Sunday, August 7, 2011

Brief Musing on Work Disincentives

Working on something else and this drifted through my head.  A big problem with benefits in the US is that many of them have strict means testing which always creates strong work disincentives.  There's really no way to avoid this entirely.

But I do think there's a lesson here about how unequal the current system is in the US, as well as a logical fix to it.  I believe the maximum total reduction rate for benefits going to the poor (meaning combining the amount of income taxed away as well as the reduction in benefits) should not be able to exceed the top rate on high incomes.  So, with a current top marginal rate of 35% someone on TANF or SSI/SSDI should never see their benefits per extra dollar earned decrease at a rate greater than that less taxes.  This isn't the case now, especially when non-cash benefits, like Medicaid, are taken into account. 

If increasing the 35% rate to 38% rate is supposed to have work killing impacts on the well off, who tend to receive income increases in large chunks, what do you think the work killing influences are on people who get raises of pennies on the dollar on real tax rates much higher than 38%?  It's no wonder people drop out of the workforce when the gains to be had are so small.

And, of course, it's not like ending the benefits would help.  It's not really possible to live off a minimum wage job anymore, especially when high rates of employment fluctuation are taken into account for these workers, so anyone trying to get out of this jam will always either have to mooch off of friends and relatives or turn to less savory means of gaining income.  We just can't make things work at the level of spending we're willing to have.  There's a way out, but no one in our political system is willing to talk about it, or even talk about what our problems really are.

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