Ryan misfires on tax rate claim

A Dominican nun took the microphone at a CNN town hall in Racine with U.S. House Speaker Paul Ryan, noted that they are both Catholics, and said to him:

I’d like to ask you how you see yourself upholding the church’s social teaching that has the idea that God is always on the side of the poor and dispossessed.

The Janesville Republican responded, in part, by referring to the Green Bay Packers’ star quarterback — and arguing that welfare programs need to be reformed so that they don’t discourage work.

Alluding to high tax rates he had criticized earlier in the Aug. 21 forum, Ryan said:

I was telling you about these successful small businesses in Wisconsin — they’ve got a 44.6% tax rate. That’s not the highest tax rate payer. I mean, Aaron Rodgers — who deserves every salary — is not the highest tax rate payer in this state. You know who it is? It’s the single mom getting 24 grand in benefits with two kids who would lose 80 cents on the dollar if she goes and takes a job. We have to fix that.

Ryan essentially repeated the claim three days later while visiting Boeing in Washington State, comparing the aerospace giant and its corporate tax rate to the same single mother. He has also made nearly the same claim in the past, including at least twice in 2016.

An unemployed single parent on public assistance who takes a job doesn’t suddenly start paying an income tax rate of 80%.

And though Ryan has a point, the example he gives is rare, not common.

Tax rates

For 2017, Rodgers’ contract with the Packers pays him a base salary of $12.55 million. That alone puts him in the income brackets with the highest tax rates:

7.65% for Wisconsin, which applies to taxable incomes over $244,750

39.6% for federal, for taxable incomes of $418,401 and over

That means Rodgers’ marginal rate — the amount paid on the last dollar of income — is a total rate of 47.25%. (The state rate plus the federal one.)

So, what happens to the unemployed single mother, in Ryan’s scenario, who takes a job?

Marginal tax rates

Ryan spokesman Ian Martorana told us Ryan’s reference was not to the income tax rate paid by the single mother, but rather her effective marginal tax rate, which takes into account public benefits that are lost as a result of an increase in income. Think of losing benefits as a result of taking a job as a tax.

Ryan argues that by taking a job, the woman in his example would lose 80 cents in benefits for every $1 in income earned from taking a job. That would be a marginal tax rate of 80%.

Experts told us that wouldn’t be the highest marginal tax rate anyone pays, but it would be among the highest.

The problem is, Ryan’s statement suggests the 80% rate is relatively common.

Experts told us it’s possible, but very rare, that a single unemployed parent could collect $24,000 a year in public benefits. She likely would need to receive relatively uncommon housing assistance in addition to food stamps, Medicaid and other benefits.

The experts also said such a person would be hit with what amounts to an 80% tax rate only if she takes a job within a narrow income range above the poverty level — not, for example, if the job pays minimum wage.

A 2015 research paper Ryan’s office cited to us from the nonpartisan Congressional Budget Office does not provide marginal tax rates for a single parent like the one Ryan described. However, for a single parent with one child — and only within a narrow income range the marginal tax rate for 2016 averaged 75%

Another source cited by Ryan, 2015 testimony to Congress from the nonprofit Urban Institute, also said marginal tax rates can reach 75%.

But that occurs among relatively few people — poverty-level workers who not only receive benefits such as food stamps and health insurance, but much less common housing assistance, and then begin earning higher incomes within a narrow range above the poverty level.

In contrast, an unemployed person who takes a job would almost never face an 80% marginal tax rate, experts told us. That’s because while a newly employed person might lose some benefits by becoming employed, she would gain benefits from earned income and child care tax credits that come with taking a job.

Other data

For example, in a 2014 paper, the Center on Budget and Policy Priorities, a left-leaning think tank, argued that a single mother of two is better off by taking a job, even if it pays only $12,000 per year. She would lose some food stamps and have to pay income taxes. But by gaining the earned income and child tax credits, “that $12,000 job leads to a $16,630 increase in income,” according to the paper.

Only in narrow circumstances — with an income of less than $29,000 and receiving “an unusual combination of government benefits” — would the marginal tax rate for a single mother of two exceed 80%, according to a 2016 paper by the center.

“In the overwhelming majority of cases, in fact, adults in poverty are significantly better off if they get a job, work more hours, or receive a wage hike,” that paper said.

At the same time, even if marginal tax rates don’t reach 80% for most lower-income people, they are perceived as a problem.

The paper from the nonpartisan CBO says “when marginal tax rates are high, people tend to respond to the smaller financial gain from employment by working fewer hours, altering the intensity of their work, or not working at all.”

And Wisconsin Taxpayers Alliance President Todd Berry told us: “It is a real problem for anyone moving up the income scale from poverty, because so many of these programs are income conditioned. The main point to be made here is how these programs are designed can create powerful disincentives” to work.

Our rating

Ryan says Aaron Rodgers “is not the highest tax rate payer” in Wisconsin, it’s “the single mom getting 24 grand in benefits with two kids who will lose 80 cents on the dollar if she goes and takes a job.”

There’s some mixing of apples and oranges here. The reference to Rodgers is for the actual highest rate he would pay for income taxes. With regard to the single mother, Ryan is referring to her marginal tax rate — how much in public benefits she would lose by taking a job.

Ryan is correct that it’s possible for the woman he describes to lose 80 cents in benefits for every $1 in income earned — an 80% marginal tax rate. But that occurs in very rare cases where the mother would be receiving a higher than typical set of public benefits and would take a job within a narrow income range above the poverty level.

The vast majority of lower income people aren’t hit with a marginal tax rate as high as 80%, although even lower rates are considered strong disincentives to work. And advocates for the poor say the unemployed generally are better off financially by taking a job, even if they lose some public assistance.

For a statement that contains some element of truth but ignores critical facts that would give a different impression, our rating is Mostly False.