Paul Krugman provided some class notes on his site today. In them, he reprinted a graph from The Hefty Penalty on Marriage Facing Many Households with Children. The graph confused me to be honest. As a result, I read the original paper and managed to figure it out. Lucky you because (hopefully) you won’t have to do that. Here’s the graph:
What this shows is the marginal tax faced by a low-income single parent family with two children. The first bar is the effective combined federal and state tax on every extra dollar they make. So assuming the mother has a $20K per year job, she will face 35.9% in direct taxation for all the income she receives from a second job should she decide to take one. This is about incentives. Conservatives claim that rich people will not work as hard if we raise their taxes. Even though the taxes may be very low for this family now, there is a substantial disincentive to make more money. But it gets worse.
The second bar includes government food and medical benefits. As the mother in our hypothetical family makes more money, she will also have her family’s benefits reduced. This provides yet more disincentive to get that second job. In this case, it brings the effective pay of that second job down by 58.8%. But again, it gets worse.
The third bar includes direct welfare supports. When this is taken into account, the effective pay of the second job goes down by a staggering 88.6%. Meanwhile, for the same family making $90K per year, the only disincentive is direct taxation: 33.2%.
What this all means is that tax and social service policy is designed to make the poor stay poor. Most people forced to get a second job, will be getting a poorly paying job. For example, if the job pays $8.75 per hour, the effective take home will be less than $1.00 per hour. The $90K family, even if it took the same crummy job would be taking home $5.85 per hour—almost 6 times as much for the same work!
Am I the only one who thinks this is shocking?