Why Are The Poor, Poor?

Have you ever wondered why poor people are poor? It’s not as though there aren’t plenty of role models around. Millions of people live highly successful, productive lives in this country. So why don’t people at the bottom of the income ladder copy the behavior of those several rungs above them and better their lot in life?

If this question doesn’t really interest you, that’s understandable. What’s not understandable is why it is not an interesting question for those who regard inequality of income the burning issue of the day.

For example, when is the last time you saw a Paul Krugman column on why poor people are poor? When Krugman writes about poverty, he can’t get more than a few sentences into the piece without launching into an attack on Republicans for being racists and indifferent to the plight of the poor. And that’s on a good day. When he’s in a bad mood, he depicts Republicans as actually delighting in the suffering of the poor. What motivates Krugman more: Concern for the poor? Or hatred of Republicans? You decide.

Okay. What about the rest of the paper? When is the last time you saw a New York Times unsigned editorial on why the poor are poor? How about any editorial in The New York Times?

Actually, there was one — just a few days ago. Under the heading “Where The GOP Gets It Right,” Nicholas Kristof writes that Republicans have been right all along — especially in stressing the role of strong families, job creation and education reform. (You wonder if Paul Krugman and Nicholas Kristof ever talk to each other.)

Yet good as it is, the Kristof column has one gaping hole: it totally neglects the role of incentives.

As I wrote previously, the federal government’s own pilot programs established conclusively from the very early days of the War on Poverty that the welfare state encourages people not to be married, not to work and not to invest in human capital.

This is Gene Steuerle before a House Ways and Means subcommittee:

The chart below shows a hypothetical example whereby a family (single parent and two children) can receive nearly $30,000 in government benefits with no household earnings, but only about $10,000 in government benefits with $35,000 in household earnings.

So if the mother earns, say, $35,000 she loses about two-thirds of that amount in lost welfare benefits, and that’s not even counting what the government will take in income and payroll taxes.

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Steuerle’s chart shows what incentives look like at a point in time. But activities today affect benefits tomorrow. For example, working and earning wages produces Social Security benefits and perhaps a private pension at the time of retirement. What do the incentives look like when we look at the lifetime effects of earning wages today?

That question was addressed in a study for the National Center for Policy Analysis by Jagadeesh Gokhale, Laurence J. Kotlikoff and Alexi Sluchynsky (NBER version here.) The authors explicitly incorporate future Social Security benefits as well as current payroll taxes to calculate lifetime marginal tax rates. They conclude that:

  • Americans at every income level face a lifetime marginal net tax rate greater than 50 percent.
  • That is, for every dollar they earn, they will lose more than 50 cents in higher taxes and reduced transfer benefits.

Furthermore, the highest marginal net tax rates are not imposed on the highest-income families. They are imposed on those with the lowest earnings. For example:

  • At two times the minimum wage ($42,800), working couples get to keep less than 30 cents out of each dollar they earn.
  • At 1.5 times the minimum wage ($32,100), they get to keep less than 20 cents out of each dollar they earn.
  • By contrast, a couple earning $200,000 a year gets to keep 44 cents.

In a follow up study, Kotlikoff and coauthor David S. Rapson calculate the effects of working more hours for people at different income levels. They conclude that effective marginal tax rates are generally and substantially higher for lower-income households than for high-income households.

  • For 30-year-old couples earning $20,000 the marginal tax rate on an additional dollar earned is 42.5 percent; yet those earning $50,000 a year face a marginal tax rate of only 24.4 percent.
  • At age 45, couples earning $30,000 a year face a higher marginal tax rate (41.9 percent) than do those earning $200,000 a year (35.9 percent).
  • At age 60, couples earning $10,000 a year face a marginal tax rate of 50.9 percent, compared to a 43.2 percent marginal tax rate for those earning $200,000!

Moreover, single-parent households who qualify for more benefit programs than do couples face astonishingly high marginal tax rates beginning at lower incomes. For example:

  • At age 30, a single parent earning $10,000 a year faces a 72.3 percent marginal tax rate on an additional dollar earned due to their loss of welfare benefits; this rate is substantially higher than the 36.9 percent tax rate on the single parent earning $200,000.
  • At 45 years of age, a single parent earning $20,000 faces a marginal tax rate of 42.9 percent; higher than a single parent earning $200,000.
  • A 60-year-old single parent earning $10,000 a year faces a 50.9 percent marginal tax rate, while those earning $200,000 face a rate of 43.2 percent.

Comments (25)

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  1. Devon Herrick says:

    A previous blog post linked to a New York Times article about whether parents matter. I believe that questions relates to why some people are poor. It could be that some poor people simply didn’t get the genetic endowment of brain power they need to thrive. But, I don’t think that is the reason for most poor people. Parents motivate their kids at a time in life when kid’s don’t have motivation to think about their future. Parents instill values and expectations about the future. If someone didn’t receive that as a child, it’s harder to acquire as an adult. When you add to this the immense subsidies for low-income parents, poverty becomes an inescapable trap. It’s not that a single mother cannot escape, but the marginal tax is very high — making the incentive to escape somewhat low.

