By Zachary Janowski | Raising Hale
HARTFORD — When average Connecticut taxpayers completed their returns for the deadline earlier this week they may have paid marginal rates higher than the state’s top tax bracket because of the way the state phases out certain deductions.
Marginal taxes determine how much of the next dollar a person earns he or she will get to keep.
For example, residents in the highest tax bracket have a marginal rate of 6.7 percent. For every dollar they earn after federal taxes, they get to keep 93.3 cents.
Connecticut single filers pay no taxes on the first $13,000 of their income, but the state undoes that exemption once the person starts earning $26,000 a year. Between $26,000 and $38,000 an individual pays the state’s highest marginal tax rate, 10 percent.
About 125,000 individual filers earn between $25,000 and $40,000, the closest approximation available in the Department of Revenue Services 2010 Income Tax Reports.
For married couples, the highest marginal tax rate occurs when they earn $48,000 to $71,000.
Just over 100,000 married couples earn between $48,000 and $74,000, according to DRS.
Based on these estimates it is possible that as many as 300,000 people are paying the state’s highest marginal tax rate.
The 10 percent marginal tax rate is made up of two components: the 5 percent tax bracket and the phase-out of the personal exemption, which amounts to a second 5 percent tax.
These high marginal tax rates are not new. They predate Gov. Dannel Malloy’s record 2011 tax increases.
According to the Tax Foundation, Connecticut residents work until May 5 to pay off the taxes they owe federal, state and local governments, longer than in any other state.
Economists give marginal tax rates – the tax rate on the next dollar earned –more importance than average tax rates because marginal tax rates affect behavior.
People make the decision whether to work more or to enjoy more leisure at the margin. As marginal tax rates rise, people trade work – which has less value to them because of the tax – for more leisure time.
“If incentives matter, we must expect that higher marginal tax rates may actually reduce the incentive to earn or seek out additional income,” Trinity College economics Prof. William Butos said in an interview last summer. Continue reading at Raising Hale.