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Poor face equivalent 70% marginal tax rate to get out of hole   The Consumer You: Marketplace

Started Oct-22 by $1,661.87 in cats (ROCKETMAN_S); 710 views.

I've known for decades that falling into poverty often traps you in an endless Le Brea Tar Pit of hand to mouth despair due to how the web of benefits and subsidies end before most can reach the bottom rung of the ladder to get out.

Here is where someone did the math, for accounting purposes treating a loss of benefits like a marginal tax rate as a punishment for attempted success, and illustrates how maybe the way our present social safety net is structured may be penny wise and pound foolish if one's desire is to help people who have had a series of unfortunate events actually become self sufficient and reduce the bitter legacies of multi-generational poverty.

https://finance.yahoo.com/news/tax-burden-equal-70-rate-090000602.html

... Poorer families may rely on Medicaid insurance, welfare payments, food stamps, housing vouchers and tax credits that are based on family incomes. Small increases in wages can bring big losses of benefits, reinforcing a negative cycle in which workers aren’t rewarded if they improve their skills or pay. ... “This is a perverse incentive that says you shouldn’t try to make yourself better,” said Atlanta Fed President Raphael Bostic, who is leading a virtual conference Thursday intending to focus attention on the problem. “They are not dumb. It’s on us to actually change those incentives so that people understand what the potential is and move forward towards opportunity.” ... 

...  While the median low-income American family may have a marginal tax rate of about 45%, there’s a large dispersion of experiences, depending on age, family size, location and benefits. Some families face an exaggerated problem -- 70% tax rates or occasionally much more. Just $1,000 in higher pay for a single mother in Oregon, in one example cited in Altig’s research, would result in a devastating loss of $15,000 in housing subsidies. ... The researchers characterize this consequence as a marginal tax rate because it leads to the government extracting more money from low-income workers through higher taxes or reduced spending on benefits. The richest 1 percent also face a high median lifetime marginal tax rate of roughly 50 percent, but they don’t face the housing, food and medical hardships endured by the poor. ...  “These are crazy hurdles some people are facing,” Altig said. “This is a significant impediment to our capacity to move people into better and higher-paying jobs.”

Showtalk
Staff

From: Showtalk

Oct-22

It should not be that way. People shouldn’t be punished for getting a job or a better one.

Showtalk said:

People shouldn’t be punished for getting a job or a better one.

Bingo.

And the example of the single mother getting a $1000 annual raise and losing $15k in housing subsidies is not the most extreme I have seen happen to people I knew. Sometimes earning $1 too much can cost tens to hundreds of thousands in loss of access to health care, which can be a death sentence to someone with a chronic illness whose treatment is abruptly interrupted until they are too sick to keep working after they got a small cost of living raise.

Showtalk
Staff

From: Showtalk

Oct-23

At the same time, there must be a cut off number of subsidies.

Showtalk said:

At the same time, there must be a cut off number of subsidies.

You use a nice clean math equation written into the law to taper off the subsidies gently, so making $1 over the full subsidy doesn't cost them $15k in housing. A good slope number that some experiments suggest will work is about a 4:1 to possibly a 3:1 subsidy tapering off, so you lose $1 in subsidies for every $4 (or $3) extra you make. And you need to set tax policy so that until your income reaches the point that you're fully beyond the subsidy need, essentially you're in the zero bracket.

So if you need $15,000 just for housing, the assistance doesn't drop off totally until you hit $45,000 to maybe $60,000 of income - so you have something left over for food, transportation, etc. during that transition period. So if you are making, say, only $30,000, you would lose only about $7,500 in subsidies  (4:1 model) so that raise or promotion doesn't put you on the streets.

This encourages people to take that promotion, to increase their overall productivity, and by the time the housing subsidy goes completely away and they are off Medicaid, they actually are earning enough that they can afford full market price for housing and can afford medical coverage premiums.

It's like the difference between having a very low stoop on the 1st floor and the front door to success on the 5th floor, which is the present system, and a wheelchair ramp that goes up all the way to the point one can pull their own weight. So you aren't trapped in the wheelchair only able to get onto the low stoop and stare at the entrance to the building of success that is 5 stories overhead, which you can't climb to or jump. You can't take away their wheelchair the moment they manage to get more than 12 inches up a ramp and hit a blank wall.

It could be adjusted for cost of living in the area, but I'm thinking, if done properly, it will encourage people to be frugal, to save for a rainy day, and opt for cheaper housing without having to resort to something in a crime-riddled neighborhood that bullets could zing through the paper-thin walls and decomposition juices from an O.D. a floor above won't drip down into your bedroom through the light fixture.

Showtalk
Staff

From: Showtalk

Oct-23

That makes too much sense. Why can’t politicians figure it out? We all would do a better job at planning Than they seem to be.

Showtalk said:

That makes too much sense. Why can’t politicians figure it out? We all would do a better job at planning Than they seem to be.

As I once wrote in an op-ed about 40 years ago, it's because politicians are not engineers or scientists. They don't think about how one thing affects a whole lot of other things, or how to really calculate the effects before just doing it and then condemning several generations for well over a half century of unnecessary suffering, and many going to their graves with a whole lot of untapped potential never getting used.

Showtalk
Staff

From: Showtalk

Oct-24

Maybe politicians should be engineers and scientists, rather than social managers. Ron Paul and Rand Paul are doctors.  

I fear that those with serious technical and scientific training are going to be too small a minority until after civilization as we know it has ended. Maybe out descendants will be too busy trying to improve their spears and loin cloths and properly processing furs to survive the winters to worry about the nuances of social manipulation.

Showtalk
Staff

From: Showtalk

Oct-28

If it ever gets to that, social media will not be a factor.

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