Estimating Implicit Marginal Tax Rates of Welfare Recipients across the US States

Abstract

This article provides a more accurate estimate of implicit marginal tax rates (IMTRs) faced by low-income households in all fifty states. Complications arising from multiple program participation, regional differences in wage regulations, and cost of living make former generalizations about representative low-income households in a state potentially problematic. Additionally, it is appropriate to account for differences in work requirements by choosing the relevant margin to estimate the IMTR, and these margins vary by state. This article is the first to consider these margins, and, indeed, the author finds significant variation of IMTRs for different states. One of biggest sources of variation is the structure of child care subsidies provisions and cost. However, changes made to initial assumptions causes the estimated rates to vary in unpredictable ways. Given this complicated and unpredictable nature of the variation, researchers should exercise caution when using estimated IMTRs to examine work incentives of welfare programs.