When you put all our social programs together, low-income Americans face roughly 100% marginal tax rates. Earn an extra dollar, lose a dollar of benefits. It’s not that simple, of course, with multiple cliffs of infinite tax rates (earn an extra cent, lose a program entirely), and it depends on how many and which programs people sign up for. But the order of magnitude is right.
The incentive effect is clear: don’t work (legally). As Phil Gramm and Mike Solon report,
Since 1967, average inflation-adjusted transfer payments to low-income households—the bottom 20%—have grown from $9,677 to $45,389. During that same period, the percentage of prime working-age adults in the bottom 20% of income earners who actually worked collapsed from 68% to 36%.
Similarly, the WSJ points to a report by Jonathan Bain and Jonathan Ingram at the Foundation for Government Accountability finding that there are four million able-bodied adults without dependents on food stamps, and three in four don’t work at all. Less than 3% work full-time.
A gift of money with an income phase-out leads people to work less, and to require more gifts of money. That’s just a fact.