Michael Tanner and Charles Hughes write,
In Austria, Croatia, and Denmark, the effective marginal tax rate for someone leaving welfare for work was nearly 100 percent, meaning that a person would gain virtually no additional income from working. In another 16 countries, individuals would face an effective marginal tax rate in excess of 50 percent.
Benefits in the United States fit comfortably into the mainstream of welfare states. Excluding Medicaid, the United States would rank 10th among the EU nations analyzed, more generous than France and slightly less generous than Sweden. Thirty-five states offer a package more generous than the mean benefit package offered in the European countries analyzed.
In my view, the key goal of reform should be reducing the marginal tax rate. This can be done either with a high level of benefits (in which case the budget cost is very high, and people with relatively high incomes will still be receiving benefits) or a low level of benefits (in which case we are looking for charities or local governments to fill in gaps). I prefer the latter approach.
You can look at my old posts on universal benefits or flexible benefits, often in the category “Setting Economic Priorities.” I once wanted to do a project that would try to put something like that on the agenda for the 2016 election campaign. That looks like something that would have been doomed, seeing how the campaign is actually shaping up. It looks as though the Republicans are going to have to spend so much time talking economic nationalism with respect to Mexico and China that even if they win the Presidency, they will have no economic policy mandate whatsoever.
It’s worth asking whether certain economic trends would cause this problem to exist even with flat effective marginal tax rates.
Let’s say there are two categories of consumption items – one which is affordable compared to wages but with which people achieve satiation relatively early (call it ‘stuff’), and the other for which there is plenty of ‘utility headroom’, but which is extremely expensive to upgrade, perhaps because of inherent scarcity or a zero-sum character (call it ‘neighborhood’).
The question is whether, say, a doubling of salary really has the same incentivizing importance in terms of potential utility gains for everyone in the income distribution. It seems plausible to me that in some cities, going from $10 to $20K a year household income, or $20K or $40K a year, doesn’t really offer that much ability to upgrade one’s neighborhood quality (trading off with commute times) or social status, even though one can consume lots more ‘stuff’. But from $40K to $80K is a big leap, and $80K to $160K even bigger.
Beyond the money required to pay for the basics, if it becomes very hard to upgrade one’s lifestyle without earning a lot more money, then the incentive to work beyond that ‘basic’ level, if those high-incomes are clearly out of reach, is significantly diminished, and independently of any distortions caused by taxation and social welfare policy.
I find it unlikely that an increase of salary of 30% is not going to be a significant upgrade in life style except for some special cases like video game addicts. The basics are expandable going from cooking rice and beans at home to having steaks at a restaurant is an upgrade. Changing entertainment from watching T.V. to renting a car for a trip to the state park, or flying to Vegas for the weekend. There is also gaining status in ones peer group by purchasing gifts for nieces and nephews and other relatives and buying a round of drinks for the gang at the bar.
These are fair statements, and the matter is clearly one ripe for empirical investigation. But it’s not just a question of how typical consumption baskets of similarly situation people can and do evolve with increased income at different parts of the spectrum.
The bigger question is whether, in the subjective evaluations of the people we’re talking about – especially at the low-end of the distribution – the trade off between those consumption upgrades is worth the opportunity cost in terms of loss in ‘leisure’.
This, after all, is the insight behind the Laffer Curve and Effective Marginal Tax Rate concepts – at a certain point less than 100%, we would expect people to forsake opportunities to work more and earn more money – even though they can – because the marginal utility bang isn’t worth the marginal income bucks.
What I’m saying is that even absent any taxation or regulation of work hours, we still expect people in wealthy, developed countries to work much less than every waking moment, or even their recent ancestors (remember what the infamous Lochner case was about).
And I don’t see any reason why it’s not a priori implausible that we’ve reached a stage of technological and economic development where such market trade-offs, by themselves, could generate such discouragements arising from low marginal utility, especially for workers with low or zero marginal labor productivity.
Of course there is plenty of government distortion layered on top of that, but it’s possible that this is a parallel cause that only exacerbates a problematic situation that would still exist even in the absence of those distortions.
“in which case we are looking for charities or local governments to fill in gaps.”
If the local government is to fill in gaps, why not the central government? What is so magical aboutvlocal government?
