Designing a Work-Friendly Tax System

[Excerpt] Taxes tend to influence individual choices between labor and leisure, and high effective marginal tax rates on earned income tend to discourage work. In particular, the empirical evidence shows that high effective marginal tax rates tend to discourage work by low- and moderate-income individuals, especially those that are trying to work their way out of the welfare system. Unfortunately, the current federal tax system often imposes its highest effective marginal tax rates on just those individuals. The purpose of this paper is to suggest some simple ways to reduce those high effective marginal tax rates. One approach would be to replace the current earned income tax credit with a $2,000 per worker credit and a refundable $1,000 per child tax credit. A more comprehensive approach would be to integrate the individual income tax and Social Security tax systems into a single, comprehensive income tax system with refundable $2,000 per worker earned income tax credits and with $1,000 or $2,000 per person refundable personal tax credits or demogrants. In short, this paper considers how to make the federal tax system more work-friendly for low- and moderate-income workers