. For details, see Congressional Budget Office, Effective Marginal 

Tax Rates on Labor Income (November 2005).
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 9

CBO

federal marginal rate. Because of that interaction, the 

incremental effect of including state income taxes shrinks 

for taxpayers who itemize deductions.

For this illustrative example, CBO used the income tax 

rates in effect in the Commonwealth of Pennsylvania. 

(Pennsylvania was chosen because its statutory income 

tax rate and phaseout rules for transfer benefits, discussed 

below, are similar to those found in many other states. 

Pennsylvania, however, does not have a state version of 

the EITC.) State income taxes add a fixed amount to the 

marginal tax rate once the taxpayer’s income exceeds the 

tax entry threshold (see the second panel of Figure 2). (In 

Pennsylvania, the state income tax rate is 3.07 percent 

once a head of household’s income exceeds $16,000.9

) 

These results would differ if another state’s tax laws had 

been used in the analysis. 

Means-Tested Transfer Programs

The contribution of means-tested benefit programs to 

marginal tax rates is complex. Eligibility for benefits 

depends on financial characteristics such as income and 

assets as well as nonfinancial characteristics such as the 

presence of children in the family. Programs vary in what 

sources of income are counted, the maximum level of 

income a household can have and still be eligible, and the 

rate at which benefits phase out. Programs also interact 

with each other because some programs count benefits 

from another program as income.

This hypothetical example focuses primarily on the ways 

that three widely used means-tested programs influence 

marginal tax rates. Those programs are:

 Temporary Assistance for Needy Families, 

 The Housing Choice Voucher Program (housing 

vouchers; also known as Section 8), and

 The Supplemental Nutrition Assistance Program.

The marginal tax rates arising from these three programs—which are among the largest means-tested 

programs in terms of federal spending—illustrate the 

interactions between transfer programs and between 

the tax rates arising from the tax and transfer systems. 

(See Table 2 for federal spending on selected meanstested programs in 2011.) Two other large programs, 

Supplemental Security Income and Pell Grants, are available only to people who are disabled or over age 65 or to 

students and not to low- and moderate-income people in 

general. However, the inclusion of other means-tested 

benefits would increase estimated marginal tax rates 

somewhat.10

Among means-tested programs serving low-income 

families, total federal expenditures are highest for Medicaid. Including insurance benefits from Medicaid or the 

related Children’s Health Insurance Program (CHIP) in 

marginal tax rates is difficult. First, the cash value of those 

benefits to recipients is not clear because different people 

place different values on the insurance provided through 

Medicaid or CHIP.11 Second, Medicaid benefits typically 

do not vary by income until income exceeds a threshold 

and benefits cease. For individuals whose income is far 

from the thresholds, small increases in income would not 

change their Medicaid benefits and therefore would have 

no effect on marginal tax rates. However, for taxpayers 

near the threshold, an incremental increase in income 

that resulted in the complete loss of Medicaid coverage 

would push marginal tax rates above 100 percent. Such 

“cliffs” occur when the taxpayer’s income reaches an 

established threshold and benefits stop immediately 

rather than phasing out gradually over a range of income. 

Because the value of these benefits substantially increases 

a taxpayer’s resources, maintaining eligibility for Medicaid would affect labor supply decisions even though that 

program does not contribute to marginal tax rates over 

most income ranges. This example shows the income 

levels at which a taxpayer would lose Medicaid eligibility 

(that is, reach the cliff). In addition, the majority of states 

require premiums and cost sharing for higher-income 

children participating in CHIP, which increase marginal

9. In Pennsylvania, taxpayers with income below an established 

threshold are eligible for a credit that eliminates their state income 

tax liability. When the taxpayer’s income exceeds the threshold, 

the credit phases out over a $2,250 range of income. These 

examples do not include that phaseout.

10. See statement of C. Eugene Steuerle, Urban Institute, Marginal 

Tax Rates, Work, and the Nation’s Real Tax System, before the 

Subcommittee on Human Resources and the Subcommittee on 

Select Revenue Measures, House Committee on Ways and Means 

(June 27, 2012), www.urban.org/UploadedPDF/901508

-Marginal-Tax-Rates-Work-and-the-Nations-Real-Tax

-System.pdf.

11. In its analyses of average tax rates, CBO incorporates the value of 

Medicaid when estimating a household’s total income using the 

Census Bureau’s calculation of the program’s average cost to the 

federal government per recipient. See Congressional Budget 

Office, The Distribution of Household Income and Federal Taxes, 

2008 and 2009 (July 2012).
10 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Table 2.

Federal Spending for Selected Means-Tested Transfer Programs and 

Number of Participants in Fiscal Year 2011

Source: Congressional Budget Office based on data from the Social Security Administration, Departments of Education, Health and Human 

Services, and Agriculture, Centers for Medicare and Medicaid Services, and Budget of the United States Government, 

Fiscal Year 2013, Historical Tables.

Note: The Supplemental Nutrition Assistance Program was formerly known as the Food Stamp program.

N.A. = not available.

a. Includes administrative costs.

b. Spending and participation for grants awarded between July 1, 2010, and June 30, 2011.

c. Number of cash assistance recipients.

d. Includes the Housing Choice Voucher Program and other rental assistance programs.

e. Includes School Lunch, School Breakfast, the Child and Adult Care Food Program, and four other smaller programs.

tax rates. The example shows the income limits for free 

and subsidized CHIP coverage. 

To simplify the calculation of transfer benefits in this 

portion of the analysis, CBO made several assumptions 

about its hypothetical taxpayer. First, CBO assumed 

that the taxpayer earned income evenly throughout the 

year (therefore, the simulated $100 increase in income 

would amount to about $8 each month). Second, when 

calculating program-specific net income, CBO included 

only the most commonly used deductions: for SNAP, 

deductions for household size, earnings, and high 

housing costs; and for housing vouchers, the dependent 

deduction. (The benefit amounts for all three programs 

are based on the difference between the maximum benefit 

and the family’s net income.) Other deductions, such as 

those for dependent care expenses for SNAP, were not 

modeled. To illustrate the effects of cash assistance, CBO 

calculated marginal rates using the rules governing TANF 

in Pennsylvania.12 Calculations for income limits for 

Medicaid and CHIP were also based on rules in effect in 

Pennsylvania. 

Another assumption underlying the illustrative example 

is that the taxpayer participates in every transfer program 

for which he or she is eligible (with eligibility based on 

income and family composition). For the means-tested 

programs under consideration, that assumption resulted 

in the upper bound of the marginal tax rate a taxpayer 

would face. Families that do not receive transfers will face 

lower marginal tax rates because they are unaffected by a 

reduction in benefits. Survey data show that the majority 

of families with a head of household who is under age 65, 

not disabled, and in the workforce, and that have earnings and income below 250 percent of FPL (an income 

level that corresponds, in some instances, to eligibility for 

the EITC and certain means-tested transfers) do not 

Medicaid 274,966 a 55,558

Supplemental Nutrition Assistance Program 77,637 a 44,709

Supplemental Security Income 48,042 7,756

Pell Grantsb 35,677 6,826

Temporary Assistance for Needy Families 17,884 a 4,417c

Housing Rental Assistanced 27,265 3,597

Child Nutritione 17,284 N.A.

Children's Health Insurance Program 8,633 a 5,099

(Millions of dollars) (Thousands)

Average Number of

Federal Spending Participants per Month

12. Transfer programs that have uniform rules across all states often 

calculate benefits on the basis of information that tends to vary 

across states, or even within states, such as local housing costs and 

median family income. For these stylized examples, CBO uses the 

median housing costs and median family income in Pennsylvania. 

Like many other states, Pennsylvania sets a higher gross income 

limit (at 160 percent of FPL) for households that are categorically 

eligible for SNAP. (SNAP benefits are excluded from income in 

determining TANF eligibility and benefits.)
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 11

CBO

receive TANF, housing assistance, SNAP, or Medicaid 

(see Box 1). Medicaid coverage for a family member was 

the most commonly used program, followed by SNAP 

benefits. As a result, the marginal tax rates illustrated in 

this example are higher than those that apply to most 

low-income taxpayers with this family structure.

Because benefit amounts from some transfer programs 

affect the amounts received from other programs, the 

marginal rate resulting from the cumulative phaseout of 

transfers differs from the sum of the marginal rates for 

each program in isolation. CBO calculated benefits in 

an order consistent with the way these programs count 

income in Pennsylvania. First, CBO calculated cash 

TANF benefits. Next, CBO calculated housing assistance, which includes TANF in its measure of income. 

Finally, CBO calculated SNAP benefits, which includes 

TANF benefits and the household’s housing costs, net of 

the value of any housing voucher, in its calculation of net 

income. CBO first examined the marginal rate under the 

transfer system and then added it to the marginal tax rate 

under the tax system. 

TANF. At the lowest levels of income, a single parent with 

one child is eligible for TANF (see the third panel of 

Figure 2). Because the first $90 of monthly earnings is 

disregarded under TANF, a marginal rate of zero applies 

until the taxpayer’s annual income exceeds $1,080. Then, 

TANF benefits begin phasing out at a rate of 50 cents for 

each additional dollar of earnings until the taxpayer’s 

income exceeds the limit for receiving TANF benefits—

$4,900. At that point, the hypothetical taxpayer would 

face a “cliff,” wherein a $100 increase in earnings would 

result in a loss of $1,900 in TANF benefits. 

Housing Choice Voucher Program. The income measure 

used to determine the value of housing vouchers takes 

into account earnings and TANF benefits. As a result, in 

this illustrative example, increases in earnings that result 

in the reduction of TANF benefits have a different effect 

on income, and on housing benefits, than an increase in 

earnings that does not change TANF benefits. Beginning 

with the hypothetical taxpayer’s first dollar of earnings, 

each additional dollar would reduce the housing voucher 

by 30 cents. Once the taxpayer reached the TANF phaseout range, each additional dollar of earnings would 

reduce TANF benefits by 50 cents, causing net income—

before housing vouchers—to increase by 50 cents. For 

each 50 cent increase, housing benefits would be reduced 

by 30 percent, or by 15 cents, causing the marginal tax 

rate attributable to both programs to increase to 65 percent (50 percent from TANF plus 15 percent from the 

housing voucher). The loss of TANF benefits at $4,900 

of income would result in an increase in the annual housing voucher—from $4,836 to $5,388—which would 

partially offset the loss in TANF. After TANF benefits 

stopped, each additional dollar of earnings would reduce 

the housing voucher by 30 cents until it completely 

phased out at $22,900 of earnings (151 percent of FPL).

SNAP. Similarly, because SNAP benefits depend on TANF 

benefits and housing vouchers, an increase in earnings 

affects SNAP benefits directly and indirectly through 

reductions in TANF benefits and the housing benefits. 

Starting with the hypothetical taxpayer’s first dollar of 

earnings, each additional dollar would reduce the SNAP 

benefit by 24 cents. That would increase the marginal 

rate arising from these three transfers by 24 percentage 

points to 54 percent. However, because SNAP includes 

TANF benefits as income, once the taxpayer reached the 

phaseout range for TANF benefits, an additional dollar 

of earnings would reduce SNAP benefits by just 9 cents. 

(A $1 increase in earnings would be offset by a 50 cent 

reduction in TANF benefits as well as by a 20 cent earnings deduction when determining SNAP net income.) 

Between $1,100 and $4,800 of income, the marginal rate 

under the transfer system would reach 74 percent for this 

hypothetical taxpayer who participates in all three programs. Between $4,800 and $4,900 of income, when a 

$100 increase would result in the loss of TANF benefits, 

annual SNAP benefits would increase from $3,202 to 

$3,832.

After TANF benefits ceased, increases in earnings would 

be partially offset by reductions in housing assistance. 

Without TANF benefits, housing costs—net of the 

housing voucher benefit—would become high relative to 

income and enable the household to qualify for the 

“excess shelter cost” deduction. After accounting for the 

interactions between the housing voucher and SNAP, an 

additional dollar of earnings would reduce the SNAP 

benefit by 27 cents. Between $4,900 and $7,300 of 

income, the marginal rate from the two transfers would 

be 57 percent. Once earnings exceeded $7,300, the taxpayer’s housing costs would no longer be high relative to 

his or her income and he or she would not be able to 

claim the shelter deduction. In that range, SNAP 

would add 24 percentage points to the marginal rate 

and the combined marginal rate from SNAP and housing 

assistance would be 54 percent. SNAP benefits would 
12 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Continued

Box 1.

Estimated Program Participation Rates Using Survey Data

Marginal tax rates are especially high for low- and 

moderate-income workers who participate in multiple means-tested transfer programs. The cumulative 

loss of benefits across multiple programs can 

approach or even exceed an increase in earnings. 

However, the degree to which reductions in benefits 

result in high marginal tax rates appears to be limited 

because the share of families facing phaseouts from 

multiple programs is small. That small share reflects 

the following: not all families are eligible for every 

program, not all eligible families participate, and not 

all participating families have income that reaches the 

various programs’ phaseout ranges.1

To understand how the phaseout of transfer benefits 

affects marginal tax rates, CBO examined the extent 

to which low- and moderate-income workers participate in transfer programs. That analysis was based on 

information from the 2011 Annual Social and Economic Supplement of the Current Population Survey 

(CPS), a nationally representative survey of households that is conducted annually by the Census 

Bureau. The survey contains information on participation in the labor force and in transfer programs in 

2010, as well as certain household characteristics 

reported when the survey was conducted in March 

2011. CBO assessed the level of self-reported participation in the following programs: the Supplemental 

Nutrition Assistance Program (SNAP, formerly 

known as the Food Stamp program), Temporary 

Assistance for Needy Families (TANF), housing 

assistance programs, and Medicaid or the Children’s 

Health Insurance Program. 