    For example, in the above graphic the family subsidies are about $27,000; but leisure time is plentiful. By contrast, working full-time might only pay $32,000 (including subsidies). If we assume this working mother would spend 50 hours per week at work, commuting to work or dressing for work, the cost of leisure time is being sold for $2 per hour [($32,000-$27,000)/2,500 hours=$2)]. I can imagine a very busy single mom deciding that $2 for an hour of leisure is a bargain.

  2. Thomas says:

    “When Krugman writes about poverty, he can’t get more than a few sentences into the piece without launching into an attack on Republicans for being racists and indifferent to the plight of the poor.”

    It seems in many of Krugman’s arguments to help the poor, none of his statements are backed with evidence to give credibility to what he is saying. Much of it is attacks on the opposing party for not doing enough.

  3. Bart I. says:

    Intuitively, maximal tax efficiency should be achieved with a single effective income tax rate for all. For those in the mid- to upper income range, effective tax rate would equal the actual tax rate. For those with very low incomes, the actual tax rate would be close to zero, with the bulk of the effective tax rate coming from loss in benefits.

  4. James M. says:

    Marginal tax rates are hurting the poor the most. Any reform to where they are not as burden with marginal tax rates would help the poor substantially.

    • Walter Q. says:

      The way things are set up now, being rich allows you to stay rich, and be better off by being penalized less by taxes. The poor will stay poor because of the higher penalties in proportion to their income.

      • Thomas says:

        Hopefully someone can eventually inform Krugman of this. Maybe then he will state his disdain for Republicans a bit more eloquently.

  5. Earl Grinols says:

    It is time to tax preference not just health care savings and savings for retirement but ALL saving. That implies a consumption tax. You pick your preferred format. Eliminate the 16th amendment at the same time. Eliminate the IRS and let people see the benefits of their work.

  6. Vicki says:

    No song today?

  7. Perry says:

    The poor are poor because of Liberal Democrats…

  8. Jimbino says:

    John Galt was poor, but he was free.

    Just as in the Vietnam Occupation era, if you have scruples, you just have to drop out. There’s only so much gaming of the system that you will be able to manage if you work, are childfree, and don’t believe in religion and insurance.

    If you want to avoid poverty in Amerika, make lots of babies. A man can have up to 5 wives and raise all their 50 children, and, if he plays it right, can manage for the gummint to support all of them through SS, Medicare, Medicaid, EITC, Obamacare and Foodstamps. And he himself will be well attended to.

    • Jeff N says:

      Completely agree. The system is so messed up that having more babies, without financial stability to sustain them, is beneficial. This is a signal that the welfare state is a broken model that needs to be changed.

  9. Charles T says:

    Many of the poor simply stay in poverty because the government gives them no opportunity of improving their status and facing incentives to do so. This is what happens when you have a flawed tax system with a regressive tax structure and a welfare state, you are dooming the poor to live in poverty.

  10. LAURENCE BRODY says:

    I think culture has moved too far away from the work ethic and value of the family. Relatives live all over the world now, and neighborhoods may be obsolete. Who can afford a starter house, marriage and children in our situation?
    Governments raising children have not done well, unless you are politically elite. Sexuality is no longer reserved for marriage. To restore family values will take an enormous amount of societal effort over a generation at least

  11. Wanda J. Jones says:

    John and Colleagues:

    Ahem. Having endured myriad statements about how the health system is broken in this country and must be fixed, hearing of how badly the tax systerm operates and expressions of dismay that there do not appear advocates for “fixing” it, it would be well for all citizens to note that when a pervasive program is wholly managed by the government, it ossifies and there is no yellow brick road out of the kingdom of Oz. Let’s don’t have single payer.

    Wanda J. Jones, MPH
    San Francisco

  12. Wanda J. Jones says:

    All–Yet, there’s more.

    Being poor is a multi-factor problem that defies easy formulas. I’d like to take a crack at it:

    First–read Eric Toffler. He writes about how there is a fundamental shift in the way wealth is created in America. From Agriculture, (now only 1% of workers) to Manufacturing (also reduced, partly from shipping work to other countries, partly automating work, and Services. The source of wealth most prominent now is “Knowledge work.” Stay with me.

    Today’s young people are limited in their ability to do knowledge work as they have developed the visual side of their brain through immersion in computers and game consoles; they don’t read and they don’t write. Meaning that few of them are useful in the computer industry. That’s where job growth is and where one can get very, very rich.

    Third is culture. We as a country, have approached civil rights as a legal problem–if people have the right to vote, they can elect those who will help them. So far so good. But the culture of dependency that existed with tenant farmers throughout the south has been carried over to cities where work other than farming was available. When that work, too, faded away, the people still expected to be taken care of. So–it is an equation: Ill-prepared people, disappearing industry, and a culture of blame and extortion. Instead of paying people not to work, we should teach them skills that allow them to survive. Can they write? Can they read instructions? Can they show up for work? Can they remain celibate until they have an income?

