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We're comparing not working to working. So it's a choice between $100 welfare, $0 working; or $75 welfare, $100 working. And anyone who still qualifies for pub

• thaumasiotes 8y ago
  But the benefits you're describing penalize gainful employment very heavily. Look at the cash flow: Before: 0 labor output, $100 income. After: $100 labor output, $175 income. You've gained $75 by doing $100 of labor, which means that the welfare program is taxing your labor income at a 25% rate. This is a fairly strong disincentive to work, and a substantial penalty on gainful employment. In the reverse direction: Before: $100 labor output, $175 income After: 0 labor output, $100 income You'd expect losing $100 of sales to represent a loss of $100 in income. But it's only a loss of $75, because the welfare program will subsidize you to quit your job. This is, again, a disincentive to work. To evaluate whether the program is an incentive to work or a disincentive to work, you have to ask whether, in the presence of the program, more work or less work is done than would be done in the absence of the program. It's not at all relevant that the marginal tax rate implied by the program is always less than 100%. As long as it's more than 0%, it is a disincentive to work.