For comparability to the main analysis, CBO limited 

the CPS sample to families headed by an individual 

under the age of 65 who did not receive disability 

income and whose family income included earnings. 

To focus on families most likely to qualify for 

means-tested programs, CBO further restricted the 

sample to families with income below 250 percent of 

federal poverty guidelines (abbreviated as FPL), a 

lower income threshold than that considered in the 

main analysis. Programs typically also have additional 

eligibility criteria based on nonfinancial characteristics, such as family composition and time limits on 

assistance. CBO classified families into four types—

those consisting of a single taxpayer with no children 

under the age of 19, a single parent with children, 

a married couple with no children, and a married 

couple with children.

CBO estimated that 38 percent of families with 

income under 250 percent of FPL participated in one 

or more of those programs (see the table to the right). 

The majority of families who received transfer benefits participated in only one program—typically, 

Medicaid. Because Medicaid coverage does not gradually phase out but, rather, ceases once income 

exceeds an established threshold, it would not affect 

marginal tax rates unless the family’s income crossed 

the threshold. Further restricting the sample to those 

who could claim the earned income tax credit (EITC) 

or child tax credit would exclude higher-income families without children (because the EITC for childless 

workers has much lower income thresholds). Such an 

adjustment would result in higher rates of program 

participation, and higher rates of participation in 

multiple programs, among the remaining families 

without children.

The presence of children affects a family’s eligibility 

for means-tested programs; for instance, eligibility for 

TANF is typically restricted to families with children 

and Medicaid’s income thresholds for children are 

generally much higher than those for adults. Families 

with children are most likely to participate in at least 

one transfer program—65 percent of families headed 

by single parents and 52 percent of families headed 

by a married couple received transfers. In addition, 

families headed by single parents were most likely to 

participate in multiple programs.

A disadvantage of using survey data for this analysis is 

that participation in transfer programs and the value

1. See Janet Currie, The Take Up of Social Benefits, Working 

Paper 10488 (Cambridge, Mass.: National Bureau of Economic Research, May 2004), www.nber.org/papers/w10488.
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 13

CBO

Box 1. Continued

Estimated Program Participation Rates Using Survey Data

Share of Families Participating in Selected Means-Tested Transfer Programs in 2010

Source: Congressional Budget Office based on survey data from the Census Bureau.

Notes: CBO’s estimates are based on information from the 2011 Current Population Survey. The survey contains information on 

participation in transfer programs in 2010 as well as certain household characteristics (including the receipt of housing 

assistance) reported when the survey was conducted in March 2011. The sample was restricted to taxpayers under the age 

of 65 who were not disabled, who had earnings in 2010, and whose family income was below 250 percent of federal poverty 

guidelines. 

Children are defined as family members under the age of 19. Housing assistance includes the Housing Choice Voucher 

Program, other rental assistance programs, and public housing. 

SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); CHIP = Children’s 

Health Insurance Program; TANF = Temporary Assistance for Needy Families.

of benefits received tend to be underreported.2

Researchers have estimated that survey data capture 

between 50 percent and 80 percent of beneficiaries of 

SNAP and TANF. Some respondents forget about 

benefits they received briefly or are hesitant to report 

them to the interviewer because of privacy concerns. 

One study has estimated participation rates using 

administrative data from means-tested programs, 

which are less likely to be compromised by survey 

respondents’ recall errors. Estimates using administrative data show that most workers do not receive 

means-tested transfers, and of those who do, most 

participate in only one program.3

 Participation in 

multiple programs is more common among single 

parents than among the general population. CBO’s 

survey-based results are consistent with those 

findings.

Number of Programs

None 48 82 35 79 62

One 29 14 28 16 22

SNAP only 3 6 5 10 6

Medicaid or CHIP only 25 7 22 4 13

TANF or housing assistance only 1 1 1 2 2

Two 19 4 26 4 13

SNAP and Medicaid 17 3 22 2 10

Any other combination of two programs 2 1 4 2 2

Three 3 0 9 1 3

Four 0 0 2 0 1

Memorandum:

Total Participation, by Program

SNAP 21

Medicaid or CHIP 29

TANF 2

Housing assistance 6

 With Children With No Children With Children With No Children Types

Married Couple Single Parent

Taxpayer Characteristics

Married Couple Single Taxpayer All Family

2. See Laura Wheaton, Underreporting of Means-Tested Transfer 

Programs in the CPS and SIPP (Washington, D.C.: Urban 

Institute, January 1, 2007), www.urban.org/publications/

411613.html; and Bruce D. Meyer, Wallace K. C. Mok, and 

James X. Sullivan, The Under-Reporting of Transfers in Household Surveys: Its Nature and Consequences, Working Paper 

15181 (Cambridge, Mass.: National Bureau of Economic 

Research, July 2009), www.nber.org/papers/w15181. 

3. See Stephen D. Holt and Jennifer L. Romich, “Marginal 

Tax Rates Facing Low- and Moderate-Income Workers Who 

Participate in Means-Tested Transfer Programs,” National 

Tax Journal, vol. 60, no. 2 (June 2007), pp. 253–276, 

http://ntj.tax.org/. 
14 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

continue to phase out until the taxpayer’s SNAP benefit 

reached the minimum amount, at $19,700 of earnings. 

After that point, SNAP benefits would not change until 

the taxpayer became ineligible at $23,500 of earnings. 

Because he or she would lose the annual $192 minimum 

benefit at that amount of earnings, a $100 increase in 

income would result in a marginal tax rate from SNAP of 

192 percent.

Medicaid and CHIP. Health insurance benefits generally 

only vary when income exceeds an established limit and 

eligibility is lost. In addition, CHIP increases premiums 

and cost sharing at various income levels. The hypothetical single parent living in Pennsylvania would lose 

Medicaid eligibility when his or her earnings exceeded 

47 percent of FPL; however, the child would remain 

eligible until the parent’s earnings exceeded 100 percent 

of FPL. (That threshold is higher for children under the 

age of six.) When income exceeded Medicaid’s limits, the 

child would become eligible for health insurance through 

CHIP at no cost. Once income reached 200 percent of 

FPL, CHIP would impose premiums and cost sharing on 

a sliding scale—which would increase when income 

reached 250 percent and 275 percent of FPL. (Monthly 

premiums depend on the health insurance company 

providing CHIP benefits but average $48 for a child at 

201 percent of FPL, $67 for a child at 251 percent of 

FPL, and $77 for a child at 276 percent of FPL.13) When 

income exceeded 300 percent of FPL, the child could still 

receive health insurance through CHIP, but premiums 

and cost sharing would increase because the cost of coverage would no longer be subsidized. As a result, marginal 

tax rates would increase sharply at the income levels 

where premiums increased.

An Illustration of Marginal Tax Rates: Combining 

Taxes and Transfers

The combination of the marginal rate of benefit reduction from these transfers and the marginal rate from 

income and payroll taxes results in positive marginal tax 

rates throughout the entire income range (see the fourth 

panel of Figure 2 on page 6). At low levels of income, the 

marginal rate of benefit reduction more than offsets the 

negative marginal rate from the federal income tax system 

(which is attributable to the phase-in of the EITC and 

child tax credit)—resulting in a marginal tax rate that 

ranges from 17 percent to 52 percent. The marginal 

tax rate that results from the interaction between income 

taxes and tax credits, payroll taxes, and transfers continues to increase as taxpayers move through the EITC 

phase-in, plateau, and phaseout ranges and into the 

10 percent bracket. Under those circumstances, taxpayers 

whose income is between $17,100 and $19,700 face 

marginal rates as high as 95 percent; those with slightly 

higher income are subject to a 71 percent rate. The combination of receiving the EITC while, at the same time, 

experiencing the phaseout of the transfer benefits discussed earlier affects a taxpayer with earnings below 

250 percent of FPL. For the hypothetical single parent, 

the loss of Medicaid coverage at 47 percent of FPL, and 

increases in premiums and cost sharing for CHIP 

between 200 and 300 percent of FPL, would produce 

large spikes in marginal tax rates near those income levels. 

(For an illustration of how taxes and transfers affect the 

relationship between earnings and disposable income, see 

Box 2.)

The marginal tax rates calculated in this report are based 

on a small increase in yearly earnings and are generally 

more important for people who are already in the labor 

force—especially when they make choices about the 

number of hours to work—than for people outside of the 

labor force who are deciding whether to work. Individuals considering whether to work probably compare the 

amount of disposable income that they currently receive 

with the disposable income they would receive from 

working part-time or full-time. (For calculations of the 

increase in disposable income associated with entering 

the labor force, see Box 3.)

Simulating the Distribution of Effective 

Marginal Tax Rates

For the first portion of its analysis, CBO used a hypothetical example to illustrate the way various features of 

the tax system and transfer programs interact. Such stylized examples, however, provide little information about 

the marginal tax rates that actual households face or how 

many households fall into each income range. Therefore, 

for the second portion of its analysis, CBO simulated the 

tax liabilities and transfer benefits of actual households to 

provide information about the distribution of marginal 

rates across the low- and moderate-income population. 

The distribution of marginal tax rates depends on the 

distribution of income and on taxpayers’ degree of 

13. See www.chipcoverspakids.com/assets/media/pdf/

complete_income_chart_2012.pdf.
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 15

CBO

Box 2.

Income After Taxes and Transfers

Relationship Between Earnings and Disposable Income for a 

Hypothetical Single Parent with One Child in 2012

(Disposable income in dollars) (Percentage of FPL)

Source: Congressional Budget Office based on survey data from the Census Bureau.

Notes: This example assumes that the taxpayer files as a head of household (an unmarried individual who covers most of the cost 

of maintaining a household for his or her dependents), has one child, and qualifies for both the EITC and the CTC; that all 

income is from wages, salaries, or net earnings from self-employment (otherwise described as earnings); and that the 

taxpayer has itemized deductions worth 18 percent of income and claims the greater of those deductions or the standard 

deduction. (Forty percent of the itemized deductions are assumed to be state and local taxes, and the rest are charitable 

contributions and mortgage interest.) 

Disposable income was calculated as the sum of earnings and transfers (TANF, SNAP, and the Housing Choice Voucher 

Program) minus tax liability (from federal individual income taxes, state individual income taxes, and federal payroll taxes). 

The market value of Medicaid is taken from the 2011 Annual Social and Economic Supplement of the Census Bureau’s 

Current Population Survey; those values were based on the average cost of providing benefits to a nondisabled child and 

nondisabled adult residing in the Commonwealth of Pennsylvania.

FPL = federal poverty guidelines; CHIP = Children’s Health Insurance Program; EITC = earned income tax credit; 

CTC = child tax credit; TANF = Temporary Assistance for Needy Families; SNAP = Supplemental Nutrition Assistance 

Program (formerly known as the Food Stamp program).

An analysis of disposable income—the amount of 

income available to an individual after accounting for 

earnings, taxes, and transfers—provides another way 

to view the interactions between provisions in the tax 

code and transfer programs. (For this illustration, the 

Congressional Budget Office assumes that the taxpayer’s only source of income apart from the government is from earnings.) A taxpayer’s disposable 

income differs from his or her earnings because of 

tax liability and transfers. At low levels of earnings, 

the value of refundable tax credits and transfer benefits boosts the taxpayer’s disposable income above 

earnings (see the figure above). Because marginal tax 

rates are positive when benefit reductions are 

included, disposable income does not increase as 

quickly as earnings—each additional dollar of 

earnings results in less than a dollar of additional disposable income. As earnings rise above 175 percent 

of federal poverty guidelines, disposable income falls 

below earnings because income and payroll tax liability (before accounting for credits) exceeds the sum 

of transfer payments, the earned income tax credit, 

and the child tax credit. The amount of disposable 

income people have after including benefits from 

Medicaid and the Children’s Health Insurance 

Program relies heavily on the valuation of health 

insurance coverage. (This calculation of disposable 

income does not include the value of employmentbased health insurance, which tends to be substantial 

for people who have such insurance.)

0 10,000 20,000 30,000 40,000 50,000 60,000

0

10,000

20,000

30,000

40,000

50,000

60,000

0

50

100

150

200

250

300

350

400

450

Earnings (Dollars)

Earnings

After-Tax

Income

Disposable Income Excluding

CHIP and Medicaid

Disposable Income Including

CHIP and Medicaid

0 50 100 150 200 250 300 350 400 450
16 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Continued

participation in transfer programs. As discussed in the 

following sections, CBO simulated tax liabilities and 

benefits from one transfer program—SNAP—under 

provisions of law in effect in 2012 and under those scheduled to be in effect in 2013 and 2014. CBO focused on 

SNAP because it is the second most widely used meanstested program, after Medicaid. However, the phaseout of 

SNAP benefits represents only a portion of the marginal 

tax rates from the transfer system; taxpayers who participate in additional means-tested programs typically face 

higher marginal tax rates. 

