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Discussion: (33 comments)

  1. SeattleSam

    Since the whole objective of our welfare system is to create a large group of dependents, it makes perfect economic sense to have a high marginal tax on those attempting to earn more money. Government, like anyone else, acts in its own self-interest.

  2. morganovich

    first off, sowell has a point that the way these programs are structured is foolish and actually discourages looking for work. with that i absolutely agree.

    however, describing this as a tax rate seems a bit of a stretch. a cessation of getting to take money from my taxes is not really the same thing as paying taxes.

    i get that they experience it that way, and that it works in a very functionally similar manner, but i would have described this as a set of perverse incentives that encourage dependency and discourage going back to work as opposed to calling it a tax and then trying to compare it to the tax rate paid by top brackets

    while it might look similar to the welfare recipient, to those who pay taxes, this looks very different. when someone goes off welfare, that’s a rebate to the rest of taxpayers. when a high earner pays taxes, that pays INTO the federal pool.

    trying to compare those rates from the standpoint of those actually paying taxes demonstrates why i think we ought to talk about this as a bad incentive structure as opposed to calling it a “tax”.

    going from a negative tax rate to zero is not the same as going from say 10% to 30% even if it feels that way to the guy who does it.

    1. SeattleSam

      If requiring an individual to pay a penalty if they don’t buy something is considered a tax, then I think you can consider taking away someone’s subsidy a tax.

      1. morganovich

        sam-

        fair point.

        orwell would have a field day with this.

        1. Orwell was a socialist who probably would have been fine with taxing you more.

          1. I need some of what you’re smoking.

          2. Why, flakester? Suddenly developed a desire to lose half your IQ points to enable you to spew total crap?

      2. Try telling that to grovef norquist.

    2. Morganovich,

      Someone on Cochrane’s blog also mentioned that calling it a tax is not that descriptive. He agreed. However, I think the word “tax” read as government taking income you used to have (in this case, withholding income it once gave you) conveys the problem relatively well. I don’t think people are confused by the use of the word “tax” in this case. The point gets across.

      And the point is that we provide every disincentive in the world to produce as little as possible. Are you going to be working as much next year? I don’t plan to.

      1. And, of course, the irony is that the more we transfer to “the poor”, the higher their marginal tax rate for the next dollar earned.

      2. How much less are you planning to earn?

        Enough less to qualify for government help? If it is such a good deal, why not?

  3. taking away someone’s subsidy“…

    Don’t you mean ‘wealth transfersam?

  4. Citizen B.

    If forty percent of wage earners pay zero fed income tax and recieve a tax refund, in the form of earned income tax credit,

    then yes, they are taxed if they earn greater income and lose the tax credit.

    1. morganovich

      this may be semantic, but i do not think that the loss of a subsidy is the same as a tax.

      if a new homebuyer tax credit ends, you would not call that a tax upon those that do not own a house, would you?

      in fact, it’s likely the opposite as that credit was being paid out of taxes that they may well have paid.

      notions of negative tax rates are fraught here.

      if i give the homeless guy i walk past going to work $1 every day, then, one day stop, that’s not a tax, even if it is because i see that he has new $200 sneakers.

      it may be a disincentive, but going from getting free stuff to not getting free stuff is not a tax.

      a tax implies that you pay money out, not that you get less free stuff.

      i think sowells point about the disincentives to find work is correct and valid, but calling getting less free stuff a tax is not vaild, even if it has the same net effect, especially if you then compare it to taxes actually paid out of their own earnings by others.

      this somehow makes getting welfare the same as running a business. the incentives might be the same for an individual on welfare, but viewed from outside as a society, the net effects could not be more different.

      1. Citizen B.

        My point in bringing up the earned income credit is that it is definitely linked to taxation. One gets a refund and pays zero tax below a threshold. So, upward income movement is linked very closely to loss of benefits and a taxable event — simply paying income tax.

        When you give the homeless guy a buck every day, then he might use it as daily bus fare. That buck might get him back downtown, for a ride that really costs ten bucks, but at least he has some skin in the game.

  5. We agree with Sowell on this point. There are perverse incentives for the poor with often sudden cutoffs of benefits, e.g. make a dollar more and lose medical coverage for your children.

    1. There are perverse incentives for the poor with often sudden cutoffs of benefits, e.g. make a dollar more and lose medical coverage for your children“…

      What are you saying here?

      These ‘poor‘ have some sort of right to someone else’s earnings so they can fulfill their medical responsibilities to their children?

      1. juandos: These ‘poor‘ have some sort of right to someone else’s earnings so they can fulfill their medical responsibilities to their children?

        No. We didn’t address that point. But given a safety net, it would make sense to provide positive incentives to move people into self-sufficiency.

