Commenting on a new CBO report, Charles Hughes writes,
The median marginal tax rate for households just above the poverty level is almost 34 percent, the highest for any income level. Some households that receive larger benefits or higher state taxes have even higher effective rates: 10 percent of households just above the poverty line face a marginal rate higher than 65 percent. For each additional dollar earned in this range, these households would lose almost two-thirds to taxes or lost benefits. The comparable rate for the highest earners, households above 400 percent of the poverty level, is only 43.4 percent. If anything this analysis might understate how steep the effective marginal rates are for some households. CBO only considers the combined effect of income taxes, payroll taxes, SNAP and ACA exchange subsidies, so households that participate in other programs like TANF or housing assistance could face even higher rates.
I think that this ought to be a big issue. Sending a message to low-income households that says, in effect, “You might as well not work” is bound to have bad consequences. I wish that the Republicans were talking more about this and less about immigration.
Would this be another good reason to replace welfare with a universal basic income?
“Sending a message to low-income households that says, in effect, ‘You might as well not work'”
Isn’t this essentially what the pro-minimum wage crowd is implicitly arguing? If your labor isn’t worth at least $15, it is preferable to remain unemployed (i.e., dependent on the state).
Though very high marginal tax rates are not ideal I think that they are appropriate for those receiving charity as long as they are below 70%. Below is a reference to a paper by Peter Diamond and Emmanuel Saez that finds evidence that up to a 70% is on the left side of the Laffer curve for the rich, at least.
Diamond and Emmanuel Saez that tries to suss out the “optimal” marginal tax rate on the rich. In this case, the paper defines “optimal” as the tax rate that raises the most money (i.e, the rate before you hit the wrong side of the Laffer curve). According to their read of the literature, that rate is about 70 percent.
I advocate a BIG (basic income guarantee) where each adult USA citizen gets about $200/week where for each dollar they earn the BIG is lowered by 50 cents. I think people would still work. I think that the bigger problem with such a program would be that their might be too much incentive to work for unreported cash.
Instead of a societal mandate banning an individual improving their station, the modern version is to make it expensive. The cost of escaping to full liberty is steep and inhibiting.
First, what is the best the socialists, in their writings, can offer us? What do the most optimistic of them say? That our subsistence will be guaranteed, while we work; that some of us, the best of us, may earn a surplus above what is actually necessary for our subsistence; and that surplus, like a good child, we may “keep to spend.” We may not use it to better our condition, we may not, if a fisherman, buy another boat with it, if a farmer, another field ; we may not invest it, or use it productively ; but we can spend it like the good child, on candy — on something we consume, or waste it, or throw it away.
Could not the African slave do as much? In fact, is not this whole position exactly that of the … slave? He, too, was guaranteed his sustenance; he, too, was allowed to keep and spend the extra money he made by working overtime; but he was not allowed to better his condition, to engage in trade, to invest it, to change his lot in life. Precisely what makes a slave is that he is allowed no use of productive capital to make wealth on his own account. The only difference is that under socialism, I may not be compelled to labor (I don’t even know as to that — socialists differ on the point), actually compelled, by the lash, or any other force than hunger. And the only other difference is that the … slave was under the orders of one man, while the subject of socialism will be under the orders of a committee of ward heelers. You will say, the slave could not choose his master, but we shall elect the ward politician. So we do now. Will that help much? Suppose the man with a grievance didn’t vote for him?
–Socialism; a speech delivered in Faneuil hall, February 7th, 1903, by Frederic J. Stimson
The complexity of benefits along with differing subjective values of them greatly obscures this though, and while some will avoid them at their own cost, most would still consider themselves better off with them for option value if nothing else. Insurance can be expensive, but most would still prefer to have it.
You have means tested safety net, you put a high marginal tax rate on those receiving the benefit of the safety net. Not sure there is any way around it. I encountered a situation like that when hiring a care giver for my mom. Her answer was to work “off the books”. I am sure she was not unique.
This is also likely one reason labor participation rate is so low.
Incentives matter, a large means tested safety net discourages work for lower income individuals and the high tax rates needed to pay for it discourages work for the upper income groups. Yet no one want to eliminate the safety net or not make it means tested.
The GOP is talking about issue. They would reduce tax rates and reduce the safety net.