The analysis was based on information from a public-use 

sample of income tax returns filed in 2006 (the most 

recent public-use data available at the time the analysis 

was undertaken).14 The sample was designed to be 

representative of the population that filed tax returns in 

that year.15 CBO augmented the tax return data in various ways, such as by using information from the Census 

Bureau’s Annual Social and Economic Supplement of 

Box 3.

Effective Marginal Tax Rates Associated with Labor Force Entry in 2012

In the analysis presented in the main sections of this 

report, the Congressional Budget Office (CBO) 

examined how a relatively small increase in earnings 

would affect people’s disposable income, which 

accounts for taxes and for transfer benefits. That type 

of analysis is especially relevant when evaluating how 

features of the tax system and transfer programs affect 

the decisions of people who are already employed and 

considering whether to increase or reduce the number of hours they work. However, evaluating people’s 

decisions about whether to enter or leave the workforce requires a different approach because their 

decisions probably reflect how working part-time 

or full-time or not working at all would alter their 

disposable income. 

To assess how benefits provided through the tax system and transfer programs would affect the marginal 

tax rates of individuals considering whether to enter 

the labor force, CBO calculated the marginal tax 

rate as 1 minus the ratio of the change in disposable 

income to the change in earnings under two 

scenarios: 

 Scenario 1: A single parent with one child moves 

from being jobless to working part-time (20 hours 

per week for the entire year).

 Scenario 2: A single parent with one child moves 

from working part-time to working full-time 

(40 hours per week for the entire year).

CBO assumed that under both scenarios, the prospective job would pay the minimum wage (currently 

$7.25 an hour).1

 CBO estimated that the annual 

earnings from the part-time job would correspond to 

$7,540, about 50 percent of the federal poverty 

guideline for a household of two in 2012. (In 2012, 

the guideline was $15,130 for a household that size.) 

Earnings from the full-time job would amount to 

$15,080, almost 100 percent of the federal poverty 

guidelines for the same household. (The supplemental material accompanying this report illustrates how 

labor force entry would affect the marginal tax rates 

of workers in families of different configurations.)

1. Eighteen states and the District of Columbia have a higher 

minimum wage than that established by the federal government. Those minimum amounts range from $7.40 to $9.04 

per hour. Pennsylvania’s minimum wage is set at the federal 

level.

14. The analysis simulated taxes after adjusting for inflation and real 

income growth by deflating unindexed parameters by the nominal 

rate of per capita income growth and deflating indexed parameters 

by the real rate of per capita income growth, both outputs of 

CBO’s tax model. Applying those adjusted tax parameters to fixed 

2006 income yields the same marginal tax rates that taxpayers 

would face, under current law, if nominal income grew 9.97 percent between 2006 and 2012 and prices grew by 10.57 percent 

(resulting in a 0.6 percentage-point decline in real income over 

that period). 

15. To protect the identity of taxpayers in the public-use file, the 

Internal Revenue Service modifies information in various fields 

so that the resulting records do not contain complete information 

from any individual tax return.
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 17

CBO

the 2007 Current Population Survey (CPS) to create 

records for households that did not file tax returns. The 

tax simulation model that CBO used to perform those 

calculations accounts for most, but not all, of the provisions that affect people’s marginal federal income tax rate. 

CBO calculated marginal tax rates in this distributional 

analysis as the change in tax liability and SNAP benefits 

that would result from a $100 increase in earnings.

CBO restricted the sample to focus on taxpayers whose 

labor decisions are most likely to be affected by marginal 

tax rates. First, it considered only individuals who filed 

tax returns and reported earnings. Ideally, the analysis 

would also have included potential workers (those who 

might join the labor force), but such people cannot be 

easily identified. One possibility would be to include all 

households in the analysis in order to capture potential 

workers. However, that approach would also include 

many people who have chosen not to enter the workforce 

for reasons unrelated to disposable income or who have 

permanently left the workforce, such as those who have 

retired. Second, the analysis is limited to tax returns filed 

by taxpayers under age 65 who are not disabled, a group 

for whom marginal tax rates on labor income are more 

relevant to labor supply decisions.16 Third, only tax 

returns with adjusted gross income (AGI) under 450 percent of FPL are included to focus on taxpayers who are 

potentially eligible for both means-tested transfers and 

refundable tax credits, including the premium assistance 

tax credits that will take effect in 2014. (AGI includes all 

taxable sources of income net of certain expenses and is 

closely related to the measure of income used to determine eligibility for some refundable tax credits. In 

2012, the federal poverty guidelines are $11,170 for a 

household of one; $15,130 for a household of two; and 

$23,050 for a household of four.)

Box 3. Continued

Effective Marginal Tax Rates Associated with Labor Force Entry in 2012

Under the first scenario, the single parent who moved 

from not working to working part-time would face a 

marginal tax rate of 36 percent because even a modest 

level of earnings would result in the reduction or loss 

of several transfer benefits. Earnings from part-time 

work would result in a loss of eligibility for assistance 

through the Temporary Assistance for Needy Families 

program, some reduction in the housing voucher, 

and a decrease in benefits available through the Supplemental Nutrition Assistance Program. However, 

by entering the workforce, the single parent would 

become eligible for two refundable tax credits: the 

earned income tax credit (EITC) and the child tax 

credit. Those two tax credits would partially offset 

the reduction in transfer benefits. 

The marginal tax rate associated with moving from 

part-time to full-time employment, illustrated in 

CBO’s second scenario, would be higher—47 percent. Earnings from full-time work would place the 

single parent in the EITC’s plateau range and would 

allow him or her to claim the maximum EITC 

amount ($3,169 in 2012). However, because moving 

from part-time work to full-time work does not 

increase the EITC as much as does moving from not 

working to working part-time, marginal tax rates 

in this scenario would be higher than in the first 

scenario. 

Although the marginal rates in this report do not 

include the value of Medicaid, eligibility for Medicaid can be a factor for people deciding to enter the 

labor force. In both scenarios, earnings from employment would result in the loss of the parent’s eligibility 

for Medicaid (if the parent had been eligible previously). The child, though, would still be eligible for 

Medicaid or for the Children’s Health Insurance 

Program. A potentially compensating factor for the 

parent is that an individual working full-time would 

probably qualify for employment-based health insurance at employers that offer such insurance. Substituting Medicaid with employment-based insurance 

would eliminate the “cliff” that results when people’s 

income exceeds the cut-offs for Medicaid eligibility. 

16. For this purpose, the disabled are identified through the receipt of 

disability benefits (which includes workers’ compensation) or 

Supplemental Security Income.
18 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

The resulting sample includes 54 percent of all actual and 

potential tax-filing units and 42 percent of earnings in 

2006. Reasons for being excluded from the sample varied: 

10 percent of all tax-filing units had zero earnings; 

another 10 percent (representing 7 percent of earnings) 

consisted of elderly or disabled taxpayers; 17 percent 

(representing 51 percent of earnings) had income above 

450 percent of FPL; and the remaining 8 percent (with 

only a negligible share of earnings) did not file a federal 

income tax return. 

To illustrate marginal rates arising from the phaseout of 

transfer benefits, CBO modeled SNAP benefits using 

information from the 2007 CPS and the 2006 American 

Community Survey, both of which are weighted to be 

representative of the U.S. population in 2006.17 Income 

limits for eligibility vary by state, and those variations are 

incorporated into the model. Many households do not 

report the benefits they receive; to account for that outcome, CBO simulated participation among eligible 

households to match its projections of participants 

between 2012 and 2014. Simulated SNAP benefits for 

households were then statistically matched to the sample 

of income tax returns on the basis of taxpayers’ income 

and demographic characteristics. 

As in its illustrative example, CBO included payroll taxes 

in its simulation, again assuming that the employer’s 

share of those taxes would be passed on to employees. 

Most workers are in jobs covered by Social Security and 

Medicare and thus face OASDI and HI taxes, but about 

6 percent of employees are exempt from those taxes.18

Because payroll taxes are levied on the worker, not on the 

tax-filing unit, each worker in a married couple filing 

jointly can face a different payroll tax rate—if, for example, one spouse is above the OASDI taxable maximum 

and the other is not.19 CBO assumed that for a married 

couple filing jointly, the $100 in additional earnings 

would be divided between spouses in proportion to their 

actual earnings. The calculated marginal payroll tax rate 

for the couple is the average of the rate that each spouse 

faces, weighted by his or her earnings. Therefore, the 

couple’s combined payroll tax rate is closer to that faced 

by the person with the highest earnings.

CBO also included state income taxes in the distributional analysis. Those tax rates were estimated by 

applying a set of state income tax calculators to the 

sample of federal tax returns, using state tax laws in place 

in 2006.20 That method provides a fairly reliable estimate 

of state income tax rates but is more approximate than 

CBO’s estimates of federal income tax rates because of 

limitations in the public-use income tax data.21

For the distributional analysis, marginal tax rates for 

households in the sample were weighted by the number 

of returns filed to reflect the total population. Therefore, 

the distribution of marginal tax rates reflects the share 

of returns filed by people in the sample facing that marginal tax rate. CBO used returns-weighted measures of 

marginal tax rates because individuals and families of low 

and moderate income, the focus of the agency’s main 

analysis, account for only about 40 percent of earnings in 

the economy. (For an earnings-weighted distribution that 

17. The Annual Social and Economic Supplement of the Current 

Population Survey does not contain the information necessary to 

compute the housing cost deduction available through SNAP. As a 

result, housing costs are imputed using data from the American 

Community Survey—specifically, the median housing cost for 

households, living in the same state, in households of the same 

size, and having similar income.

18. Certain government employees are the main class of workers 

exempt from OASDI, HI, or both. Unlike nearly all private-sector 

workers, about 28 percent of workers employed by state and local 

governments are not covered by Social Security. Although all federal employees hired after December 31, 1983, are covered by 

Social Security and pay the associated payroll taxes, many workers 

who were hired earlier and who have remained with the federal 

government are not covered by OASDI. Furthermore, state and 

local government employees hired before April 1, 1986, are not 

covered by Medicare and do not pay HI taxes. For more details 

about groups exempt from payroll taxes, see Congressional Budget 

Office, Differences in Wage and Salary Income Included in Various 

Tax Bases, Background Paper (June 2005).

19. Two and a half percent of the tax units in the sample had earnings 

exceeding the OASDI maximum ($110,100 in 2012) and thus 

did not pay OASDI taxes for income in excess of that amount. 

Most families with income less than 450 percent of FPL had 

income well below the OASDI maximum. However, the poverty 

guidelines increase with family size. As a result, it was possible for 

families consisting of five or more people to have income below 

450 percent of FPL and also have earnings above the OASDI 

maximum. In addition, some taxpayers reported losses, which 

meant that their AGI was less than earnings—another reason 

some taxpayers would have had income below 450 percent of FPL 

and still faced a zero marginal tax rate from OASDI taxes.

20. Jon Bakija of Williams College created the state tax calculator 

used by CBO. For more details, see Jon Bakija, “Documentation 

for a Comprehensive Historical U.S. Federal and State Income 

Tax Calculator Program” (working paper, Williams College, 

August 2009).
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 19

CBO

reflects the share of reported earnings facing a given 

marginal tax rate, see Appendix B.) 

Effective Marginal Tax Rates Under 

2012 Law

Under current law, working taxpayers with income below 

450 percent of FPL face, on average, a marginal tax rate 

from taxes and SNAP benefits of 30 percent in 2012. 

That average masks the fact that taxpayers with similar 

earnings face widely varying marginal rates, depending 

on their personal circumstances. Marginal rates vary systematically by income group and by family type. 

Overall Distribution

The major contributors to the overall marginal tax rate 

are federal individual income taxes (especially, the statutory rate brackets) and payroll taxes. The contribution of 

various tax provisions and SNAP to the marginal rate 

depends both on the share of taxpayers affected by the 

provisions and the effect on the marginal rate for those 

who are affected (see Table 3). Because the sample is 

restricted to taxpayers with earnings, almost all filers 

faced the payroll tax, which contributed an average of 

12 percentage points to their marginal tax rate. Statutory 

rates under the regular income tax affected 90 percent of 

working taxpayers with income below 450 percent of 

FPL; and among taxpayers facing the regular income tax, 

the statutory rate increased the average marginal rate by 

9 percentage points. The 15 percent bracket contained 

the largest proportion of taxpayers (36 percent) in the 

sample (see Table 4). Twenty-six percent of the taxpayers 

in the sample did not have any taxable income and thus 

faced a statutory rate of zero.

Notably, 10 percent of taxpayers in the sample, typically 

those who were married and had child dependents, were 

subject to the AMT because of the expiration of the 

higher AMT exemption at the end of 2011. (If the 2011 

exemption levels were extended through 2012, very few 

taxpayers in this group would face the AMT.) Although 

the AMT primarily affects high-income taxpayers, lowand moderate-income taxpayers whose liability under the 

regular income tax was lower than their AMT liability 

were subject to the AMT. That occurred when taxpayers 

claimed various exemptions and deductions not allowed 

under the AMT, such as the dependent exemptions. In 

addition, the lack of a higher standard deduction or wider 

brackets for heads of households under the AMT can 

result in a higher minimum tax liability than would be 

the case under the regular income tax. 

Other provisions that result in relatively high marginal 

tax rates applied to fewer taxpayers. In the sample, 

26 percent of working taxpayers with income below 

450 percent of FPL claimed the EITC. Most of those taxpayers were in the EITC phaseout range, which increased 

their marginal rate by an average of 15 percentage points. 

