Should unemployment benefits be taxed?

A number of people on Twitter were mocking this earlier idea of Martin Feldstein’s, now a policy since 1986.  But of course unemployment benefits should be taxed at the federal level.  If your income that year was low, you won’t pay any tax anyway.  As of 2018, about 44 percent of American households paid no federal income tax in any case, so that is covering quite a few of the lower earners.

if you are in the taxable range, in your choices you should be comparing taxable income to taxable unemployment benefits, otherwise there is a distortion in your labor supply decision.  If need be, raise the level of unemployment benefits.  No, that isn’t a wash, because different individuals and households face different possible rates of marginal taxation.  The higher earners (at least potentially the higher earners) should face a higher tax on their unemployment benefits than the lower earners will.  So it is in fact a “progressive” policy.

Marty was right, as indeed he was about many things.  Here is a good CRS overview of the issue.  Here is Marty’s (partially gated) 1974 piece on the issue.  This is exactly the kind of issue Twitter is ill-suited to considering.



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