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(reply in place of broken edit functionality) Actually I think the main reason why we have a high marginal tax rate on low income people, is a deeper reason whi

(reply in place of broken edit functionality) Actually I think the main reason why we have a high marginal tax rate on low income people, is a deeper reason which is that incentives on the bottom end are more "expensive" because they propagate upwards. E.g. to incentivize a person earning $10000 a year, you need to give then $X for every dollar they earn, but then these affects the after tax earnings of everyone earning above $10000 a year. Sorry if this is vague but this comes from various results/methods in mechanism design theory. Unfortunately as is often the case, the advocates of basic income (not you in particular) are too political, while the economists don't chime in on political matters when they should.

evanpw 11y ago
I think you're overthinking this. If you want to give a benefit to low-income people, then either you phase out slowly and it costs a lot, or you phase out quickly and you have high effective tax rates. And the people passing the laws probably pay a lot more attention to total budget cost than to the effects on effective marginal tax rates, so you end up with a lot of programs that have fast phase-outs.
- google15 11y ago
  The budget has to balance, so the question is not how much the system costs, but what are the incentive effects on the (wealthier) people who pay for it. If you agree with me that phasing the benefit out slowly "costs a lot" then you actually agree with my reasoning.
  - evanpw 11y ago
    Maybe I'm just misunderstanding, but you're talking as if the current system was consciously selected because of some inherent advantages it has over the alternatives. I don't think that's really true, and I would argue that the high marginal tax rates on low-income people are less the result of a careful analysis of trade-offs, and more the result of a flaw in the incentive structure for law-makers (on-budget costs look worse than off-budget costs).

evanpw 11y ago

I think you're overthinking this. If you want to give a benefit to low-income people, then either you phase out slowly and it costs a lot, or you phase out quickly and you have high effective tax rates. And the people passing the laws probably pay a lot more attention to total budget cost than to the effects on effective marginal tax rates, so you end up with a lot of programs that have fast phase-outs.

google15 11y ago
The budget has to balance, so the question is not how much the system costs, but what are the incentive effects on the (wealthier) people who pay for it. If you agree with me that phasing the benefit out slowly "costs a lot" then you actually agree with my reasoning.
- evanpw 11y ago
  Maybe I'm just misunderstanding, but you're talking as if the current system was consciously selected because of some inherent advantages it has over the alternatives. I don't think that's really true, and I would argue that the high marginal tax rates on low-income people are less the result of a careful analysis of trade-offs, and more the result of a flaw in the incentive structure for law-makers (on-budget costs look worse than off-budget costs).