Because only 14 percent of taxpayers in the sample were 

affected by the EITC phaseout, its contribution to the 

average marginal tax rate was just 2 percentage points. 

Similarly, the phaseout of SNAP added 25 percentage 

points for affected taxpayers, but because it affected only 

18 percent of taxpayers in the sample, its overall impact 

was much lower (5 percentage points).22 About 20 percent of tax units in this sample received Medicaid for one 

or more family members.23 For tax-filing units with 

income near the established threshold, reaching the 

Medicaid cliff would result in high marginal tax rates.

21. Several factors limit the accuracy of the state tax estimates. First, 

a federal income tax return lacks all of the information necessary 

to calculate state income taxes. For example, many states exempt 

state employees’ pension income from taxation. Because federal 

tax law offers no such exemption, federal tax returns do not 

contain any information about the source of pension income, 

which makes it difficult to model state law. Nor do federal returns 

contain information regarding the state in which income is earned 

or taxable. For its analysis, CBO assumed that all income was 

earned in one state, even though many taxpayers have to apportion their income among states. A second problem results from 

the disclosure rules that protect taxpayers’ privacy. To ensure that 

individual taxpayers cannot be identified from their tax returns, 

the public-use tax data set masks states for taxpayers with AGI 

above $200,000. For those tax units, CBO imputes the state 

from the CPS. Third, the sample of federal tax returns that CBO 

used is probably not representative of every state. Nevertheless, 

on balance, the benefit of having a more complete measure of 

marginal tax rates outweighs the fact that the state estimates are 

approximations.

22. The estimate of the share of the sample enrolled in SNAP differs 

from that in Congressional Budget Office, The Supplemental 

Nutrition Assistance Program (April 2012), because of differences 

in the samples used, the unit of analysis, and the methods used to 

estimate benefits.

23. CBO adjusts for the underreporting of Medicaid receipt in the 

CPS using the method described in Michael Davern and others, 

“A Partially Corrected Estimate of Medicaid Enrollment and 

Uninsurance: Results from an Imputational Model Developed Off 

Linked Survey and Administrative Data,” Journal of Economic and 

Social Measurement, vol. 34 (2009), pp. 219–240.
20 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Table 3.

Contributions of Tax Provisions and SNAP Benefits to the Marginal Tax Rates of 

Low- and Moderate-Income Workers Under Provisions of Law in Effect in 2012

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns 

filed in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey 

and the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who 

had earnings in 2006, and whose adjusted gross income was below 450 percent of federal poverty guidelines. It was weighted to be 

representative of the population of tax filers.

The simulated marginal tax rates were based on taxpayers’ total compensation before their employers’ share of payroll taxes was

deducted.

EITC = earned income tax credit; SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); 

n.a. = not applicable.

a. Provisions of the federal individual income tax do not add up to the marginal federal individual income tax rate because not all provisions 

of the tax code are shown.

b. Accounts for the deductibility of state income taxes on federal income tax returns for people who itemize.

c. Includes adjustments to correct for the underreporting of Medicaid in the Current Population Survey.

Among nonelderly, nondisabled taxpayers with earnings, 

about 21 percent faced marginal rates below 20 percent, 

and 51 percent faced marginal rates of 30 percent or 

higher (see Figure 3). About 8 percent of taxpayers in this 

group faced marginal tax rates greater than 50 percent. If 

those marginal tax rates had included only federal income 

taxes, a larger share of taxpayers would have been subject 

to marginal tax rates below 20 percent. In particular, 

almost half of working taxpayers with income below 

450 percent of FPL faced marginal federal income tax 

rates ranging from 10 percent to 19 percent. 

To provide context for the marginal tax rates faced by this 

sample under 2012 law, CBO compared the distribution 

of marginal rates among the low- and moderate-income 

population to the distribution faced by higher-income 

taxpayers who met the other sample restrictions. About 

90 percent of nonelderly, nondisabled taxpayers whose 

income was above 450 percent of FPL faced marginal tax

Federal Individual Income Taxesa 100.0 10.8 10.8

(Regular income tax) 90.0 9.0 8.1

EITC 26.3 1.8 0.5

Phase-in 7.1 -24.2 -1.7

Plateau 5.1 0 0

Phaseout 14.1 15.4 2.2

Child tax credit 32.7 -7.3 -2.4

Alternative minimum tax 10.0 25.5 2.6

Federal Payroll Taxes 98.9 12.2 12.1

State Individual Income Taxes 60.8 4.3 2.6

SNAP Benefits 18.1 25.4 4.6

Interactions Among Tax Provisionsb 24.5 -0.7 -0.2

Average Marginal Tax Rate (Percent) n.a. n.a. 30.0

Memorandum:

Share of Tax Filers Receiving Medicaid in 2006c 20.3 n.a. n.a.

Marginal statutory tax rate

Contribution to

(Percent)

Returns Affected

(Percent)

Those Affected

(Percentage points)

Aggregate Marginal Rate

Share of Marginal Rate Effect for
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 21

CBO

Table 4.

Distribution of Individual Income Tax 

Returns Filed by Low- and ModerateIncome Workers, by Statutory Marginal 

Tax Rate, Under 2012 Law

(Percent)

Source: Congressional Budget Office.

Note: CBO’s simulations of tax liabilities were based on 

information from a public-use sample of federal individual 

income tax returns filed in 2006. The sample was restricted 

to taxpayers under the age of 65 who were not disabled, 

who had earnings in 2006, and whose adjusted gross income 

was below 450 percent of federal poverty guidelines. It was 

weighted to be representative of the population of tax filers.

rates of 30 percent to 49 percent (see Figure 4). Compared with higher-income taxpayers, a significantly larger 

share of taxpayers with income below 450 percent of FPL 

faced marginal tax rates below 30 percent. However, they 

were also slightly more likely to face high marginal tax 

rates: About 8 percent of taxpayers with income below 

450 percent of FPL faced marginal tax rates exceeding 

50 percent, compared with about 5 percent of higherincome taxpayers.

Distribution by Earnings Group 

Marginal rates vary across earnings groups for several reasons. First, statutory rates increase with income. Second, 

some provisions of the tax code apply only over certain 

income ranges. Third, marginal rates vary with earnings 

when other tax-related characteristics are correlated with 

earnings. For example, taxpayers with higher earnings 

tend to have more income from investments (which, by 

increasing AGI, generally increases the marginal rates on 

earnings) and more itemized deductions (which generally 

decrease marginal rates). Those higher-income taxpayers 

are also less likely to receive SNAP benefits. Marginal 

rates also vary within earnings groups because of differences in eligibility for tax credits and SNAP benefits.

To examine how marginal tax rates on earnings vary 

among and within earnings groups, CBO grouped taxpayers in the sample on the basis of their family size and 

earnings relative to the federal poverty guidelines and 

analyzed the range of marginal rates within each group 

(less than 50 percent of FPL, 50 to 99 percent of FPL, 

100 to 149 percent of FPL, and so on). Because the 

poverty guidelines increase with family size, two families 

with the same earnings could be in different groups.

Marginal tax rates generally increase as earnings relative 

to FPL increase (see Figure 5 on page 24). In the categories below 150 percent of FPL, the median marginal rate 

increased sharply from 12 percent to 32 percent as earnings increased. The median marginal rate then stayed 

roughly constant in each category until earnings reached 

350 percent of FPL, when it ticked up to 35 percent. 

That pattern is largely a reflection of the progressive 

nature of the federal income tax system. 

Marginal rates varied widely among taxpayers in the 

sample who had similar earnings relative to the federal 

poverty guidelines, particularly among taxpayers with 

earnings under 200 percent of FPL. For example, among 

taxpayers with earnings below 50 percent of FPL, 

43 percentage points separated the 10th percentile and 

the 90th percentile of marginal tax rates. However, 

among taxpayers with earnings above 200 percent of 

FPL, only about 16 percentage points separated the 10th 

and 90th percentiles. 

Much of that variation was driven by the marginal rates 

found in the federal income tax system, particularly 

those arising from the phase-in and phaseout of the 

EITC. Taxpayers with large families faced marginal rates 

as low as -44 percent (the sum of the -45 percent EITC 

phase-in rate, the -15 percent refundable child tax credit 

rate, and 13.3 percent payroll tax rate, all adjusted as a 

share of total compensation). By contrast, single taxpayers without children who had comparable earnings 

relative to FPL faced rates as high as 53 percent (the sum 

of the 7.65 percent EITC phaseout rate, the 13.3 percent 

payroll tax rate, and the 36 percent reduction in SNAP, 

all adjusted as a share of total compensation). Taxpayers 

with higher earnings relative to FPL were ineligible for 

the EITC and SNAP, so there was less variation in marginal rates after earnings exceeded 200 percent of FPL.

Tax Rate

0 26

25

36

3

0

0

0

Alternative Minimum Tax 10 ____

Total 100

Facing That Rate

Share of Federal

10

15

25

28

33

35

Statutory Marginal Income Tax Returns
22 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Figure 3.

Share of Returns Filed by Low- and Moderate-Income Taxpayers, by 

Marginal Tax Rate, Under 2012 Law

(Percentage of tax returns)

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns 

filed in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey 

and the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who 

had earnings in 2006, and whose adjusted gross income was below 450 percent of federal poverty guidelines. It was weighted to be 

representative of the population of tax filers.

The simulated marginal tax rates include the combined effects of federal individual income taxes, state individual income taxes

(under provisions in effect in 2006), federal payroll taxes, and the reduction in SNAP benefits. The simulated marginal tax rates were 

based on taxpayers’ total compensation before their employers’ share of payroll taxes was deducted.

SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program).

Distribution by Family Type

Marginal tax rates vary on the basis of marital status and 

the presence of children in the family. Family composition determines the taxpayer’s filing status: The number 

of children determines the amount of the EITC and its 

phase-in and phaseout rates, as well as the amount of the 

child tax credit and its phase-in rate. Although SNAP 

does not have any explicit provisions for children, the 

income tests for eligibility and the maximum benefit 

amount are based on family size. To see how marginal 

rates vary by family type, CBO categorized its sample of 

taxpayers into four groups on the basis of marital status 

and the presence of children in the household: married 

with children, married without children, single parent 

with children, and single taxpayer without children.24

Within each group, CBO then ranked each taxpayer by 

the marginal tax rate incurred as a result of taxes and the 

phaseout of SNAP benefits.

The presence of children had a large effect on the variation in marginal tax rates among single taxpayers (see 

Figure 6 on page 25), largely because of the EITC and 

child tax credit. (Among working taxpayers with children 

and income below 450 percent of FPL, almost all claimed 

at least one of the credits, and about one-third claimed 

both.) Among single parents with children in the sample,

Below 0 0–9 10–19 20–29 30–39 40–49 50–59 60–69 70–79 80 or Above

0

10

20

30

40

50

Marginal Tax Rate (Percent)

Effects of Federal Income Taxes Only

Combined Effects of Federal and State

Income Taxes, Federal Payroll Taxes, and SNAP Benefits

24. For this analysis, taxpayers were considered to have children if 

they claimed a child dependent at home or a child for the EITC, 

or if they filed as a head of household but did not claim a dependent. (Under rules in effect in 2006, a single parent could claim 

head-of-household filing status when the taxpayer’s child lived 

with the taxpayer for over half the year but was claimed as a 

dependent by the noncustodial parent.)
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 23

CBO

Figure 4.

Share of Returns Filed by All Taxpayers, by Marginal Tax Rate, Under 2012 Law

(Percentage of tax returns)

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns 

filed in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey 

and the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled and 

who had earnings in 2006. It was weighted to be representative of the population of tax filers.

The simulated marginal tax rates include the combined effects of federal individual income taxes, state individual income taxes

(under provisions in effect in 2006), federal payroll taxes, and the reduction in SNAP benefits. The simulated marginal tax rates were 

based on taxpayers’ total compensation before their employers’ share of payroll taxes was deducted.

FPL = federal poverty guidelines; SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program).

69 percentage points separated the 10th and 90th percentiles of marginal rates. In contrast, only about 31 percentage points separated the 10th and 90th percentiles among 

single taxpayers without children in the sample. In comparison with taxpayers with children, taxpayers without 

children faced less variation in their marginal tax rates 

because they could not claim the child tax credit and 

because the EITC phase-in and phaseout rates were lower 

for childless taxpayers (and applied over a narrower range 

of income). In addition, single parents with children were 

also more likely to receive SNAP, which increased their 

marginal tax rates and tended to increase variation in 

those rates.

Effective Marginal Tax Rates Under 

2013 and 2014 Law

To illustrate the effects of legislative changes on marginal 

tax rates, CBO compared the marginal tax rates that a 

hypothetical single parent with one child would face 

under provisions of law in effect in 2012 with the rates 

he or she would face under provisions of law that are 

scheduled to go into effect in 2013 and 2014. (See the 

supplemental material accompanying this report for the 

marginal rates that would apply to other family types in 

2013 and 2014.) CBO also simulated the distribution of 

marginal rates under provisions of 2013 and 2014 tax law 

using the same sample of 2006 tax returns that were used 

in the second portion of its analysis for 2012. 

Example of Effective Marginal Tax Rates in 2013 

Various provisions of the Tax Relief, Unemployment 

Insurance Reauthorization, and Job Creation Act of 2010 

Below 0 0–9 10–19 20–29 30–39 40–49 50–59 60–69 70–79 80 or Above

0

10

20

30

40

50

Marginal Tax Rate (Percent)

AGI Below 450 Percent of FPL

AGI Above 450 Percent of FPL
24 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Figure 5.

