This post is something of a coda to my\u00a0Tuesday\u00a0post on taxes<\/a>, this time taken from the other direction.<\/p>\n

The most common objection to welfare system is that it discourages work, leading\u00a0to\u00a0protracted welfare\u00a0dependency. \u00a0This can indeed happen, and through a similar mechanism to one of the reasons that the laffer curve\u00a0eventually\u00a0bends downward. \u00a0Pretty much every benefit in the Western world is abated as your\u00a0income\u00a0increases, by which I mean it is partially (or in\u00a0some\u00a0cases totally) withdrawn as your\u00a0income\u00a0rises. \u00a0A benefit structured in this way lowers a\u00a0person’s\u00a0average tax rate (to negative numbers in some case), but increases their marginal tax rate (for every extra dollar they earn, they lose a few cents in taxes but more cents in lost welfare. \u00a0In extreme cases a household receiving many different\u00a0benefits\u00a0can end up with an effective marginal tax rate of greater than 100%. \u00a0It\u00a0should\u00a0come as no surprise if\u00a0people\u00a0in such circumstances don’t try very hard to\u00a0improve\u00a0their circumstances since very extra dollar they earn is making it harder to make ends meet. \u00a0Even before you hit the 100% mark things\u00a0become\u00a0problematic – how hard would you work to improve your\u00a0income\u00a0when you’re only getting 10-20 cents on the dollar? \u00a0Some\u00a0of\u00a0the highest marginal tax rates accrue to people on low\u00a0incomes\u00a0thanks\u00a0to the way welfare is structured,\u00a0poverty\u00a0is persistent not because of laziness but in large part because people are rationally reacting to their circumstances.<\/p>\n

So how to fix this? \u00a0There are two major solutions, with varied ideological appeal. \u00a0One option is to make beenfits less generous, which makes the effect they have on incentives less powerful. \u00a0The othe ris to make beenfits abate more slowly, which means you end up helping more people who don’t actually need help, increasing the cost of the programme.<\/p>\n

This\u00a0phenomenon\u00a0is also what led Milton Friedman to propose the Negative Income Tax, which in it’s most common form is a combined tax and welfare system that combines a flat\u00a0income\u00a0tax with a universal deduction so everyone would pay (for example) 33% of their income in taxes, less $10,000. \u00a0If you earned $100,000 you would pay $100,000 * 0.33 – 10,000 = $23,000 for an average\u00a0tax\u00a0rate of 33%. \u00a0If you earned $30,000 you would pay no tax at all, and if earned nothing at all the government would pay you $10,000. \u00a0A\u00a0system\u00a0like\u00a0this could replace unemployment, social security and most other benefits, it spreads the\u00a0disincentives\u00a0of taxation evenly across the\u00a0income\u00a0spectrum and it would eliminate the need for welfare offices entirely. \u00a0The downside is large though – it is expensive to run (carrying on my example from above multiply $10,000 by the number of adult sin the United States,\u00a0and\u00a0you’ll see what I mean). \u00a0Still I, and a lot of economists,\u00a0think\u00a0it would be a worthwhile approach to look into. \u00a0Ultimately\u00a0the improved incentives\u00a0could\u00a0improve the\u00a0lives\u00a0of the poor immensely, why promoting\u00a0independence, a combination that\u00a0should\u00a0appeal to left and right.<\/p>\n","protected":false},"excerpt":{"rendered":"

This post is something of a coda to my\u00a0Tuesday\u00a0post on taxes, this time taken from the other direction. The most common objection to welfare system is that it discourages work, leading\u00a0to\u00a0protracted welfare\u00a0dependency. \u00a0This can...<\/p>\n","protected":false},"author":234,"featured_media":302021,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":"","_wpscppro_custom_social_share_image":0,"_facebook_share_type":"","_twitter_share_type":"","_linkedin_share_type":"","_pinterest_share_type":"","_linkedin_share_type_page":"","_instagram_share_type":"","_medium_share_type":"","_threads_share_type":"","_selected_social_profile":[]},"categories":[13],"tags":[],"class_list":["post-33537","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-the-league"],"yoast_head":"\n