Did You Know the Poverty Rate Didn’t Change During the Great Recession?

This is Casey Mulligan:

When measured to include taxes and government benefits, poverty did not rise between 2007 and 2011, and that shows why government policy is seriously off track.

When somebody earns, say, $10,000 by working, he should keep some of it for himself and his family rather than handing it all over to the government. By the same reasoning, when someone loses $10,000 by not working, he should get some help from the government or from others in the forms of reduced taxes and enhanced benefits but still should bear a portion of that loss himself.

That implies that the combination of taxes and welfare benefits have created an implicit marginal tax rate of 100%!

As James Tobin, a John F. Kennedy adviser, Nobel laureate and leading Keynesian economist of his day, said in a 1965 article, a 100 percent tax rate causes “needless waste and demoralization”‚ĶProfessor Tobin called the 100 percent tax situation demoralizing because the affected people find that all of the benefits of their hard work and success go to the government in the form of more tax receipts and fewer benefit payments.

Comments (8)

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  1. Devon Herrick says:

    I was an undergraduate in college when our professor explained that in natural experiments on unemployment, people suddenly got a job just about the time their benefits expired. This was true whether they had been unemployed only briefly or for an extended period.

    People need the appropriate incentives. If taxes and subsidies erodes the benefit of work, fewer people will seek employment.

  2. Jordan says:

    Completely agree, Devon.

  3. Michelle says:

    Finding a job can be almost a full time job; I think a lot of young people fail to fully appreciate that they won’t emerge victoriously from college to be awarded their career.

    The culture of dependency has lots to do with it — the idea that you can reach a stage where you’re “figuring out what to do” or “finding yourself” is a dangerous fiction.

  4. Jason says:

    Spot on! The government has made it so easy for those unemployed to receive so many benefits and taxes reductions and so forth just for not working, that they have absolutely no incentive to work. On the other hand, the other group who does want to work and does want to make a living for themselves, find themselves in the predicamente of whether they are better off working or simply remain unemployed to receive government aid. The perception of so many people is so mediocre that they are actually happy and comfortable by living off of other people’s money and it’s people like this that deserve to find themselves a job, struggle while at it, and learn to be independent.

  5. Wasif Huda says:

    I agree, government programs that just give “free hand-outs” is ultimately not encouraging (signaling) segments of its populace to get out and work. Why don’t we have programs that aid people to take initiatives to start a small business themselves. The concept of micro-finance and its link to encouraging entrepreneurship has been, on balance, successful in numerous developing countries. There are valid criticism to micro-finance, but, in its country of origin, Bangladesh, micro-financing the poor to become entrepreneurs have transformed this nation. By investing in the poor to start their own businesses, the Grameen Bank has been more instrumental in fighting poverty through out South Asia than the government.

  6. August says:

    Timothy Taylor has an interesting discussion of Marginal income rates at low income levels here:
    http://conversableeconomist.blogspot.com/2012/11/marginal-tax-rates-on-poor-and-lower.html

  7. Baker says:

    @August

    Nice! Best bit of that article “For those who express a lot of concern about how high marginal tax rates would injure incentives to work for those at the top income levels, consistency would seem to suggest that they express similar concern over lower marginal tax rates for those at the lower and moderate income levels, too–which means making programs like the Earned Income Tax Credit, food stamps, welfare, and others more generous, so that they can be phased down more slowly as people earn income.”

    A solution that doesn’t involve cutting help to the poor!

  8. Slater says:

    “Tobin called the 100 percent tax situation demoralizing”

    - It’s interesting to know that some people actually feel that the Government should tax anything at that rate!