Distribution of Marginal Tax Rates, by Earnings Relative to Federal Poverty 

Guidelines, Under 2012 Law

(Tax rate in percent)

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns filed 

in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey and 

the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who 

had earnings in 2006, and whose adjusted gross income was below 450 percent of FPL. It was weighted to be representative of the

population of tax filers.

The simulated marginal tax rates include the combined effects of federal individual income taxes, state individual income taxes

(under provisions in effect in 2006), federal payroll taxes, and the reduction in SNAP benefits. The marginal tax rates were based on 

taxpayers’ total compensation before their employers’ share of payroll taxes was deducted.

The bold line in the center (the 50th percentile) represents the median marginal tax rate for a given earnings group. The area between 

the 25th and 75th percentiles is the range of tax rates that the middle half of tax returns in each group faces. The area between the 

10th and 90th percentiles is the range of tax rates that the middle 80 percent of tax returns in each group faces.

FPL = federal poverty guidelines; SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program).

(referred to in this report as the 2010 tax act) are scheduled to expire at the end of 2012. The 2010 tax act 

temporarily extended several tax provisions that reduced 

individual income tax rates and increased certain tax 

credits and deductions that had originally been enacted in 

the Economic Growth and Tax Relief Reconciliation Act 

of 2001 (EGTRRA), the Jobs and Growth Tax Relief 

Reconciliation Act of 2003 (JGTRRA), and the American Recovery and Reinvestment Act of 2009 (ARRA). In 

2013, the affected provisions will revert to those in effect 

before 2001. As a result:

 The 10 percent bracket will be repealed, and other 

statutory income tax rates will be 15, 28, 31, 36, and 

39.6 percent.

 The standard deduction for married couples filing 

jointly will be reduced—declining from 200 percent 

to 167 percent of the deduction for single filers. The 

range of incomes included in the 15 percent bracket 

will also be narrowed for joint filers.

 The child tax credit will be reduced from $1,000 to 

$500 for each child, and eligibility for the refundable

0–49 50–99 100–149 150–199 200–249 250–299 300–349 350–399 400+

-10

0

10

20

30

40

50

60

70

Earnings as a Percentage of FPL

10th Percentile

25th Percentile

Median

75th Percentile

90th Percentile
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 25

CBO

Figure 6.

Distribution of Marginal Tax Rates, by Taxpayer Characteristics, Under 2012 Law

(Tax rate in percent)

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns 

filed in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey 

and the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who 

had earnings in 2006, and whose adjusted gross income was below 450 percent of federal poverty guidelines. It was weighted to be 

representative of the population of tax filers.

The simulated marginal tax rates include the combined effects of federal individual income taxes, state individual income taxes

(under provisions in effect in 2006), federal payroll taxes, and the reduction in SNAP benefits. The simulated marginal tax rates were 

based on taxpayers’ total compensation before their employers’ share of payroll taxes was deducted.

SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program).

portion of the credit will be limited to taxpayers with 

three or more children.

 The value of the EITC will no longer be higher for 

married couples than it is for unmarried filers with the 

same number of children and level of earnings. The 

credit amount will be the same for families with two 

children and for those with three or more children.

 Refundable tax credits—including the EITC and the 

refundable portion of the child tax credit—will be 

reduced by the taxpayer’s AMT liability. 

Because of those changes, marginal tax rates will generally 

rise at the end of 2012. 

The 2010 tax act also reduced the employee’s share of the 

OASDI tax to 4.2 percent through 2011. That reduced 

rate was extended until the end of 2012 by the Middle 

Class Tax Relief and Job Creation Act of 2012. Beginning 

in 2013, the employee’s share will return to 6.2 percent.

For a single parent with income below 450 percent of 

FPL and one child, marginal tax rates in some income 

ranges will be higher in 2013 than they are in 2012 

because the refundable child tax credit will be restricted 

to filers with three or more children and the 10 percent 

statutory bracket will expire (see the top panel of 

Figure 7). The restricted eligibility for the refundable 

child tax credit will increase the marginal tax rate for 

filers with income between $3,100 and $9,400, from 

-49 percent to -34 percent (corresponding to their EITC 

Married Couple

With Children

Married Couple

With No Children

Single Parent

With Children

Single Taxpayer

 With No Children

-10

0

10

20

30

40

50

60

70

75th

Percentile Median

25th

Percentile

10th to 90th

Percentile
26 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Figure 7.

Marginal Tax Rates for a Hypothetical Single Parent with One Child, by Earnings, 

Between 2012 and 2014

(Tax rate in percent)

Under the Federal Individual Income Tax System

Under the System of Taxes and Transfers

Source: Congressional Budget Office.

Notes: This example assumes that the taxpayer files as a head of household (an unmarried individual who covers most of the cost of 

maintaining a household for his or her dependents), has one child, and qualifies for both the EITC and the CTC; that all income is 

from wages, salaries, or net earnings from self-employment (otherwise described as earnings); and that the taxpayer has itemized 

deductions worth 18 percent of income and claims the greater of those deductions or the standard deduction. (Forty percent of the 

itemized deductions are assumed to be state and local taxes, and the rest are charitable contributions and mortgage interest.) It also 

assumes that the state expands Medicaid in 2014 as originally specified in the Affordable Care Act (ACA) to cover individuals with 

income up to 138 percent of FPL. The ACA comprises the Patient Protection and Affordable Care Act (Public Law 111-148) and the 

health care provisions of the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152).

The simulated marginal tax rates were based on taxpayers’ total compensation before their employers’ share of payroll taxes was deducted. 

The marginal rate increase associated with the “cliff” in premium assistance credits, which occurs at 400 percent of FPL, is not shown. 

Cost-sharing subsidies are not illustrated in the second panel.

Marginal rates including transfer programs calculated using stylized program rules under 2012 law (see the notes to Figure 2). Dotted lines 

indicate income limits for Medicaid (under 2012 and 2014 law) and CHIP (under 2012 law) where taxpayers face cliffs. Similar spikes in 

marginal tax rates when the taxpayer loses eligibility for TANF and SNAP are not illustrated.

EITC = earned income tax credit; AMT = alternative minimum tax; CTC = child tax credit; FPL = federal poverty guidelines; SNAP = 

Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); TANF = Temporary Assistance for Needy Families; 

CHIP = Children’s Health Insurance Program.

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000

-60

-40

-20

0

20

40

60

80

100

Earnings (Dollars)

0 50 100 150 200 250 300 350 400 450

2012

2013

2014

EITC

Phase-In

(-34%)

EITC Plateau (0%)

EITC

Phaseout

(-15.98%)

Premium Assistance Credits

15% Statutory Bracket

26% AMT

EITC Phaseout and

15% Statutory Bracket

(30.98%)

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000

-60

-40

-20

0

20

40

60

80

100

Earnings (Dollars)

0 50 100 150 200 250 300 350 400 450

Medicaid:

Income Limit

for Parent

in 2012

CHIP:

Income Limit

for Free

Coverage

in 2012

2012

2013

2014

Medicaid:

Income Limit

for Parent

in 2014

CHIP:

Income Limit

for Reduced-Cost

Coverage in 2012
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 27

CBO

phase-in rate). The expiration of the 10 percent statutory 

bracket will increase marginal tax rates for taxpayers with 

income between $20,000 and $28,700 by 5 percentage 

points, to 30.98 percent in 2013. After accounting for 

state income taxes, federal payroll taxes, and means-tested 

transfers, a hypothetical single parent with income below 

450 percent of FPL and one child will face marginal tax 

rates between 29 percent and 84 percent (see the lower 

panel of Figure 7).

Example of Effective Marginal Tax Rates in 2014

Starting in 2014, some low- and moderate-income families will become eligible for additional assistance with 

health insurance costs when certain provisions of the 

Affordable Care Act (ACA) are implemented.25 States will 

have the option of expanding Medicaid eligibility to 

individuals with income below 138 percent of FPL.26 In 

addition, taxpayers who do not have other health insurance and whose income is between 100 percent and 

400 percent of FPL will be eligible for refundable tax 

credits to assist with the purchase of health insurance 

through newly created exchanges. The amount of that 

credit will equal the difference between the premium for 

a qualifying plan and the required family contribution; 

that required contribution will rise as the taxpayer’s 

income increases, causing the dollar value of the credit to 

fall. Also, some of those taxpayers will qualify for costsharing subsidies, which also decrease as income rises, to 

reduce out-of-pocket expenditures.27 (For more details 

about the provisions of the ACA, see Appendix A.) 

That expansion of subsidized health insurance will reduce 

marginal tax rates for some people and increase them for 

others. In states that choose to expand Medicaid benefits, 

families with very low income will no longer face the 

Medicaid cliff until the taxpayer’s income exceeds a 

higher threshold than applies today, up to 138 percent 

of FPL. Families who lose eligibility for Medicaid and 

whose income is above 100 percent of FPL will be able to 

shift to the premium assistance credits—protecting them 

from the cliff as health benefits phase out more gradually. 

For other individuals, however, the exchange subsidies 

(both premium assistance credits and cost-sharing subsidies) will increase their marginal tax rates—because of the 

gradual phaseouts of the exchange subsidies as income 

rises above 100 percent and as a result of the cliffs that 

will occur when people are no longer eligible for assistance with the cost of health insurance. (Eligibility for 

cost-sharing subsidies ceases at 250 percent of FPL and 

for premium assistance credits at 400 percent of FPL.)

In states that expand Medicaid fully to 138 percent of 

FPL, the introduction of premium assistance credits in 

2014 will increase marginal tax rates for single parents 

with one child whose income is between $21,500 and 

$62,300, which corresponds to 138 percent and 400 percent of FPL for a household of two (see the top panel of 

Figure 7). Over that income range, marginal tax rates 

will increase by 9.5 to 18.2 percentage points. Because 

the premium assistance credits will start in the EITC 

phaseout range, marginal federal income tax rates can 

be expected to increase from 31 percent to as much as 

47 percent (the premium assistance credits add 17 percentage points) when the taxpayer’s income is between 

$21,500 and $38,300. (In the upper panel of Figure 7, 

the inclusion of premium assistance credits creates a 

jagged appearance in the marginal rates because the 

family’s required contribution increases throughout the 

income range; within each bracket of the credit schedule, 

the percentage contributed by the taxpayer grows at a 

different rate.) For taxpayers claiming TANF, housing, 

and SNAP benefits, marginal tax rates under the tax 

and transfer systems will range between 29 percent and 

88 percent (see lower panel of Figure 7).

Overall Distribution

Incorporating the effects of all applicable taxes and 

SNAP benefits, the marginal tax rate for filers in the 

sample could be expected to increase, on average, from 

25. The Affordable Care Act comprises the Patient Protection and 

Affordable Care Act and the health care provisions of the Health 

Care and Education Reconciliation Act of 2010.

26. Much uncertainty surrounds the expansion of Medicaid, which 

is scheduled to go into effect in 2014 under the ACA. See 

Congressional Budget Office, Estimates for the Insurance Coverage 

Provisions of the Affordable Care Act Updated for the Recent Supreme 

Court Decision (July 2012). 

27. Unlike the premium assistance credits, the cost-sharing subsidies 

are not provided through the individual income tax code. 

Although cost-sharing subsidies affect marginal tax rates, they are 

not included in the marginal federal income tax rate. 
28 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

30 percent under 2012 law to 32 percent under 2013 

law. That rate would increase to 35 percent under 2014 

law.28

As a result of higher tax liabilities under the regular 

income tax system, a slightly larger share of filers in the 

sample with income below 450 percent of FPL would be 

subject to the regular income tax under 2013 law instead 

of the AMT. Statutory rates contribute 10 percentage 

points to marginal tax rates under 2013 law, an increase 

from 8 percentage points under 2012 law (see Table 5). 

Combined with other provisions, federal individual 

income taxes would add 12 percentage points to marginal 

tax rates, on average. Marginal tax rates vary substantially 

across the range of income and for taxpayers with similar 

earnings relative to FPL.

Under 2014 law, federal income taxes would contribute 

13 percentage points to the average marginal tax rate 

(see Table 6). CBO estimates that about 11 percent of 

nonelderly, nondisabled working taxpayers with income 

below 450 percent of FPL would receive the premium 

assistance credits; the rest either would not meet the 

income requirements or would receive health insurance 

through Medicaid or another plan. The premium assistance credits will increase recipients’ marginal tax rates 

by an average of 12 percentage points and the overall 

marginal rate by 1 percentage point. As under 2012 law, 

taxpayers with lower earnings relative to FPL would 

experience greater variation in marginal tax rates than 

taxpayers with higher earnings relative to FPL (see 

Figure 8). However, the range between marginal tax rates 

in the 10th to 90th percentiles under 2014 law would be 

slightly higher than the range under 2012 law because of 

the increases in marginal tax rates that will result when 

the higher payroll tax rate is reinstated, the 2010 tax act 

expires, and premium assistance credits are implemented.