        1. No. We didn’t address that point. But given a safety net, it would make sense to provide positive incentives to move people into self-sufficiency“…

          Ahh well zach there’s an easy solution to that problem, get rid of the federal safety net…

          1. Even for those who have no possibility of becomimg self sufficient?

          2. Even for those who have no possibility of becomimg self sufficient?“…

            hydra where in the Constitution does it say that federal government has a right to extort the wealth of those who produce that wealth and give it to those who can’t or won’t regardless of the reason?

            Now if YOU think those folks who YOU claim can’t be self-sufficient and need help then why are YOU not opening up YOUR wallet to help them?

            That’s thing about you libs, you always want someone else’s money to finance your stupid ideas…

          3. “Even for those who have no possibility of becomimg self sufficient?”

            Yes, Hydra, even for those who have no possibility of ever being self sufficient. There is no authority for a federal safety net. If you are concerned about those folks, and most of us are, find a way to help them privately in your local area. You’re a rich guy, spread the wealth. Just don’t steal money from others to redistribute to the needy. That’s not charity, and even you must understand the perverse incentives created by government handouts.

        2. Z: “No. We didn’t address that point. But given a safety net, it would make sense to provide positive incentives to move people into self-sufficiency.

          Not sure what a positive incentive would look like. Support provides a positive incentive to remain dependent.

          1. Allowing the safety net to grade as income rises leaves some positive incentive to improvement.

            For instance, consider a subsidy of £1000 provided for people below £1000 in income. This would mean someone making £900, who earned £100 more, would lose the entire subsidy for a net loss of income of £900. There is a disincentive to earn more, and if someone has children, even if they are prideful, they may decide to not earn the extra money.

            Now, consider a subsidy that grades away as income rises, such as a subsidy of (£2000-income)/2 for those with an income less than £1000. If they earn £0, they receive the full subsidy of £1000. If they earn £500, their subsidy is reduced to £750, yet their total income has increased to £1250.

          2. Should read:

            Now, consider a subsidy that grades away as income rises, such as a subsidy of (£2000-income)/2 for those with an income less than £2000.

            At all points, there is a positive incentive to earn more.

          3. Z: “Now, consider a subsidy that grades away as income rises, such as a subsidy of (£2000-income)/2 for those with an income less than £1000. If they earn £0, they receive the full subsidy of £1000. If they earn £500, their subsidy is reduced to £750, yet their total income has increased to £1250.

            How many people do suppose will work for 1/2 the amount they are being paid? They can do no work for $1000, or work for 1/2 pay up to $2000. This is equivalent to a 50% tax kicking in at $1000 is earned, in addition to any real taxes actually owed such as FICA. The real incentive in your example is to work for cash so that no income is reported. Most welfare benefits are scheduled to decrease as income increases. Rather than a positive incentive, what you suggest is a less negative incentive.

            The only positive incentive is at a subsidy level of $0

        3. Even for those who have no possibility of becomimg self sufficient?

          Yes, Hydra, even for those who have no possibility of ever being self sufficient. There is no authority for a federal safety net. If you are concerned about those folks, and most of us are, find a way to help them privately in your local area. You’re a rich guy, spread the wealth. Just don’t steal money from others to redistribute to the needy. That’s not charity, and even you must understand the perverse incentives created by government handouts.

          1. Ron H: How many people do suppose will work for 1/2 the amount they are being paid?

            Total tax burden in a few select countries:

            Denmark, 49%
            Sweden, 48%
            France, 45%
            Norway, 44%
            Germany, 40%
            U.K., 39%
            United States, 27%

            In any case, the exact rate of drop-off in benefits can be adjusted to create more or less incentive. This should answer your original question as to how such an incentive might be structured, and avoid the cliff effect.

          2. Ron H: There is no authority for a federal safety net.

            In democratic countries, there is a legislative process with judicial review and executive enforcement. Perhaps you have a different notion of “authority”, but legally constituted authority is what most people mean.

          3. Ron H: Rather than a positive incentive, what you suggest is a less negative incentive.

            Work more, have more money. That’s a net positive incentive.

  6. ““The biggest and most deadly “tax” rate on the poor comes from a loss of various welfare state benefits– food stamps, housing subsidies and the like– if their income goes up.”

    Simple solution, just raise the benefits 50% or so to make the transition easier, or force businesses to pay a much higher wage. Probably both.

    1. Simple solution, just raise the benefits 50% or so to make the transition easier, or force businesses to pay a much higher wage. Probably both“…

      Are YOU going to cover the increased costs with YOUR money?

    2. You won’t be able to force businesses to do anything of the kind. Raising the benefits raises the marginal tax rate on the poor. That’s the entire point! If you don’t give handouts, there is nothing to lose and everything to gain when you become more productive. When hand-outs are involved, the loss must be weighed against the gain in after tax income. The more handouts you get, the higher that after tax income must be for you to work.

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