The Poverty Trap

Chapter 20 of my favorite textbook has a section on antipoverty programs and work incentives. One basic point is that when multiple income-based programs are piled on top on one another, the implicit marginal tax rate can reach or even exceed 100 percent.

The chart above (source, via Kling) illustrates this phenomenon. It shows income after taxes and transfers as a function of earned income. Notice that as earned income rises from about $15,000 to $30,000, income after taxes and transfers is roughly flat. Indeed, it could even fall. The bottom line: If you are poor, the government is inadvertently ensuring that you have little incentive to try to improve your condition.

Request to CBO: Can you please make and disseminate charts like the one above? Producing this kind of chart correctly is not easy (and I cannot fully vouch for the accuracy of this one) because a variety of different government programs are involved, and their rules are often complex. CBO has the staff to do it right. Moreover, if such a chart came from a high profile, widely respected, and nonpartisan source such as CBO, the problem would get more attention. It certainly deserves it.

I bet there are people in the Obama administration who are quietly worrying about this problem. Why do I say this? Read this old post. The story there is told by Jeff Liebman, a very smart Kennedy School professor now working for President Obama.

Update: Here is some related work by Larry Kotlikoff and David Rapson.