What’s magical about charity too? If the concern is incentives, any benefit that’s available to the poor but not to the less poor is the same as a marginal tax.
Arguably the only magical thing about charity is making people ashamed to use it.
Local knowledge.
The third approach is high benefits but where the cost has been moved off books through private mandates. It isn’t a ‘tax’ then, just a ‘requirement’. Sometimes this takes the form of shifting to other taxes, like property taxes.
One should keep in mind, that in at least some of these countries, welfare is not actually unconditional (anymore, some changes are relatively recent).
So the marginal tax rates can seem higher than they actually are.
For instance in Germany (my experience), the marginal tax rate on paper for going from welfare to low paid employment might well be 75%. Though if you refuse work, your benefits might be cut by a third. So the actual marginal tax rate is 50%.
(The people making the decision on whether to cut someone off, are obviously much more forgiving to single parents than to young, healthy, childless people.)
And yet Austria has a higher employment to population ratio than the US.
And I have not been able to access the numbers on US welfare recipients “income”.
Can anyone point me to that?
I doubt many people want to be on welfare. My mother was on it because she had polio and dad had post WW2 problems. I worked at an early age while entering H.S. to help out at home. Pride and humility go hand in hand. As a creative, systems thinking marketing professional I tend to look at things differently as everything has an ecosystem behind it. The gap between the few haves and the growing have-nots seems to only manifest greater greed and wealth protection. That same problem of hidden agenda’s and protectionism is hitting larger companies who pass on an ultimate value to protect their past investments. I believe this new economy and people-powered trust networks are pressuring corporations to behave and show better qualities. I worked with Bill & Dave (HP) and they got it early on. Why didn’t more emulate them? Every employee was passionate versus Gallup’s report stating today 70% of employees are emotionally disconnected from work. Education is failing and companies just go overseas. The system of everything is imploding at a time when innovation should prevail if close-minded leaders simply embrace it as vital. There are few problems, an objective, systems/critical and creative thinking team cannot solve. People with the means need to connect to people with the right capabilities and moral compass. Yes the GOP seems to be a lot of noise without a conscience or a plan. Our country has a growing list of critical things to get done. This is not a time for obstructionists. I always thought real welfare was being a politician where no one holds you accountable to do the job entrusted to you.
I still like Morgan Warstler’s “Uber for Welfare” approach best of all. Lots of nice thinking about trade-offs and incentives.
https://medium.com/@morganwarstler/guaranteed-income-choose-your-boss-1d068ac5a205
A 50 percent marginal tax seems not so bad to me. In fact I would like to see a BIG with a 50 percent marginal tax until the BIG is gone. I guess that it would encourage wives of earners to work in the taxed economy less but most men would work just as much for he 50%.
Your universal benefits or flexible benefits is just like my BIG and might be easier to sell, shouldn’t it phase out at a 50% marginal rate?
I don’t think you want a straight 50% marginal tax rate to phase new workers out of the basic income, because of the “fixed costs” as well as the disutilities of working. Let me explain with an example.
Suppose the basic income is $200/week. Suppose minimum-wage work pays $320/week. You want to encourage people to work, so working should always offer a gain over idleness. However, working not only trades off against leisure, it requires expenses for maintaining a work wardrobe, an alarm-clock, maybe a car, and the amortization of search costs. All those costs have to be paid to enable the first hour of work, and in fact are only “worth it” if amortized over many hours of work, noting of course that experience typically leads to increased wages.
A straight 50% rate would make the first 40 hours worth only $60 more than unemployment, which is $1.50/hour– not much of an incentive and maybe not even enough to recoup startup costs in a reasonable time.
So the phase-out tax rate should probably be zero on the first several weeks of work so that the worker is highly likely to gain something over not-working, considering the new worker will earn more cash but have less leisure and more expenses. Then the rate could be gradually increased, for example, 10% on weeks 10-13, 20% on weeks 14-17, etc. so that the 50% rate doesn’t apply until 6 months into the work year, by which time the worker is into marginal returns and the tax won’t seem so awful. Obviously the rate schedule should put the worker back at the basic income-tax rate (15%?) once the 50% rate has recovered the $200/week basic guarantee.