Marginal Tax Rates Matter

Even for me they matter. Consider this decision I recently had to make:

Should my family hire a cleaner or do the work ourselves? My wife has the option of working more or less in a given week depending on or other home tasks such as cleaning and taking care of the kids. Economic efficiency dictates that everyone in the economy should do what they are best at. This means the decision of whether to hire cleaners should come down to whether my wife could make more money doing work she enjoys than we'd spend on cleaning.

Unfortunately this decision is greatly distorted by our marginal tax rate:
the decision pre-tax is easy:
1 hour of work = $35
1 hour of housecleaning = $25
Our AVERAGE federal tax rate (including payroll taxes) is only about 23%, but the tax rate on each ADDITIONAL (those subject to marginal tax rates) hour of work my wife does is much higher, more like 36%

so our decision is now between spending the same $25 or making $35*(1-.36)=22.4

What if the government, instead of giving us a bunch of deductions just charged us our average tax rate on every hour of work.

Well then the decision is between $25 or making $35*(1-.23)=26.95.

Now we make the decision to hire a cleaner, the cleaner gets work, we work more, and the government makes more money.

This is the biggest thing I see wrong with Obama's speech tonight. A whole lot more economic efficiency could be had if we just lowered rates and eliminated deductions in a revenue neutral manner - even if we choose the baseline of revenue from Clinton era rates on the rich we could still do it with lower rates.