28. The distributional analysis of marginal tax rates under 2014 

law was undertaken before the Supreme Court ruled on the 

constitutionality of the ACA. As a result, the analysis reflects the 

assumption that all states expand Medicaid as specified originally 

in the ACA. The analysis also reflects the assumption that the 

share of the population receiving exchange subsidies under 2014 

law will be the same as the projected share of the population 

receiving subsidies in 2017 if all states expand Medicaid as 

specified originally in the ACA (see Congressional Budget Office, 

Updated Estimates for the Insurance Coverage Provisions of the 

Affordable Care Act, March 2012). Following the recent Supreme 

Court decision giving states the option to expand Medicaid, some 

individuals whose income is between 100 percent and 138 percent 

of FPL would probably be eligible for exchange subsidies instead 

of Medicaid (see Congressional Budget Office, Estimates for the 

Insurance Coverage Provisions of the Affordable Care Act Updated 

for the Recent Supreme Court Decision, July 2012). Because 

those individuals represent a small share of the total population 

receiving the subsidies in 2017 and most of them would face only 

a 2 percentage-point increase in their marginal tax rates from the 

premium assistance credits, including those additional subsidies 

would not significantly change the estimated distribution of 

marginal tax rates.
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 29

CBO

Table 5.

Contributions of Tax Provisions and SNAP Benefits to the Marginal Tax Rates of 

Low- and Moderate-Income Workers Under Provisions of Law in Effect in 2013

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns 

filed in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey 

and the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who 

had earnings in 2006, and whose adjusted gross income was below 450 percent of federal poverty guidelines. It was weighted to be 

representative of the population of tax filers. 

The simulated marginal tax rates were based on taxpayers’ total compensation before their employers’ share of payroll taxes was

deducted.

EITC = earned income tax credit; SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); 

n.a. = not applicable.

a. Provisions of the federal individual income tax do not add up to the marginal federal individual income tax rate because not all provisions 

of the tax code are shown.

b. Accounts for the deductibility of state individual income taxes on federal individual income tax returns for people who itemize. 

Federal Individual Income Taxesa 100.0 11.7 11.7

 (Regular income tax) 93.6 10.5 9.9

EITC 25.8 1.8 0.5

Phase-in 7.3 -23.8 -1.7

Plateau 4.1 0 0

Phaseout 14.4 15.3 2.2

Child tax credit 21.2 -0.9 -0.2

Alternative minimum tax 6.4 25.6 1.6

Federal Payroll Taxes 98.9 13.9 13.7

State Individual Income Taxes 60.8 4.3 2.6

SNAP Benefits 17.7 25.2 4.5

Interactions Among Tax Provisionsb 23.3 -0.7 -0.2

Average Marginal Tax Rate (Percent) n.a. n.a. 32.4

Returns Affected Those Affected Aggregate Marginal Rate

(Percent) (Percent) (Percentage points)

Marginal statutory tax rate

Share of Marginal Rate Effect for Contribution to
30 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Table 6.

Contributions of Tax Provisions and SNAP Benefits to the Marginal Tax Rates of 

Low- and Moderate-Income Workers Under Provisions of Law in Effect in 2014

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns 

filed in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey 

and the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who 

had earnings in 2006, and whose adjusted gross income was below 450 percent of FPL. It was weighted to be representative of the

population of tax filers. 

The simulated marginal tax rates were based on taxpayers’ total compensation before their employers' share of payroll taxes was

deducted.

CBO assumes that states expand Medicaid as originally specified in the Affordable Care Act (ACA) to cover individuals with income up 

to 138 percent of FPL. The ACA comprises the Patient Protection and Affordable Care Act (Public Law 111-148) and the health care

provisions of the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152).

EITC = earned income tax credit; SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); 

FPL = federal poverty guidelines; n.a. = not applicable.

a. Provisions of the federal individual income tax do not add up to the marginal federal individual income tax rate because not all provisions 

of the tax code are shown.

b. Accounts for the deductibility of state income taxes on federal income tax returns for people who itemize.

Federal Individual Income Taxesa 100.0 13.0 13.4

(Regular income tax) 92.7 10.6 9.9

EITC 25.6 2.4 0.6

Phase-in 6.9 -23.4 -1.6

Plateau 4.1 0 0

Phaseout 14.5 15.4 2.2

Child tax credit 20.9 -0.8 -0.2

Premium assistance credits 10.7 12.4 1.3

Alternative minimum tax 7.3 25.6 1.9

Federal Payroll Taxes 98.9 13.9 13.8

State Individual Income Taxes 60.6 4.3 2.6

SNAP Benefits 17.3 24.3 4.2

Cost-Sharing Subsidy 7.4 13.0 1.0

Interactions Among Tax Provisionsb 24.6 -0.7 -0.2

Average Marginal Tax Rate (Percent) n.a. n.a. 34.8

Share of

Those Affected Aggregate Marginal Rate

(Percent) (Percent) (Percentage points)

Marginal statutory tax rate

Returns Affected

Marginal Rate Effect for Contribution to
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 31

CBO

Figure 8.

Distribution of Marginal Tax Rates, by Earnings Relative to Federal Poverty 

Guidelines, Under 2014 Law

(Tax rate in percent)

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns filed 

in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey 

and the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who 

had earnings in 2006, and whose adjusted gross income was below 450 percent of FPL. It was weighted to be representative of the

population of tax filers.

The simulated marginal tax rates include the combined effects of federal individual income taxes (under provisions scheduled to

go into effect in 2014), state individual income taxes (under provisions in effect in 2006), federal payroll taxes, and the reduction 

in benefits provided through SNAP and cost-sharing subsidies. CBO assumes states expand Medicaid as originally specified in the

Affordable Care Act to cover individuals with income up to 138 percent of FPL. The simulated marginal tax rates were based on taxpayers’ total compensation before their employers’ share of payroll taxes was deducted.

The bold line in the center (the 50th percentile) represents the median marginal tax rate for a given earnings group, weighted by 

returns. The area between the 25th and 75th percentiles is the range of tax rates that the middle half of tax returns in each group 

faces. The area between the 10th and 90th percentiles is the range of tax rates that the middle 80 percent of tax returns in each group 

faces.

FPL = federal poverty guidelines; SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program).

0–49 50–99 100–149 150–199 200–249 250–299 300–349 350–399 400+

-10

0

10

20

30

40

50

60

70

10th Percentile

25th Percentile

Median

75th Percentile

90th Percentile

10th to 90th

Percentile

Under

2012 Law

Earnings as a Percentage of FPL

CBO

Appendix A: 

Tax Provisions and Benefit Programs 

Affecting Effective Marginal Tax Rates

In this appendix, the Congressional Budget Office 

(CBO) provides additional details about some provisions 

of the federal income tax system and features of meanstested transfer programs that contribute to marginal tax 

rates on earnings. Benefits available through the tax 

system include the earned income tax credit (EITC) and 

the child tax credit, both of which help reduce the tax 

burden of low- and moderate-income families. As earnings increase, those benefits phase out or cease, and 

individuals face greater tax liability. At higher levels of 

earnings, those individuals can even become subject to 

the alternative minimum tax (AMT), which is another 

way of computing federal tax liability, with its own 

definition of taxable income and rate structure. Outside 

of the tax system, assistance is available to families of low 

and moderate income through various transfer programs, 

including Temporary Assistance for Needy Families 

(TANF), the Housing Choice Voucher Program, and 

the Supplemental Nutrition Assistance Program 

(SNAP, formerly known as the Food Stamp program). 

This appendix also discusses health insurance benefits 

provided through Medicaid and the Children’s Health 

Insurance Program (CHIP) as well as the health insurance cost-sharing subsidies and premium assistance 

credits that will be implemented in 2014 under the 

Affordable Care Act.1

Earned Income Tax Credit

Eligibility for the earned income tax credit is based on 

several factors, including the taxpayer’s earnings (or, if 

it is larger, his or her adjusted gross income) and the 

number of qualifying children the taxpayer claims. 

Earnings include wages, salaries, and net earnings from 

self-employment. Adjusted gross income (AGI) includes 

earnings and other income from taxable sources (such 

as investment income) net of certain deductions. For 

purposes of the EITC, qualifying children must meet 

requirements related to age, relationship to taxpayer, 

residency, and tax filing.

The credit is refundable; in other words, if the amount of 

the credit exceeds the taxpayer’s other income tax liability, 

the excess is paid as a refund. The main features of the 

EITC—the rate at which it phases in and out, the maximum amount of the credit, and the income thresholds 

that define the phase-in and phaseout ranges—depend on 

whether the taxpayer has no children, one child, two children, or three or more children (see Table A-1). Those 

features are generally the same for taxpayers who file singly, jointly, or as head of household (with the exception 

that the income level at which the EITC begins to phase 

out is currently higher for married couples filing jointly).

The EITC dramatically alters marginal tax rates for some 

taxpayers who claim it, especially those with children. For 

individuals with income in the credit’s phase-in range, 

marginal rates fall below statutory rates, usually to negative levels. (Statutory income tax rates are specified in law 

and apply to the last dollar of earnings.) In such 

instances, for each additional dollar earned, taxpayers 

receive additional money back from the government. 

Throughout the plateau—the income range between the 

two thresholds wherein taxpayers receive the maximum 

credit—the EITC has no effect on marginal tax rates. In 

the phaseout range, taxpayers’ marginal rate exceeds their 

statutory rate by the phaseout rate.

1. The Affordable Care Act comprises the Patient Protection and 

Affordable Care Act and the health care provisions of the Health 

Care and Education Reconciliation Act of 2010.
34 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Table A-1. 

Schedule for the Earned Income Tax Credit, by the Taxpayer’s 

Number of Qualifying Children, 2012

Source: Internal Revenue Service.

Note: For the purposes of the earned income tax credit, qualifying children must meet requirements related to age, relationship to the 

taxpayer, residency, and tax filing.

a. Thresholds for married couples who file joint returns are $5,210 higher than the amounts indicated here.

Child Tax Credit

Taxpayers can claim a partially refundable credit of up 

to $1,000 for each child under the age of 17. In 2012, 

individuals whose tax liability before applying some tax 

credits is less than the value of the child tax credit can 

receive a refundable credit equal to 15 percent of their 

earnings above $3,000. Between that threshold and the 

income level at which other income tax liability exceeds 

the value of the child tax credit, an additional dollar of 

income increases the credit by 15 cents, lowering the 

marginal tax rate by 15 percentage points. Alternatively, 

taxpayers who have three or more children can calculate 

the refundable portion of their credit as the amount by 

which their share of payroll taxes (for Social Security and 

Medicare) exceeds the EITC and take the higher of the 

two refundable amounts. For taxpayers who take the 

refundable portion calculated in this manner, their 

marginal rate decreases by the difference between their 

payroll tax rate and the marginal rate from the EITC. 

The child tax credit phases out at a rate of 5 percent 

for taxpayers whose income exceeds a certain threshold. 

(In 2012, the thresholds are $75,000 for unmarried taxpayers and $110,000 for married taxpayers filing jointly.) 

For taxpayers in those income ranges, the phaseout 

of the child tax credit increases their marginal rate by 

5 percentage points. 

Alternative Minimum Tax

The individual alternative minimum tax is another 

method of computing federal income tax liability. To 

determine whether a taxpayer is subject to the AMT or 

to the regular income tax, the individual must recalculate 

his or her taxable income without subtracting certain 

items that are typically allowed under the regular income 

tax. Those items include the deduction for state and local 

taxes, personal exemptions, and the standard deduction. 

Instead, a taxpayer subtracts an AMT exemption. He or 

she then pays the higher of their AMT liability or liability 

under the regular individual income tax.

Income calculated under the AMT is taxed at two rates: 

26 percent on the first $175,000; and 28 percent on anything above that amount. At higher levels of income, the 

AMT exemption phases out at a rate of 25 percent, which 

increases marginal rates under the AMT to 32.5 percent 

and 35 percent. 

Under current law, the AMT’s reach will expand rapidly 

over time as rising incomes push more taxpayers onto its 

rolls. A temporary increase in the AMT exemption 

expired at the end of 2011. As a result, beginning in 

2012, the AMT exemption levels decreased from 

$48,450 to $33,750 for unmarried tax filers and from 

$74,450 to $45,000 for married couples filing jointly. 

Another provision of law that went into effect at the 

beginning of 2012 meant that taxpayers could no longer 

benefit from most personal nonrefundable credits if those 

credits made individual income tax liability less than it 

would be under the AMT. However, they could still use 

the EITC and the child tax credit to reduce their AMT 

liability through the end of 2012.

Number of

Children

0 7.65 6,210 475 7,770 7.65 13,980

1 34 9,320 3,169 17,090 15.98 36,920

2 40 13,090 5,236 17,090 21.06 41,952

3 or More 45 13,090 5,891 17,090 21.06 45,060

Phaseout Rangea Rate Phase-In Range Credit Phaseout Rangea Rate

(Percent) (Dollars) (Dollars) (Dollars) (Percent) (Dollars)

Phase-In End of Maximum Start of Phaseout End of
APPENDIX A EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 35

CBO

Temporary Assistance for 

Needy Families

The Temporary Assistance for Needy Families program 

provides cash assistance and in-kind benefits (including 

child care, transportation to work, and job training) to 

low-income families with children. (In its analysis, when 

examining the effects of TANF benefits on marginal tax 

rates, CBO focused on cash assistance only.) Because 

states administer TANF funds, the rules governing eligibility and benefit amounts vary widely. Childless adults 

are generally ineligible for TANF benefits, as are families 

whose income or assets are above given thresholds. Each 

state determines which types of assets and which sources 

of income are counted and where to set the thresholds for 

each. For participants, benefits change as income 

changes. Eligibility often depends on nonfinancial characteristics as well; for example, the TANF program limits 

the length of time a family can receive assistance. 

