Progressives' Desires to Help the Poor Will End Up Hurting Them Instead
"How do no-income and low-income Americans pay “taxes” when they are welfare beneficiaries? Very simply. Public assistance programs are “means tested,” structured to target households below certain income thresholds. The level of benefits a beneficiary receives under a given program falls at some rate as earned income rises, eventually reaching zero dollars in benefits.
Consider a household that receives benefits from only two welfare programs, with one tapering off at 20 cents for each added dollar earned and another tapering off at 40 cents for each added dollar earned. Those cuts create an implicit tax rate of 60 percent, which means the worker has only 40 cents in additional spendable income for each added dollar earned. This implicit tax rate can be expected to affect work incentives in much the same way that a federal income tax rate does.
To further illustrate, consider a real-life, low-income single mother of two children in Forsyth County, North Carolina earning $10 an hour in a full-time job, which means she has a monthly earned income of $1,600 (or $19,200 annually). Suppose the single mother receives monthly benefits from five welfare programs: $425 in food stamps, $1,471 in subsidized childcare, $370 in housing subsidies, $180 in WIC benefits, and $493 in an earned income tax credit (EITC). Her monthly welfare benefits will total $2,939 (or $35,271 a year).
Now, suppose the single mother takes a new job paying $15 an hour, a 50 percent increase. Her monthly earned income will rise by $800 to $2,400 (with her annual income rising to $28,800 a year, an annual earnings increase of $9,600). However, she will face decreases in four out of her five monthly benefit streams, with each benefit reduction based on the same $800-increase in earnings (a problem known among welfare researchers as the “cumulative stacked effect”). The single mother will lose $231 in food stamps, $80 in childcare benefits, $216 in housing benefits, and $166 in EITC. Her total decrease in monthly benefits will reach $694 (which means her annual benefit total will drop by $8,328).4 Her implicit tax rate on her added monthly earnings of $800 is 87 percent—more than two times the highest explicit marginal tax rate proposed for the rich. (The details of our calculations are in a table we have appended to the end of this article.)
In addition, the single mother will be required to pay an added $185 a month in federal and state income taxes on her added earned monthly income of $800, which is an explicit tax rate of 23 percent. Adding the 87 percent implicit tax rate to the 23 percent explicit tax rate leads to an overall tax rate of 110 percent. Her raise has left her $79 per month poorer in lost wages and benefits—surely a strong disincentive for her to take the higher paying job.5
But the total (implicit plus explicit) marginal tax rate on poor and low-income workers can be worse, and actually spikes to 1,400 percent at an earned income of around $43,000 (which is known as the “welfare cliff”).6 However, studies in different areas of the country show that the total marginal tax rate on poor and low-income workers within an annual earned-income range of $15,000 to $80,000 moves between 28 and 53 percent for full-time workers earning up to an annual earnings of $24,000 (or $12.50 an hour). The implicit tax rate for workers earning between $24,000 and $40,000 jumps to 90 percent.7"
Consider a household that receives benefits from only two welfare programs, with one tapering off at 20 cents for each added dollar earned and another tapering off at 40 cents for each added dollar earned. Those cuts create an implicit tax rate of 60 percent, which means the worker has only 40 cents in additional spendable income for each added dollar earned. This implicit tax rate can be expected to affect work incentives in much the same way that a federal income tax rate does.
To further illustrate, consider a real-life, low-income single mother of two children in Forsyth County, North Carolina earning $10 an hour in a full-time job, which means she has a monthly earned income of $1,600 (or $19,200 annually). Suppose the single mother receives monthly benefits from five welfare programs: $425 in food stamps, $1,471 in subsidized childcare, $370 in housing subsidies, $180 in WIC benefits, and $493 in an earned income tax credit (EITC). Her monthly welfare benefits will total $2,939 (or $35,271 a year).
Now, suppose the single mother takes a new job paying $15 an hour, a 50 percent increase. Her monthly earned income will rise by $800 to $2,400 (with her annual income rising to $28,800 a year, an annual earnings increase of $9,600). However, she will face decreases in four out of her five monthly benefit streams, with each benefit reduction based on the same $800-increase in earnings (a problem known among welfare researchers as the “cumulative stacked effect”). The single mother will lose $231 in food stamps, $80 in childcare benefits, $216 in housing benefits, and $166 in EITC. Her total decrease in monthly benefits will reach $694 (which means her annual benefit total will drop by $8,328).4 Her implicit tax rate on her added monthly earnings of $800 is 87 percent—more than two times the highest explicit marginal tax rate proposed for the rich. (The details of our calculations are in a table we have appended to the end of this article.)
In addition, the single mother will be required to pay an added $185 a month in federal and state income taxes on her added earned monthly income of $800, which is an explicit tax rate of 23 percent. Adding the 87 percent implicit tax rate to the 23 percent explicit tax rate leads to an overall tax rate of 110 percent. Her raise has left her $79 per month poorer in lost wages and benefits—surely a strong disincentive for her to take the higher paying job.5
But the total (implicit plus explicit) marginal tax rate on poor and low-income workers can be worse, and actually spikes to 1,400 percent at an earned income of around $43,000 (which is known as the “welfare cliff”).6 However, studies in different areas of the country show that the total marginal tax rate on poor and low-income workers within an annual earned-income range of $15,000 to $80,000 moves between 28 and 53 percent for full-time workers earning up to an annual earnings of $24,000 (or $12.50 an hour). The implicit tax rate for workers earning between $24,000 and $40,000 jumps to 90 percent.7"
Other sources: https://taxfoundation.org/american-families-plan/
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This is the current list (80+) of means tested "welfare" programs for the poor, low-income, single moms, etc. In 2020, federal spending on 13 largest of these low-income programs — which account for the bulk of welfare spending, totaled $838.8 billion with Medicaid accounted for half, followed in size by the refundable portion of the EITC, SNAP and SSI.
In total, these 4 programs — which account for the bulk of welfare spending — comprised almost 80% of total spending or about $670 billion.
https://singlemotherguide.com/federal-welfare-programs/
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