How Do the Presidential Candidates’ Tax Plans Affect Taxpayers’ Marginal Tax Rates?

The Presidential candidates have proposed comprehensive tax plans that reshape tax policy in important ways. A perhaps neglected aspect of their tax plans is how they alter effective marginal tax rates, the amount of tax that people pay out of their last dollar of income. High marginal tax rates can be economically harmful because some decisions may be based more on tax considerations than on economic merit. Although Senator Obama’s plan lowers the already negative marginal tax rates for the lowest income taxpayers, most low- and moderate-income couples would see their effective marginal tax rates rise, in some cases, significantly. Senator McCain’s tax plan also changes marginal tax rates. His proposal to replace the exclusion for employer-based health insurance with a new health tax credit boosts taxpayers’ taxable incomes by their health insurance premiums which generally pushes taxpayers into higher tax brackets, but not to as great an extent as Senator Obama’s tax plan.

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