The indispensable Eugene Steuerle has written a brilliant report outlines the pathologies of the patchwork U.S. system of taxes and transfers:
The nation’s real tax system includes not just the direct statutory rates explicit in such taxes as the income tax and the Social Security tax, but the implicit taxes that derive from phasing out of various benefits in both expenditure and tax programs. What I have labeled “expenditure taxes” are like tax expenditures in the sense that both tend to hide the full impact of government and are seldom dealt with on a consistent basis.
Implicit taxes are an inevitable byproduct of means-testing, yet the deleterious impact of means-tested transfers on work incentives can be mitigated in various ways, e.g.:
Among the many approaches to reform are (a) seeking broad-based social welfare reform rather than adopting programs one-byone with multiple phase-outs, (b) starting to emphasize opportunity and education over adequacy and consumption; (c) putting tax rates directly in the tax code to replace implicit tax rates, (d) making work an even stronger requirement for receipt of various benefits, (e) adopting a maximum marginal tax rate for programs combined, and (f) letting child benefits go with the child and wage subsidies go with low-income workers rather than combining the two.
Steuerle’s report offers an intelligent take on the origins of our patchwork system and appropriate humility regarding the prospects for reform. (Thanks to Greg Mankiw for the pointer.)