BEYOND THE NUMBERS
House Speaker Paul Ryan argued yesterday that the safety net is “trapping people in poverty,” suggesting that a single mother with one child working at the minimum wage loses 80 or 90 cents in higher taxes and lower benefits for each additional dollar she earns. He then called for sweeping changes in the safety net. But the example he cites is the exception, not the rule, as data from a new Congressional Budget Office (CBO) report show.
CBO’s findings include:
- Workers in poverty face marginal tax rates — the reduction in benefits or increase in taxes for each additional dollar of earnings — that are typically far below other workers’, and dramatically below those in Speaker Ryan’s example. Workers with earnings below half the poverty line typically have marginal tax rates of 14 percent, the report estimates, meaning they lose 14 cents in higher taxes or lower benefits for each extra dollar earned. Workers with earnings between 50 and 100 percent of the poverty line typically have marginal tax rates of 23.5 percent. In contrast, the other groups of earners that CBO examined typically have marginal tax rates of about 33 percent.
- Workers just above the poverty line typically face marginal tax rates much less than half of those in Speaker Ryan’s example. Workers with earnings between 100 and 150 percent of the poverty line typically face marginal tax rates of 34 percent, according to CBO.
The Earned Income Tax Credit and the Child Tax Credit are particularly important to these results. For workers in poverty, these credits mostly grow with each dollar earned (thereby lowering workers’ marginal tax rates and increasing the incentive to work) or remain unchanged. Studies have repeatedly shown the overall positive influence of these credits on work, especially in encouraging those who are not employed to obtain a job.
To be sure, marginal tax rates can be high in certain circumstances. But the CBO data underscore that those circumstances are atypical, applying to a small fraction of households in certain income ranges who receive a range of benefits that the large majority of households don’t receive. And they’re especially atypical for workers in poverty, the CBO data show.
Moreover, in circumstances where marginal tax rates are high, the policy response isn’t clear-cut. As we’ve discussed elsewhere, one approach is to phase out benefits more slowly (but that would cost more); another is to shrink benefits for those in poverty so they have less to lose (but that would diminish the benefits’ positive impact).
Speaker Ryan hasn’t indicated which approach or combination of approaches he prefers. Instead, he largely suggests turning the decisions over to the states. That doesn’t address the issue but merely means that states would have to instead. And the concerns that he and others have raised about marginal tax rates and the safety net largely miss a critical point: due to important features of the safety net itself, workers in poverty typically face the lowest marginal tax rates of all.