Henry Aaron writes to me

James Kwak's calculation of the value of tax exclusion is incomplete.  He leaves out the exclusion from the payroll tax, worth 15.3 percent to the person in his example and to most people, and 2.9 percent (at the margin) for the rest who earn more than the OASDI taxable maximum.  The correct math is that the gross wage is 1 + .0765 = 1.0765 to allow for the employer's payroll tax cost.  The take home pay that could be used, after both payroll and income tax for someone in the 15 percent bracket is 1 – 0.0765 – 0.15 = 0.7735.  That means that the tax wedge is equivalent to a subsidy of 1- [.7735/1.0765] =.7185.  That is a 28.15 percent subsidy. 

For filers in the 28 percent bracket, which is easy to reach for a couple each of whom earns, say, $75,000, the subsidy is a bit over 40 percent.


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