The dead zone: implicit marginal tax rates on the working poor

A look at our awful system:



Mises Daily explains:

At A, the marginal tax rate is quite high, essentially because of the generosity of the package of cash and noncash benefits provided to those on welfare. At B, the marginal tax rate is relatively low (!) because of the Earned Income Tax Credit (EITC). From B to D, we (or, rather, the working poor) are in the Dead Zone, with implicit marginal tax rates mostly exceeding 100 percent.

How stupid and evil must our elected representatives be to do this to the working poor! Actually, this being a democracy, there is nobody to blame but the electorate. Especially the left-liberal do-gooders. Since Milton Friedman developed the negative income tax, waaay back in the 1950s, there can be no excuse for any educated person to not be aware of the fact that taxes and means-tested benefits destroy the lower classes' positive incentive to work.

At C, the implicit marginal tax rate is momentarily "only" 75 percent. This is because, in the face of losing other means-tested benefits while the federal income tax kicks in, the children of the household still qualify for the State Children's Health Insurance Program (SCHIP). The lull in the onslaught is momentary, however, ending as soon as that prop is removed from the household.

At D, the family is finally done with jumping through the hoops to qualify and remain qualified for the give-away programs. Now all it has to concern itself with is paying taxes. But there is no rest for the weary because, at E, the child tax credit phases out.

In the above scenario, I describe the effects of the tax and subsidy programs of the government with respect to a hypothetical family of three, consisting of one adult and two minors, with a focus on the working poor. I could just as well have talked of a middle-class family with one or more children of college age, and how means-tested financial aid programs such as the Pell Grant and federally subsidized loans make fools of those who save for college; or how Medicaid's rules for nursing-home eligibility make those who save for retirement into fools; or how bringing back the pre-Reagan tax rates will make utter fools of families in which the wife and husband both work.

Everywhere, the government's desire (meaning the left-liberal do-gooders' desire) to be generous to the poor is destroying the positive incentives to work and to save that are so necessary for a well-functioning economy. What they have done to Detroit, and are doing to New Jersey, they will do to the entire country.

(via Marginal Revolution)