Tuesday, April 14, 2009

Flashback: The Marginal Tax Rate Hike of 2009

As I explained in January, marginal tax rates were increased in 2009:

Today Reuters reports "IRS agents were given more flexibility in their collection actions, including the ability to reduce or suspend monthly payments on back taxes so those hit hard by the financial downturn are not forced to default on their tax payments." In plain language: the IRS will give you a payment reduction ONLY if you demonstrate if your income is low.

I explained in a number of previous posts (here, here, here, here, here, here, here, here, and here) how when mortgage debt collectors offer forgiveness, but only for persons with incomes that are low in comparison with their debts, that creates financial disincentives for working.

You might guess that the economics is much the same for tax debt collectors: when they offer forgiveness, but only for persons with incomes that are low in comparison with their debts, that creates financial disincentives for working. That's why I call that new IRS policy a marginal tax rate hike, even if the result is to reduce tax collections.

1 comment:

Joseph said...

I know many who were laid off, and none were trying not to work so they could renegotiate their mortgage or pay less in taxes.

They all wnated to work so they could feed, clothe, and shelter their families, and ensure that they had health care coverage.

You incentives not to work pale in comparison to the incetives to work. I doubt the unemployment numbers we see are a result of everyone wanting a reduced mortgage payment. The pain, stress, and embarassment of job loss is immense. An external cost that you refuse to include in any analysis you have done.