July 07, 2005
Making Work Really Pay
Posted by Victor Fleischer

Stealing a scoop from TaxProf, I'll be liveblogging for the next couple of hours from the American Tax Policy Institute, where Stephen Holt is presenting a paper on "Making Work Really Pay: Income Support and Marginal Effective Tax Rates Among Low-Income Working Households."   

Neil Buchanan (Rutgers) will have more complete analysis tomorrow on TaxProf, but I'll offer a few thoughts today. 

Holt looks at data from Wisconsin in 2000.  The basic theme of the paper is that through a combination of tax (EITC) and transfer / social benefit programs (Medicaid, state health care assistance, food stamps, etc.), Wisconsin did a pretty good job of getting the poor up to a minimally adequate standard of living.  And a pretty good job of keeping them trapped there.  Because of phase-outs and cliff effects, as the poor make more money, marginal tax rates shoot up well above 50% and sometimes over 100%, negating much of the benefit of working more, or finding better jobs. 

In other words, if you are a single mother working a $6 per hour job at a 7-11 and have a chance to move up to a $10 per hour job as an office clerk, you won't actually improve your economic situation much at all by switching jobs.  This is, obviously, terrible social policy. 

For those who are interested, there's more below the fold.   

One nice thing about Holt's project is that he looks at a number of ways to improve the situation by making small moves, like increasing participation and education.  He's really gone into the trenches to talk to folks -- both benefit providers and benefit users, to gain a real feel for how the program works in action.  Holt finds, for example, that because of low participation rates in certain programs, somewhat fewer people actually face the astronomical marginal tax rates that you can find in practice.  Ironically, the better job we do of educating people about social programs, the bigger the problem of high MTRs becomes. 

[I'm having some technical difficulties with the web connection, or maybe it's Typepad, as well as some difficulty typing and thinking and listening at the same time, so rather than try to summarize everything, I'll just offer some passing thoughts.] 

High marginal tax rates on the poor are really offensive at first blush.  On the other hand, optimal income tax theory suggests that marginal rates should be higher on the working poor than on the rich, at least from an efficiency perspective.  The real problem here is on the redistribution side --- redistribution through social service programs like Medicaid and food stamps, coupled with phaseouts or cliff effects.  If, instead of redistribution through social programs, we had redistribution through a demogrant (which the poor could then use to purchase food, housing and health care), I'm not sure the high marginal rates on the tax side would bother me so much. 

Clarissa Potter (Georgetown) is moderating.  Clarissa has just accepted a job with the IRS as Special Counsel, where she will be working on tax reform.  Congrats Clarissa!  The nation is lucky to have you working on this.

I'm very impressed by the comments offered now by Janet Holtzblatt of the Treasury Department.  She's weaving together academic-style analysis of the paper with a policy-maker's insight quite nicely. 

Eugene Steuerle from the Urban Institute is up now.  Steuerle makes a couple of nice points: (1) economists measure welfare losses by the square of the tax rates, so high MTRs should really trouble us, (2) all the talk about creeping towards a consumption tax really only applies to the rich.  For the poor, tax credits and benefit programs are tied to income. 

Another nice point --- our tax and benefit system REALLY encourages the poor to work off the books. 

Steurerle is also arguing, quite persuasively, that limited outreach has become a dangerous de facto social policy.  Liberals take too much comfort in knowing that the programs exist, but limited outreach pleases conservatives by reducing budget costs.   The success of welfare reform is measured by how many people you get off the rolls, not how many people get new jobs.

Dan Shaviro (NYU) is up next.  He's getting right into optimal income tax theory (Mirrlees).  Dan's not so sure that people understand their MTR or know what it is, and so their behavioral responses (work incentives) aren't always clear.  Still, Dan argues that nothing in the optimal income tax literature suggests that MTRs should ever be THIS high. 

Wow.  Dan has found an example from the paper that for a single parent with 2 children, the marginal tax rate from 15,000 to 35,000 is close to 100%.  In other words, if she gets a raise from $7.50 to $17.50 an hour, her financial picture remains essentially the same.   (Because, along the way, she will lose housing, food, EITC and health care assistance).   No wonder some folks feel like giving up as they try to claw their way out of poverty.

Q&A is starting.  Here's what I'll ask, if I get a chance: 

Why are demogrants so despised politically?  Liberals should like demogrants, since they help achieve progressivity.  Conservatives should like them, at least compared to social service programs, since the poor can buy what they need instead of what the government determines what they need.  Just before we got started, a colleague suggested to me that perhaps liberals don't like them because they jeopardize pet programs that they could replace.  And conservatives don't like them because they'd prefer a broken social program that might lead to frustration and, ultimately, fewer total transfers to the poor.

I'm currently listening to the world's longest question.  Not clear that I'll make it up the queue.

The answer, apparently, is George McGovern.  Convinced by some Yale and Harvard profs, he proposed a $1000 demogrant when he was running for president in 1972.  It did not go over well -- it was perceived as putting millions on the dole.  (As if we don't all receive government benefits in one form or another.)  And no one has gone near it since. 

Demogrants are the third rail of tax policy.

Signing off for now, will add some edits later if I get a chance.  Go read Neil B.'s analysis on TaxProf tomorrow. 

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Comments (5)

1. Posted by john on July 7, 2005 @ 17:38 | Permalink

i think the premise here should be about security/predictablility. thats one of the most important things for gov't to do. whether it is terrorism or economics, the govt is in this business. that whether your rich or poor there will be some level that people will not be allowed to fall under. this is one of the reasons i support a single-payer health care program that is financed with a payroll tax (think Medicare or S.S.) and/or a sales/consumption tax of some sort. that way rich or poor youll always have one of the most important things youll ever need-health insurance and youll always pay the same rate-since it will be a flat payroll/sales tax. Think of Sen. Sheila Kuehl's CA Health Insurance Reliability Act. Im a liberal and am generally agains sales/consumption taxes but when it comes to something that would be so widely used and for most of our lives-unlike Medicare/Soc. Security-this is one time i could support such a tax. if it was done in a progressive manner-exempting food/groceries, clothing, otc medicines, etc.


2. Posted by Orval on February 25, 2007 @ 16:49 | Permalink

The subject of marginal rates motivated me to start a blog tackling a visual approach of taxation, including marginal rates, http://visual-tax.blogspot.com/. tackling how phaseout, including EITC phaseout results in distorted marginal rates is an explicit goal. Still experimental at this time, but you may want to have a look already. Comments welcome.


3. Posted by Honey on July 16, 2007 @ 5:54 | Permalink

"...if she gets a raise from $7.50 to $17.50 an hour, her financial picture remains essentially the same. (Because, along the way, she will lose housing, food, EITC and health care assistance). No wonder some folks feel like giving up as they try to claw their way out of poverty...

you know, that's so true... employees pay so much taxes it's really ridicules... and yes, prices will rise faster than salaries, and the percentage of how much tax you must pay... will also rise faster than salary...

poor only can get poorer and rich richer...

------------------------------------------
freetomanifest.com team; place you can learn how income taxes work.


4. Posted by business consultants on February 15, 2012 @ 22:55 | Permalink

The government recently proposed and approved payroll tax cut. However, it does not resolve any issues on the rising and increasing of certain prices in the market today. The government doesn't even have a good housing policy which is supposedly one of the benefits of the employees.


5. Posted by tax relief attorney on March 21, 2012 @ 19:40 | Permalink

The recent payroll tax cut should also give a good effect on the rising prices of goods and services in the market. However, many citizens are still experiencing financial difficulties in spite of tax cutting.

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