"Average and Marginal Effective Tax Rates
Facing Workers in the EU: A Micro-Level
Care must be taken in interpreting this result, however, because the marginal effective tax rate is influenced by many factors, not just changes in tax rules.
A measure of the long-run marginal impact of the Tax Reform Act on the marginal effective tax rate can be calculated by computing the user cost of capital for a single year under the two sets of tax rules, ignoring recapture provisions.
b The marginal effective tax rate for large banks before tax reform was calculated using a statutory tax rate of 46 percent and assumes that banks used the percentage method to calculate the loan loss allowance.
Even taking into account recent reforms to curb the marginal tax burden, second earners in families with children continue to face marginal effective tax rates that are high by OEGD standards (Table 4.3).
Marginal effective tax rates for part-time working second earners are increased by the fact that some social benefits--such as childcare, housing and health care allowance--are not granted on an individual basis but with respect to household income, Hence, in order to strengthen work incentives, social benefits should be granted on an individual income basis, which would help to lower marginal effective tax rates for second earners.
More importantly, these measures are likely to increase the labour supply, particularly of females, who currently face steep marginal effective tax rates. ** At the same time, the reduced marginal tax burden allows for lower labour costs, which should further expand labour utilisation through lower structural unemployment (Table 4.5, column 2).
The various tax credits combine with the statutory tax rates and income-tested welfare benefits to yield a complex set of marginal effective tax rates (METRs).
Differences in marginal effective tax rates arise mainly from varying depreciation rules and other tax concessions.
Even abstracting from the effect of progressively withdrawing childcare subsidies as household income rises, marginal effective tax rates for second-earners switching from part-time to full-time employment in low-income households are high owing to the withdrawal of income-related benefits (such as tax credits for households with children, individual rent subsidies, and subsidies for the education costs of children) (Table 3.2).
Budget room for extra expenditure on care subsidies and cuts in marginal effective tax rates could be made by phasing out tax subsidies on owner-occupied housing
More can be done, how ever, notably by reforming the council tax credit and the housing and disability benefits, so as to lower further the high marginal effective tax rates
still faced by some of the jobless.