The Pomperipossa effect.


The marginal tax rate above 100% which is dubbed the ‘Pomperipossa effect’  happens whenever the government subsidizes some taxpayers below a certain income level, then abruptly removes that subsidy above that level.

In Sweden, beginning with the 1960s income transfer became all the rage. Certain people groups were to be raised to equality with the wealthier classes. I just have one small example from my own life. My father was an elementary school teacher, and covered under the non-academic teachers union. His salary was at the very peak of the class that was favored by the government. He was begged to take the job of librarian for the school, a job that would give him less than a hundred dollars a year. He said he could only afford to take the job if it was unpaid, for if he earned any more money that year some benefits would be cut. But it was against the law to work without pay. So the position was left unfilled. I still remember the story, because his refusal to do the library gave me free food coupons for two years as I entered University.

In the USA this could never happen, right? In Pennsylvania, families below a certain income level pay no State tax. Above that level the tax is gradually phased in. Lets see an example.

For a family with 8 children they pay no state tax if their income is 89000 or less (2008 numbers). If their income is 90251 they pay the full amount. The state tax is 3.07%.

So for the last 1251 dollars you pay 2770 in taxes. This is a marginal tax rate of  222%.

This is a harbinger of things to come if income transfers will become normative.

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