Which Americans pay the highest effective marginal income tax rates? Most folks would probably say, "With a progressive income tax, it's obviously the highest-income earners." Perfectly logical response, and also wrong. Actually, with our hodgepodge of welfare/income support programs, it's the lowest earners who see the highest effective marginal income tax rates.
Look at all the public benefits available to those with low or no earned incomes. A list of major programs includes subsidized health care/health insurance (
All these programs have one thing in common: As your work income increases, your benefits go down and are eventually eliminated. If someone's earned income is so low as to qualify for several of these programs, the effective tax rate on additional income can run 50 percent to 90 percent. Each dollar of additional work income costs you an almost equal amount of lost cash or in-kind government assistance. Depending on the state and income range, it can actually exceed 100 percent.
Economists often call this the "poverty trap." Why work or find a better-paying job if it makes you no better off? Pretty much everyone agrees this is lousy, but no one yet has come up with a good answer.
One way is to eliminate all these programs-which, by the way, will not happen. Another is to not phase out eligibility as incomes rise, but this would create even crazier, perverse incentives. Everyone would have an incentive to contrive a period of low or no income, qualify for subsidies, then collect those for life no matter how high income goes.
One idea receiving serious attention in policy circles is a "Universal Basic Income." UBI schemes come in various flavors, but all involve repealing existing means-tested welfare programs. Replace them with a small, government-provided income for every adult, something like
Both free-market economist