In fiscal year 2011, federal spending on TANF was about 

$18 billion (including both cash assistance and in-kind 

benefits). In an average month, 1.9 million families, consisting of 4.4 million people, received cash assistance. The 

contribution of TANF to marginal tax rates among lowand moderate-income workers is likely to be limited. The 

Department of Health and Human Services estimates 

that in 2005, roughly half of TANF recipients did not 

have any family member who was employed. Estimating 

how many families are actually eligible for TANF is more 

difficult than determining how many families participate 

in the program and receive benefits. According to one 

estimate, though, approximately 40 percent of the 

families who were eligible for TANF benefits in 2005 

received them.2

Housing Choice Voucher Program 

The Department of Housing and Urban Development 

funds the Housing Choice Voucher Program, which is 

also known as Section 8 because of its location in the 

legislation authorizing it. The Housing Choice Voucher 

Program provides subsidies to low- and moderate-income 

families who rent housing in the private market. For a 

family to qualify, the household’s annual gross income—

consisting of income (including TANF benefits) received 

by all members of the household, with some exceptions—must be less than 50 percent of the median family 

income in the area where the family lives. Priority is given 

to households with income under 30 percent of the area’s 

median family income.

The monthly subsidy is equal to the difference between a 

“reference rent,” known as the fair-market rent (typically 

the 40th percentile of rent in the area), and the family’s 

required contribution. The reference rent is adjusted for 

the size of the housing unit considered appropriate for 

the household. The family’s required contribution is 

whichever amount is greater: 30 percent of the household’s monthly net income; 10 percent of the household’s 

monthly gross income; or the minimum rent set by the 

public housing agency. (Net income is equal to gross 

income minus deductions for household members who 

are dependents, elderly or disabled, or for certain 

expenses, such as medical or child care.) Recipients of 

housing vouchers who claim the deduction for dependents face a marginal tax rate of 10 percent at the lowest 

levels of income and 30 percent at higher income levels. 

In fiscal year 2011, 2.2 million households received 

benefits through the Housing Choice Voucher Program. 

Federal spending on housing vouchers totaled about 

$19 billion. Demand for housing vouchers often exceeds 

the available funding, and public housing agencies commonly maintain waiting lists. One-third of participating 

households had earnings; the others either did not have 

any income or only had unearned income. 

Supplemental Nutrition 

Assistance Program

The Supplemental Nutrition Assistance Program 

provides benefits to households for purchasing food. 

Eligibility is determined on the basis of participation 

in other federal or state programs (known as categorical 

eligibility) or a household’s financial circumstances. 

To determine eligibility on the basis of financial circumstances, the income of all household members is 

combined to obtain monthly gross income. Various 

deductions are subtracted from that total to calculate 

monthly net income. SNAP allows a standard deduction 

that is based on household size, as well as deductions for 

20 percent of earnings, dependent care expenses, medical 

expenses, and high housing costs. The housing cost 

deduction (known as the excess shelter cost deduction) is 

2. For complete details, see Department of Health and Human 

Services, Office of the Assistant Secretary for Planning and 

Evaluation, Indicators of Welfare Dependence, Annual Report to 

Congress (2008), http://aspe.hhs.gov/hsp/indicators08/

index.shtml. 
36 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

equal, at most, to housing costs exceeding 50 percent of 

income after claiming other deductions. Housing costs 

include only what the individual pays and not the 

amount paid by a third party or through housing 

assistance (such as a housing voucher).

Typically, the household must meet an asset test and two 

income tests. Households without elderly or disabled 

members can have $2,000 in countable resources, and 

some assets (such as the value of the home and, in most 

states, the value of vehicles) are not included. On a 

monthly basis, gross income cannot exceed 130 percent 

of federal poverty guidelines (commonly known as the 

federal poverty level, so abbreviated as FPL), and net 

income cannot exceed 100 percent of FPL. Able-bodied 

adults who do not work and have no dependents face 

time limits on assistance. In recent years, most states have 

expanded the classification of households deemed categorically eligible; those households are subject to higher 

gross income limits or are exempt from asset and one or 

both income tests. 

A household’s monthly SNAP benefit is the difference 

between the maximum benefit on the basis of household 

size and 30 percent of the household’s net income. (A 

minimum benefit exists for households with fewer than 

three members; in fiscal year 2012, it is $16.) In calculating a household’s SNAP benefit, program administrators 

include TANF and Supplemental Security Income benefits in income. The income range over which SNAP benefits phase out depends on the household’s characteristics, 

such as its size, whether there is an elderly or disabled 

member, whether the household is categorically eligible, 

and whether it incurs expenses that can be deducted. 

(Benefits for categorically eligible households are based 

on their net income, as is the case with other households.) 

At very low levels of income, an additional dollar of earnings will not reduce benefits because the deductions 

exempt a certain amount of income from the benefit calculation. At higher levels of income, an additional dollar 

of earnings reduces benefits by 36 cents (if the household 

can claim the housing cost deduction) or 24 cents (if 

there is no change in the housing cost deduction). About 

70 percent of households receiving SNAP benefits claim 

the excess shelter deduction. SNAP benefits increase 

gross monthly income, on average, by 39 percent for all 

participants.3

In fiscal year 2011, an average of 45 million individuals 

received SNAP benefits each month. Federal expenditures totaled $78 billion, including administrative 

expenses. Both participation and spending were the highest they have ever been. About 30 percent of households 

receiving SNAP had earnings; the rest had no income or 

unearned income only. About 72 percent of individuals 

eligible for SNAP and 60 percent of eligible individuals 

in households with earnings received SNAP benefits.4

Medicaid and CHIP

Some low-income individuals receive health insurance 

coverage through Medicaid or the Children’s Health 

Insurance Program, which are funded at both the federal 

and the state level.5

 (CHIP provides health insurance to 

children whose families have income that exceeds 

Medicaid’s income thresholds but is below CHIP’s 

income thresholds.) States administer their Medicaid and 

CHIP programs under federal guidelines that specify a 

minimum set of services that must be provided to certain 

categories of low-income individuals. To be eligible for 

Medicaid, a person must have a low income and generally 

only minimal assets—although the financial limits vary, 

depending on the basis for an enrollee’s eligibility. Groups 

that must be eligible include children and families who 

would have qualified for the former Aid to Families with 

Dependent Children program, certain other low-income 

children and pregnant women, and most elderly and disabled individuals who qualify for Supplemental Security 

Income. States have flexibility to provide additional 

benefits and extend eligibility to additional categories 

of people. Most children in families with income under 

200 percent of FPL are eligible for Medicaid or CHIP, 

but their parents are generally not eligible unless their 

income is well below that level. (States typically disregard 

some portion of earnings, so income limits are effectively 

higher for employed parents than for unemployed 

parents.) Childless adults are generally ineligible for 

Medicaid unless they are disabled, pregnant, or elderly.

3. See Congressional Budget Office, The Supplemental Nutrition 

Assistance Program (April 2012).

4. See Joshua Leftin, Esa Eslami, and Mark Strayer, Trends in 

Supplemental Nutrition Assistance Program Participation Rates: 

2002 to 2009 (reported submitted by Mathematica Policy 

Research, Inc., to the Department of Agriculture, August 2011).

5. See Congressional Budget Office, The 2012 Long-Term Budget 

Outlook (June 2012), for more information about Medicaid and 

CHIP.
APPENDIX A EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 37

CBO

In fiscal year 2011, CBO estimates, an average of 56 million individuals received Medicaid benefits each month. 

Federal expenditures on Medicaid and CHIP totaled 

about $275 billion and $9 billion, respectively. The 

largest share of Medicaid spending reimbursed care for 

recipients who were elderly, blind, or disabled. 

Expanded Medicaid Eligibility and 

New Health Insurance Subsidies in 

2014

Certain provisions of the Affordable Care Act will affect 

marginal tax rates starting in 2014. That legislation will 

expand eligibility for Medicaid and provide some lowand moderate-income individuals and families with 

subsidies for purchasing health insurance in the form 

of refundable premium assistance tax credits and costsharing subsidies. 

Taxpayers whose modified adjusted gross income 

(MAGI)—AGI plus tax-exempt interest and income 

earned abroad—is under 138 percent of the federal 

poverty guidelines will be eligible for health insurance 

through Medicaid in states that choose to expand their 

Medicaid program.6

 Taxpayers with MAGI between 

100 percent and 400 percent of FPL will potentially be 

eligible for premium assistance credits to help with the 

costs of insurance purchased through the newly created 

exchanges in each state that will link people with insurance plans. Generally, individuals eligible for other health 

insurance coverage (through Medicare, Medicaid, or an 

employment-based plan) will not be able to receive these 

credits. Individuals who are eligible for an employmentbased plan that is deemed unaffordable, however, can 

receive the premium assistance credits.

The premium assistance credit equals the difference 

between the reference premium in the locality and the 

household’s contribution, which is a percentage of the 

taxpayer’s income.7

 In 2014, the percentages will be as 

follows:

 2 percent for households with income between 

100 percent and 133 percent of FPL;

 3 percent to 4 percent for households with income 

between 133 percent and 150 percent of FPL;

 4 percent to 6.3 percent for households with income 

between 150 percent and 200 percent of FPL;

 6.3 percent to 8.05 percent for households with 

income between 200 percent and 250 percent of FPL;

 8.05 percent to 9.5 percent for households with 

income between 250 percent and 300 percent of FPL; 

and

 9.5 percent for households with income between 

300 percent and 400 percent of FPL. 

Within each bracket, a household’s contribution toward 

premiums is based on the household’s income relative to 

the bracket’s start and end points. For example, a household with income that is 175 percent of FPL (placing it 

at the midpoint of the 150 percent to 200 percent 

bracket) will contribute 5.15 percent (the midpoint of 

4 percent and 6.3 percent) of its income toward the cost 

of premiums. 

As income increases, the amount of the premium assistance credit decreases in two ways. First, as income 

increases, the taxpayer contributes a higher percentage 

of his or her income. Second, the percentage is applied 

to a higher income level. For example, if the income of a 

single taxpayer at 175 percent of FPL ($19,900) increases 

by $100, his or her contribution toward premiums rises 

from $1,025 (5.15 percent of $19,900) to $1,038 

(5.19 percent of $20,000). The subsidy, then, decreases 

by $13, resulting in a marginal tax rate of 13 percent. 

Based on a calculation of that sort, premium assistance 

credits increase marginal rates by:

 2 percentage points for taxpayers with income 

between 100 percent and 133 percent of FPL;

6. The Patient Protection and Affordable Care Act expands Medicaid 

eligibility to taxpayers with income up to 133 percent of FPL, 

and the health care provisions of the Health Care and Education 

Reconciliation Act of 2010 disregard income up to 5 percent of 

FPL in determining eligibility. Consequently, taxpayers with 

income up to 138 percent of FPL will be eligible for Medicaid in 

states that choose to expand their Medicaid program.

7. The exchanges will group health plans into four tiers. Plans in 

each tier, labeled “bronze,” “silver,” “gold,” and “platinum,” will 

cover a specified set of benefits, paying (on average) 60 percent, 

70 percent, 80 percent, and 90 percent, respectively, of a 

beneficiary’s claims. The reference premium is the cost of the 

second-lowest-cost silver plan in the locality.
38 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

 12 to 13 percentage points for taxpayers with income 

between 133 percent and 150 percent of FPL; 

 11 to 15 percentage points for taxpayers with income 

between 150 percent and 200 percent of FPL;

 13 to 17 percentage points for taxpayers with income 

between 200 percent and 250 percent of FPL;

 15 to18 percentage points for taxpayers with income 

between 250 percent and 300 percent of FPL; and

 9.5 percentage points for taxpayers with income 

between 300 percent and 400 percent of FPL.

Because the federal poverty guidelines adjust for household size, different brackets of the credit schedule apply 

to taxpayers with the same MAGI but different-sized 

households. The subsidy amount depends on whether the 

taxpayer is buying individual or family insurance coverage, but the subsidy phases out at the same rate.

In addition, households with income between 100 percent and 250 percent of FPL who purchase insurance 

through the exchanges will be eligible for cost-sharing 

assistance to reduce their out-of-pocket costs. Households with income below 150 percent of FPL will be 

eligible for plans with an actuarial value of 94 percent 

(that value is the average share of costs for covered benefits that will be paid by the plan), households with 

income between 150 percent and 200 percent of FPL will 

be eligible for plans with 87 percent actuarial value, and 

those with income between 200 percent and 250 percent 

will be eligible for plans with 73 percent actuarial value. 

As income crosses each threshold (150 percent, 200 percent, and 250 percent of FPL), marginal rates will be 

sharply higher—largely because a small increase in 

income that moves the household into a new bracket 

results in a relatively large change in benefits as the individual or family loses eligibility for subsidies for plans 

with higher actuarial values. Because those subsidies are 

not provided through the individual income tax system, 

they will not affect the marginal rate under the federal 

income tax code; however, they contribute to the 

effective marginal rate, which accounts for both taxes 

and transfers. 
CBO

Appendix B:

Distribution of Marginal Tax Rates by Earnings

In its main analysis, the Congressional Budget Office 

(CBO) simulated the tax liabilities of tax filers to illustrate the distribution of marginal tax rates for low- and 

moderate-income workers. Those simulations were based 

on income tax returns that were weighted to be representative of the population. CBO used returns-weighted 

measures of marginal tax rates because individuals and 

families of low and moderate income, the focus of the 

agency’s main analysis, account for only about 40 percent 

of earnings in the economy. For this appendix, the agency 

took a different approach, weighting each return by the 

amount of earnings reported.1

 That approach places more 

emphasis on the marginal tax rates faced by higherincome workers and better reflects the marginal tax rates 

that affect labor market decisions of those workers.

