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One of the difficulties of devising social safety net programs is dealing with what are called “welfare cliffs” – as low-income people move up the income ladder, they see government benefits phase out. Many of these welfare benefits, like the Earned Income Tax Credit, are administered through the tax code. That results in sky-high effective marginal tax rates. There are a few different ways to try to mitigate this, but it’s certainly not clear that the federal government is doing it correctly.
The Congressional Budget Office analyzed marginal tax rates that affect different income levels under 2012 tax law and found that people just above and below the poverty line in America can face the highest marginal tax rates: