Current Year Tax Laws that Cause Low Visibility of an Individual's Effective Marginal Tax Rate

Abstract:     
More than five years ago, the Joint Committee on Taxation released a report identifying phase-outs, limitations, and floors in the code that can cause an individual's effective marginal tax rate (MTR) to be higher than their statutory tax rate (that is, tax rate for their highest taxable income bracket). This variance occurs because the identified provisions reduce the deductions, credits, and other tax benefits to which taxpayers are otherwise entitled, thus increasing MTRs without modifying the published tax rate schedules. The JCT report estimated that these provisions affect one out of four individual taxpayers. The heart of the JCT report is a table that lists the provisions, displays the income range over which each provision occurs, and contains formulas to determine MTRs applicable to each provision. Many significant changes have occurred to the provisions in this table over the last five years. This article updates the 1998 table to the 2003 tax year and reorganizes it according to type of taxpayer. It also summarizes some academic research on taxpayers' decisions when their MTRs and statutory tax rates differ and the implications of this research to tax policy makers. It concludes with three examples illustrating how to use the formulas in the 2003 table to quickly compute MTRs.

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