4 ms·

It's true that the price of receiving a subsidy at all is that any money you make is going to be effectively taxed at a higher rate than it would have been othe

It's true that the price of receiving a subsidy at all is that any money you make is going to be effectively taxed at a higher rate than it would have been otherwise. I think people can live with that as long as the effective tax rate doesn't get too high. Not sure what "too high" would be for most people, but I would guess that as long as the total effective incremental tax rate is never over 60% — meaning that after the reduction of the subsidy plus income tax, one would never keep less than $.40 of one's next dollar in earned income — that would probably be good enough. Yes, there will still be people who will find that a barrier, but at least there won't be this point where your next dollar of earned income will be effectively taxed at 50,000%. The extreme version is UBI, where everyone receives the full subsidy unconditionally, and the effective incremental tax rate is always just the income tax rate. I'm not sure that's a bad idea, but we could get rid of the current cliff much more easily than we could institute a full-blown UBI.

SilasX 8y ago
>It's true that the price of receiving a subsidy at all is that any money you make is going to be effectively taxed at a higher rate than it would have been otherwise. I wasn't referring to that; I was referring to the decreasing-subsidy-as-income-goes-up as being effectively a marginal tax. (I think the rest of your comment is recognizing it as one.) >I would guess that as long as the total effective incremental tax rate is never over 60% — meaning that after the reduction of the subsidy plus income tax, one would never keep less than $.40 of one's next dollar in earned income — that would probably be good enough. Yes, there will still be people who will find that a barrier, but at least there won't be this point where your next dollar of earned income will be effectively taxed at 50,000%. Even a 60% marginal tax is very strongly disincentivizing and makes it difficult to justify most any feasible long-term plan for increasing one's productivity from a poverty level. >The extreme version is UBI, where everyone receives the full subsidy unconditionally, and the effective incremental tax rate is always just the income tax rate. I'm not sure that's a bad idea, but we could get rid of the current cliff much more easily than we could institute a full-blown UBI. Right, that's the major upside of UBI. The downside is that it's really expensive (in terms of tax rate relative to benefits) and can't be concentrated on people who might need more help (temporary or otherwise) than others. And if you combine the two, then it's an even more punishing tax with its own effects.
- ScottBurson 8y ago
  > Even a 60% marginal tax is very strongly disincentivizing and makes it difficult to justify most any feasible long-term plan for increasing one's productivity from a poverty level. Are you aware of any research that bears on this question? Right now we just seem to have dueling intuitions. Anyway, I already agreed that some people will find it disincentivizing. But again, the disincentive can't be anything like the massive one we currently have with the cliff. Do you really not think that what I'm proposing would be an improvement over the status quo?
  - SilasX 8y ago
    Okay, let me give you the details of intuition then: the typical person in poverty might optimistically hope to go from $30k/year to $60k/year. But the typical such person has a high time preference and is only able to defer earning income under very difficult terms (e.g. high interest rates). But at a 60% effective tax on making that transition and given the long time it takes to bring it about, you need someone with an unusually low time preference and high luck for that to look worthwhile. (You would be correct that you could have a poverty program that directly targets the high impediments that exist in the short term e.g. getting childcare for when you have the night classes, low-interest loans to cover short term expenses, etc. But those would also be different policies from simply giving stuff at a lower-effective-marginal-rate than the step function does, and it would be adding the kinds of incentive effects that I have been emphasizing as more important.) If you model everyone as being the go-getter high-potential individual that you are, you'll have a different intuition on it; I don't think that model is accurate on average.
    - ScottBurson 8y ago
      Just to be clear, I don't necessarily oppose those other programs, and I never suggested that getting rid of the step function was the only thing that should be done, though I continue to believe that that in itself might be a very substantial improvement. At the very least, any welfare reform bill should clearly include that as a key component.
- 8y ago

SilasX 8y ago

>It's true that the price of receiving a subsidy at all is that any money you make is going to be effectively taxed at a higher rate than it would have been otherwise. I wasn't referring to that; I was referring to the decreasing-subsidy-as-income-goes-up as being effectively a marginal tax. (I think the rest of your comment is recognizing it as one.) >I would guess that as long as the total effective incremental tax rate is never over 60% — meaning that after the reduction of the subsidy plus income tax, one would never keep less than $.40 of one's next dollar in earned income — that would probably be good enough. Yes, there will still be people who will find that a barrier, but at least there won't be this point where your next dollar of earned income will be effectively taxed at 50,000%. Even a 60% marginal tax is very strongly disincentivizing and makes it difficult to justify most any feasible long-term plan for increasing one's productivity from a poverty level. >The extreme version is UBI, where everyone receives the full subsidy unconditionally, and the effective incremental tax rate is always just the income tax rate. I'm not sure that's a bad idea, but we could get rid of the current cliff much more easily than we could institute a full-blown UBI. Right, that's the major upside of UBI. The downside is that it's really expensive (in terms of tax rate relative to benefits) and can't be concentrated on people who might need more help (temporary or otherwise) than others. And if you combine the two, then it's an even more punishing tax with its own effects.

ScottBurson 8y ago
> Even a 60% marginal tax is very strongly disincentivizing and makes it difficult to justify most any feasible long-term plan for increasing one's productivity from a poverty level. Are you aware of any research that bears on this question? Right now we just seem to have dueling intuitions. Anyway, I already agreed that some people will find it disincentivizing. But again, the disincentive can't be anything like the massive one we currently have with the cliff. Do you really not think that what I'm proposing would be an improvement over the status quo?
- SilasX 8y ago
  Okay, let me give you the details of intuition then: the typical person in poverty might optimistically hope to go from $30k/year to $60k/year. But the typical such person has a high time preference and is only able to defer earning income under very difficult terms (e.g. high interest rates). But at a 60% effective tax on making that transition and given the long time it takes to bring it about, you need someone with an unusually low time preference and high luck for that to look worthwhile. (You would be correct that you could have a poverty program that directly targets the high impediments that exist in the short term e.g. getting childcare for when you have the night classes, low-interest loans to cover short term expenses, etc. But those would also be different policies from simply giving stuff at a lower-effective-marginal-rate than the step function does, and it would be adding the kinds of incentive effects that I have been emphasizing as more important.) If you model everyone as being the go-getter high-potential individual that you are, you'll have a different intuition on it; I don't think that model is accurate on average.
  - ScottBurson 8y ago
    Just to be clear, I don't necessarily oppose those other programs, and I never suggested that getting rid of the step function was the only thing that should be done, though I continue to believe that that in itself might be a very substantial improvement. At the very least, any welfare reform bill should clearly include that as a key component.
8y ago