BEYOND THE NUMBERS
Ryan Misleads on Safety Net’s Impact on Work
Speaking today at the Conservative Political Action Conference, House Speaker Paul Ryan argued that the safety net discourages work, claiming that if a single mother of two making roughly $20,000 “gets a raise she’ll lose 80 cents on the dollar” in higher taxes and lower government benefits, “or if she goes to work she loses more benefits than she gains in going to work.” Our new paper shows why these sorts of claims, which Speaker Ryan and other critics of the safety net have made before, are highly misleading. Here’s the opening:
Some critics of various low-income assistance programs argue that the safety net discourages work. In particular, they contend that people receiving assistance from these programs can receive more, or nearly as much, from not working — and receiving government aid — than from working. Or they argue that low-paid workers have little incentive to work more hours or seek higher wages because losses in government aid will cancel out the earnings gains.
Careful analysis of the data and research demonstrates, however, that such charges are largely incorrect and that it pays to work. In the overwhelming majority of cases, in fact, adults in poverty are significantly better off if they get a job, work more hours, or receive a wage hike. Various changes in the safety net over the past two decades have transformed it into more of what analysts call a “work-based safety net” and substantially increased incentives to work for people in poverty.
Indeed, evidence from a new Congressional Budget Office (CBO) study, as well as other data and research, show that:
Working is nearly always substantially better from a financial standpoint than not working. A critical question is whether the safety net is designed so it is worthwhile for someone who isn’t working to take a job. The answer is clear: the financial incentive to take a job is unmistakable.
To illustrate, we first consider taxes that apply to all poor single-parent families that work, along with benefits that go to all such families that qualify for them. After taking into account state and federal taxes, including federal tax credits like the Earned Income Tax Credit (EITC) and Child Tax Credit (which grow for low earners as their earnings rise), plus SNAP food assistance, a hypothetical single mother with two children taking a half-time job at the federal minimum wage gains over $10,000 in net annual income compared to not working. Her family’s income more than doubles. If she takes a full-time job at the federal minimum wage, her family is nearly $20,000 better off than if she doesn’t work; her family’s net income quadruples. Since the EITC and Child Tax Credit rise more for these families as earnings increase than their SNAP benefits decline, their assistance from government policies rises as they work more. The safety net as a whole thus increases their incentive to work.
We also consider scenarios in which families receive Temporary Assistance for Needy Families (TANF) benefits or housing assistance, which are not available to most poor families that meet those programs’ eligibility criteria. Even in the relatively infrequent examples where poor families receive both TANF and housing assistance, which generally phase down as earnings rise, the families’ incomes typically are substantially higher off if they work than if they don’t.
- Workers in poverty typically have a greater incentive to work more hours or at higher wages than other workers do. Workers with earnings below the poverty line face “marginal tax rates” — i.e., the reduction in benefits or increase in taxes for each additional dollar earned — that are typically well below those that other workers face. The median or typical worker with earnings below half of the poverty line has a marginal tax rate of 14 percent, according to CBO’s recent analysis of marginal tax rates, meaning that he or she loses 14 cents in higher taxes and/or lower benefits for each additional dollar earned. Workers with earnings between 50 and 100 percent of the poverty line typically face marginal tax rates of 24 percent. In contrast, the groups of earners with somewhat higher incomes that CBO examined typically have marginal tax rates of about 33 or 34 percent.
- Workers just above the poverty line typically also gain substantially from working additional hours or obtaining higher wages. Workers with earnings between 100 and 150 percent of the poverty line typically face marginal tax rates of 34 percent, according to CBO, or less than half the 80 or 90 percent rates that some critics of low-income assistance programs incorrectly portray as the norm (see graph).
- Critics’ examples assume that workers receive an unusual combination of benefits that few low-income workers actually get. The often-cited examples are generally atypical worst-case scenarios that apply only to a small fraction of families with children — namely, families that: a) have income in certain fairly narrow ranges, typically just above the poverty line; and b) receive an unusual combination of government benefits, all or most of which phase down in the same income range. We estimate that only about 3 percent of single mothers with two children and earnings below 150 percent of the poverty line (below about $29,000) receive the EITC, SNAP, and either TANF or housing aid (or both) and are in the earnings range where these benefits all phase down simultaneously — and consequently face marginal tax rates above 80 percent. The proportion is even smaller for other family configurations.
- El crédito tributario por hijos
- Federal Payroll Taxes
- Federal Tax Expenditures
- Fiscal Stimulus
- Marginal and Average Tax Rates
- Tax Exemptions, Deductions, and Credits
- The Child Tax Credit
- The Earned Income Tax Credit
- The Federal Estate Tax
- Where Do Federal Tax Revenues Come From?
- Where Do Our Federal Tax Dollars Go?