Evaluating the distribution of marginal rates on the basis 

of taxpayers’ earnings yields different results than a distributional analysis that examines the share of taxpayers 

facing a given statutory marginal rate (the rates specified 

in law that apply to the last dollar of earnings) or effective 

marginal rate (the increase in taxes or the reduction in 

government benefits from an additional dollar of 

income). For instance, the share of taxpayers in the sample who faced a statutory marginal tax rate of zero—

26 percent—accounted for only 8 percent of the total 

labor income earned by people in that sample. At the 

same time, the share of taxpayers in the sample who paid 

the alternative minimum tax (AMT)—10 percent—

accounted for 28 percent of earnings within the sample 

(see Table B-1). On average, the earnings-weighted 

statutory tax rate (the rate that would apply, on average, 

if each taxpaying unit increased its earnings by an equal 

percentage) was 13 percent for this sample under the 

regular income tax, higher than the returns-weighted 

statutory tax rate of 10 percent.

Earnings-weighted measures of effective marginal tax 

rates are also higher than returns-weighted measures. 

Under the federal individual income tax system, about 

half of the income earned by low- and moderate-income 

workers faces an effective marginal tax rate of between 

10 percent and 19 percent, and 37 percent of earnings 

incurs marginal tax rates of between 20 percent and 

29 percent (see Figure B-1)—which means a total of 

about 87 percent of earnings faces a marginal tax rate of 

between 10 and 29 percent. In contrast, slightly over twothirds of tax returns in this group faced marginal rates of 

between 10 percent and 29 percent. Including the effects 

of state income taxes, federal payroll taxes, and reductions 

in benefits obtained through the Supplemental Nutrition 

Assistance Program (SNAP) shifts the distribution of 

marginal tax rates higher. For this sample, about 37 percent of earnings is subject to marginal tax rates of 

between 30 percent and 39 percent, and 23 percent faces 

marginal tax rates of between 40 percent and 49 percent. 

On average, the earnings-weighted marginal tax rate 

for low- and moderate-income workers under 2012 

law is 35 percent, compared to 30 percent using a 

returns-weighted measure (see Table B-2). Under an 

earnings-weighted measure, provisions of the federal 

individual income tax, particularly the AMT, and state 

income taxes have a greater impact on the overall 

1. As with the main analysis, the analysis presented here is based on 

information from a public-use sample of income tax returns filed 

in 2006 (the most recent public-use data available at the time the 

analysis was undertaken). The sample was restricted to taxpayers 

who had earnings, who were under age 65 and not disabled, and 

whose adjusted gross income was under 450 percent of the federal 

poverty guidelines.
40 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Table B-1. 

Distribution of Earnings of Low- and Moderate-Income Workers, by 

Statutory Marginal Tax Rate, Under 2012 Law

(Percent)

Source: Congressional Budget Office.

Notes: CBO’s simulations were based on information from a public-use sample of federal individual income tax returns filed in 2006. The 

sample was restricted to taxpayers under the age of 65 who were not disabled, who had earnings in 2006, and whose adjusted gross 

income was below 450 percent of federal poverty guidelines.

Unlike the simulations in the main analysis, simulations were weighted on the basis of taxpayers’ earnings. 

marginal tax rate than is the case under a returnsweighted measure. About 28 percent of earnings in the 

sample are subject to the AMT, which contributes 7 percentage points, on average, to the marginal tax rate. 

Because taxpayers who receive the earned income tax 

credit or SNAP benefits generally have lower earnings 

than do other taxpayers, the share of earnings affected by 

those provisions is smaller than the share of returns 

affected. According to CBO’s estimates, earningsweighted marginal tax rates for low- and moderateincome workers will rise, on average, to 37 percent under 

the provisions of 2013 law and to 39 percent under 2014 

law because of the increases in marginal tax rates that will 

result from changes in various provisions of law. 

Statutory Marginal Tax Rate

8

17

43

4

0

0

0

Alternative Minimum Tax 28 ____

Total 100

Share of Earnings Facing That Rate

0

10

15

25

28

33

35
APPENDIX B EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 41

CBO

Figure B-1.

Share of Earnings Received by Low- and Moderate-Income Taxpayers, by 

Marginal Tax Rate, Under 2012 Law

(Percentage of earnings)

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns filed 

in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey and 

the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who had 

earnings in 2006, and whose adjusted gross income was below 450 percent of federal poverty guidelines. 

The simulated marginal tax rates include the effects of federal individual income taxes and the combined effects of federal individual 

income taxes, state individual income taxes (under provisions in effect in 2006), federal payroll taxes, and the reduction in SNAP 

benefits. The simulated marginal tax rates were based on taxpayers’ total compensation before their employers’ share of payroll taxes 

was deducted.

SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program).

Below 0 0–9 10–19 20–29 30–39 40–49 50–59 60–69 70–79 80 or Above

0

10

20

30

40

50

Marginal Tax Rate (Percent)

Effects of Federal Income Taxes Only

Combined Effects of Federal and State

Income Taxes, Federal Payroll Taxes, and SNAP Benefits
42 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

Table B-2. 

Earnings-Weighted Contributions of Tax Provisions and SNAP Benefits to the 

Marginal Tax Rates of Low- and Moderate-Income Workers Under Provisions of 

Law in Effect in 2012, 2013, and 2014

(Percent)

Source: Congressional Budget Office based on a public-use sample of tax returns from the Internal Revenue Service and survey data from 

the Census Bureau.

Notes: CBO’s simulations of tax liabilities and SNAP benefits were based on information from a public-use sample of income tax returns 

filed in 2006 supplemented with information from the 2007 Annual Social and Economic Supplement of the Current Population Survey 

and the 2006 American Community Survey. The sample was restricted to taxpayers under the age of 65 who were not disabled, who 

had earnings in 2006, and whose adjusted gross income was below 450 percent of FPL.

Unlike the simulations in the main analysis (which were weighted to be representative of the population of tax filers and did not take 

earnings into account), these were weighted on the basis of taxpayers’ earnings. 

The simulated marginal tax rates were based on taxpayers’ total compensation before their employers’ share of payroll taxes was

deducted.

CBO assumes states expand Medicaid in 2014 as originally specified in the Affordable Care Act (ACA) to cover individuals with income 

up to 138 percent of FPL. The ACA comprises the Patient Protection and Affordable Care Act (Public Law 111-148) and the health care 

provisions of the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152).

FPL = federal poverty guidelines; SNAP = Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); 

EITC = earned income tax credit; n.a. = not applicable.

a. Provisions of the federal individual income tax do not add up to the marginal federal individual income tax rate because not all provisions 

of the tax code are shown. 

b. Accounts for the deductibility of state income taxes on federal income tax returns for people who itemize.

Federal Individual Income Taxa 100.0 100.0 100.0 17.2 17.4 18.8 17.2 17.4 18.8

Marginal statutory tax rate

(Regular income tax) 72.3 81.0 78.8 11.9 13.4 13.5 8.6 10.9 10.7

EITC 13.9 13.6 13.5 10.3 10.0 10.4 1.4 1.4 1.4

Phase-in 1.2 1.5 1.4 -29.1 -27.2 -26.5 -0.4 -0.4 -0.4

Plateau 2.1 1.6 1.6 0 0 0 0 0 0

Phaseout 10.6 10.5 10.6 16.9 16.8 16.8 1.8 1.8 1.8

Child tax credit 52.5 32.7 31.1 -3.8 -0.5 -0.5 -2.0 -0.2 -0.2

Premium assistance credits n.a. n.a. 7.9 n.a. n.a. 13 n.a. n.a. 1

Alternative minimum tax 27.7 19.0 21.2 25.7 25.6 25.5 7.1 4.9 5.4

Federal Payroll Taxes 99.0 99.0 99.0 12.0 13.6 13.6 11.8 13.5 13.5

State Individual Income Taxes 72.5 72.6 72.3 4.9 4.8 4.8 3.5 3.5 3.5

SNAP Benefits 10.1 10.1 9.8 25.6 25.7 24.5 2.6 2.6 2.4

Cost-Sharing Subsidy n.a. n.a. 4.3 n.a. n.a. 20.2 n.a. n.a. 0.9

42.5 40.5 43.4 -0.9 -0.8 -0.9 -0.4 -0.3 -0.4

n.a. n.a. n.a. n.a. n.a. n.a. 34.8 36.6 38.6

(Percent)

Affected by Provision

2012 2013 2014

(Percent)

Those Affected

2012 2013

Contribution to

Interactions Among 

Average Marginal Tax Rate

(Percent)

2014

(Percentage points)

Aggregate Marginal Rate

2012 2013 2014

Share of Dollars Marginal Rate Effect for

Tax Provisionsb
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 43

CBO

List of Tables and Figures

Tables

S-1. Contributions of Tax Provisions and SNAP Benefits to the Marginal 

Tax Rates of Low- and Moderate-Income Workers Under 

Provisions of Law in Effect in 2012, 2013, and 2014 vi

1. Statutory Federal Individual Income Tax Brackets, by Income Range, 2012 4

2. Federal Spending for Selected Means-Tested Transfer Programs and 

Number of Participants in Fiscal Year 2011 10

3. Contributions of Tax Provisions and SNAP Benefits to the Marginal 

Tax Rates of Low- and Moderate-Income Workers Under 

Provisions of Law in Effect in 2012 20

4. Distribution of Individual Income Tax Returns Filed by Low- and ModerateIncome Workers, by Statutory Marginal Tax Rate, Under 2012 Law 21

5. Contributions of Tax Provisions and SNAP Benefits to the Marginal 

Tax Rates of Low- and Moderate-Income Workers Under 

Provisions of Law in Effect in 2013 29

6. Contributions of Tax Provisions and SNAP Benefits to the Marginal 

Tax Rates of Low- and Moderate-Income Workers Under 

Provisions of Law in Effect in 2014 30

A-1. Schedule for the Earned Income Tax Credit, by the Taxpayer’s 

Number of Qualifying Children, 2012 34

B-1. Distribution of Earnings of Low- and Moderate-Income Workers, by 

Statutory Marginal Tax Rate, Under 2012 Law 40

B-2. Earnings-Weighted Contributions of Tax Provisions and SNAP Benefits to the 

Marginal Tax Rates of Low- and Moderate-Income Workers Under 

Provisions of Law in Effect in 2012, 2013, and 2014 42

Figures

S-1. Disposable Income for a Hypothetical Single Parent with One Child, by 

Earnings, in 2012 v

S-2. Range of Marginal Tax Rates Between the 10th and 90th Percentiles, by 

Earnings Group, Under 2012 Law vii

1. Dollar Amount of Child-Related Tax Credits for a Hypothetical 

Single Parent with One Child, by Earnings, in 2012 5

2. Marginal Tax Rates for a Hypothetical Single Parent with One Child, by 

Earnings, in 2012 6
44 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS NOVEMBER 2012

CBO

3. Share of Returns Filed by Low- and Moderate-Income Taxpayers, by 

Marginal Tax Rate, Under 2012 Law 22

4. Share of Returns Filed by All Taxpayers, by Marginal Tax Rate, Under 2012 Law 23

5. Distribution of Marginal Tax Rates, by Earnings Relative to Federal 

Poverty Guidelines, Under 2012 Law 24

6. Distribution of Marginal Tax Rates, by Taxpayer Characteristics, Under 2012 Law 25

7. Marginal Tax Rates for a Hypothetical Single Parent with One Child, by 

Earnings, Between 2012 and 2014 26

8. Distribution of Marginal Tax Rates, by Earnings Relative to Federal 

Poverty Guidelines, Under 2014 Law 31

B-1. Share of Earnings Received by Low- and Moderate-Income Taxpayers, by 

Marginal Tax Rate, Under 2012 Law 41

Figures (Continued)
NOVEMBER 2012 EFFECTIVE MARGINAL TAX RATES FOR LOW- AND MODERATE-INCOME WORKERS 45

CBO

About This Document

This Congressional Budget Office (CBO) report was prepared at the request of the Chairman of 

the Senate Committee on Finance. In keeping with CBO’s mandate to provide objective, impartial 

analysis, the report makes no recommendations.

Shannon Mok of CBO’s Tax Analysis Division prepared the study under the direction of 

Janet Holtzblatt and Frank Sammartino. Ed Harris and Jonathan Schwabish of CBO provided 

helpful comments on the report. Stacy Dickert-Conlin of Michigan State University, Ron Haskins of 

the Brookings Institution, and Elaine Maag, Caleb Quakenbush, and Eugene Steuerle of the Urban 

Institute also reviewed the report. The assistance of external reviewers implies no responsibility for the 

final product, which rests solely with CBO.

Loretta Lettner edited the study. Jeanine Rees and Maureen Costantino prepared the report for 

publication. An electronic version is available on CBO’s Web site www.cbo.gov.

Douglas W. Elmendorf 

Director

November 2012