    In Germany, there is a little town called “Erbach,” where the historic skill was woodcarving, usually of some religious image. But every town in Bavaria did the same thing. One year business was so bad that the Prince went to Africa and brought back ivory, then had the woodcarvers taught to carve it. You know the rest…When Jews went to Israel, most of the land was unimproved, with no water. They irrigated the desert and established both an agricultural sector, but a parallel light manufacturing sector.

    I know–let’s do a quarterly report on the purported “leaders” of the poor, listing the innovations they have brought in that use the labor recently displaced. Let them gain credibility, not on how they can successfully extort cash from elected officials, but how many people they have gifted with meaningful work. Why send phone bank work to India?

    John–You are a caution.

    Wanda Jones
    SF, CA

  13. Nils-Eric says:

    I recognize the US poverty problem. We have very much the same in Sweden, and at least as many Krugmans as you.
    Most of the people have worked hard, sent their children to education, encouraged them to work hard in the schools, saved av invested and started business. That´s how and that´s why they went from poverty to wealth. This is the key recipe.
    Behind all money there is work – your own, not the work of someone else.

  14. Ron says:

    The Pew Study of upward mobility in the U.S. shows that one born in the lowest quintile has a 65% probability of living his/her entire life in the lowest quintile (or maybe move up one quintile).

    Connecting the result with the analysis of John’s above work and reasonable people can make the connection that expansive welfare not only keeps people done by destroying incentives to get ahead, but even worse in my mind….we then have fewer resources to help those in real need due to birth, age, or other maladies of life for which they had no control or choice in.

    But, for a few politicians the result of expanding welfare and the destruction of personal responsibility is a good thing… they can demagogue, distort, and deceive the “useful idiots” into votes for election & reelection.

    God help us all.

  15. David Frazier says:

    Hey John,

    You bring up some good points as usual. However, I respectfully suggest that your essay avoids the root causes of a life cycle of poverty–culture. You will recall that on December 9, 2013 you wrote a great essay about the interconnection between poverty and culture. You explained that in Barbados, children who are raised where there is respect for family and authority, combined with structure at home, that these children generally perform better in school and contribute more effectively as functioning members of society as adults, than those individuals who are raised in dysfunctional, violent, and undisciplined environments.

    I recently asked a friend who is a naturalized citizen from Vietnam who owns and operates a couple of successful restaurants in our area why it is that as a general rule Asian Americans achieve/succeed so well in business and academics in America. Without hesitating, he told me that Asian culture teaches its people to avoid being dependent on government and on others. He said that if a person does need assistance, he should go through the family; but that it is considered disgraceful to request support assistance outside of one’s own family or close friends–especially through the government.

    Or, as Kevin D. Williamson recently wrote: “The conservative plantation theory holds that African Americans support the Democratic party in exchange for welfare benefits and other handouts, that the Democratic party cultivates black welfare dependency in order to keep black voters firmly in their camp, and that the liberal establishment through either incompetence or cynical calculation frustrates the aspirations of black Americans in critical areas such as education, family life, crime, and economic mobility. That is a mostly accurate assessment of the Democratic party’s side of the relationship. . . .”
    Perhaps then, in our national discussion on poverty, we should refocus our attention on those cultural factors which have a proven record of success—respect for family, authority, and consistent structure at home, as well as a return to the classical conservative principle of good old-fashioned self-reliance, if we ever intend to stop the growth of poverty in America. We need to start making plans accordingly. With the national debt exceeding seventeen trillion dollars and rising, pretty soon America will have run out of other people’s money to spend.

    Keep up the good work.

  16. Floccina says:

    Why are the poor poor?
    I am sure that marginal tax rates are a part of the answer but a small part because most poor people value Government benefits at way below what Governments spends on them. Take medicaid I would guess that most people on medicaid value it at a fraction of its cost. I dare to say if they had to pay a small amount for it they would most forgo insurance.

  17. saltwaterpappy says:

    Hey John:
    To be sure, many of us came up in life by way of privilege, or as Warren Buffett would say, “the ovarian lottery.” In this respect, you will recall that on December 9, 2013 you wrote a great essay about the interconnection between poverty and culture. You explained that in Barbados, children who are raised
    where there is respect for family and authority, combined with structure at home, that these children generally
    perform better in school and contribute more effectively as functioning members of society as adults, than those individuals who are raised in dysfunctional, violent, and undisciplined environments.
    Also, Thomas Jefferson discussed that there exists a “natural aristocracy among men”. This is not politically correct. However, when left to our own devices, there are those among us who have a way of rising and succeeding, regardless of his humble beginnings. Perhaps, this is just a biological form of the “ovarian lottery”. But in my 34 years of practicing law, I have found that most people whom I have met who are part of the chronically poor, are just plain stupid–intellectually deficient. And where there is stupidity, it’s soul mate, lethargy is usually present as well. And once again, although it is not politically correct to say it, we all know that “you can’t fix stupid!”
    Therefore, as Jesus himself understood and acknowledged, “the poor you shall always have.” So instead of trying to assess blame, perhaps we should look at and apply those cultural factors that make a difference in helping people escape the cycle of poverty, and understand that our nation will always have the
    challenge of helping the chronically poor meet their basic needs.

    Pappy