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Wednesday, November 11, 2009

Jacobson: 100+% Implicit Marginal Tax Rates Will Create Permanent Democratic Majority

William A. Jacobson (Cornell), 100% Plus Taxation Key To Permanent Dem Majority:

Is it possible to pay more than 100% of your last dollar of income in taxes? And if it were, would you bother to earn that last dollar?

Herein lies the key to how Democrats will obtain a permanent, economically-enslaved majority if universal income-based health care subsidies are enacted. ... 

The key distinction is between marginal tax rate and implicit marginal tax rate. The marginal tax rate is the rate we all talk about - what absolute percentage of your last dollar earned will be taken by the government.

The implicit marginal tax rate is the absolute percentage of your last dollar taken by the government plus the loss of government benefits resulting from that last dollar. This implicit marginal tax rate can, and does, exceed 100% for the lower-middle and middle classes., and will expand under Democratic health care proposals.

Here's an explanation, plus a chart, from an article titled The Dead Zone: The Implicit Marginal Tax Rate (h/t The Right Coast):

To say that antipoverty programs in the United States are perverted may be an understatement. When you take into account the loss of means-tested benefits (e.g., cash assistance, food stamps, housing subsidies, and health insurance), and the taxes that people pay on earned income, the return to working is essentially zero for those in the lower two quintiles of the income distribution.

For many of the working poor, the implicit marginal tax rate is greater than 100%. The long-run consequence of undermining the positive incentive to work is, of course, the creation of an underclass acclimated to not working; the supplement of cash and noncash benefits with income from crime and the underground economy; and the government resorting to negative incentives such as mandatory work programs....

This situation will only get worse as Obama implements universal income-based health care subsidies and other goodies which will phase out as income rises. ...

In addition to all the other problems with highly subsidized, income-tested health care benefits, will come an even more permanent underclass which, being economically rational, will choose not to earn another dollar rather than lose more than a dollar of benefits.

Conservatives often speak of the Obama-Pelosi-Reid axis as seeking to create a permanent Democratic majority through big government handouts. This implicit marginal tax analysis shows that it is much worse than it seems; the permanent big-government majority will not be there by choice, but by government-created economic necessity.

Lower income voters, who pay no federal taxes and who are very voters facing this government-benefits trap, voted for Obama overwhelmingly, as this chart from the Tax Prof shows:

A permanent, Democratic-voting majority living off government benefits with no way out. It really is that bad, and this really is a once-in-a-lifetime chance for the Democrats to achieve a permanent, economically-enslaved majority.

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Comments

The most important distinction in outcomes within the two lowest quintiles is ability to milk the various benefit programs. Those who are adept at qualifying for benefits win, and those who are not competent to deal with the bureaucracy (or whose particular situation does not fit the template of a government program) lose.

A system in which you get ahead by earning a higher income has been replaced by a system in which you get ahead by knowing how to exploit government programs. This is what passes for progress.

Posted by: AMTbuff | Nov 11, 2009 4:32:20 PM

Seriously,

The working poor sit down and do a cost/benefit analysis on how "milking" the system is more advantageous than earning a living.

Using the "economically rational" line of thinking argument and coming to the conclusion that people choose to be poor, I'd suggest the author actually give it a try. Quit your job, become poor. I think you'll find that it was easier earning a wage as a white collar professional.

Posted by: Jay Gleason | Nov 12, 2009 8:15:54 AM

This is certainly interesting . . .

Is there some sort of link to the author's data, or an explanation of how he created those graphs? I am just curious as to how he valued the marginal economic "cost" of lost government benefits.

Also, a key factor here is whether these incentives (or disincentives) for work actually are apparent to, and affect, those in the lowest income brackets. I still hear cab drivers complaining about how, if they work Sundays, it puts their income into the next tax bracket thus forcing them to pay more taxes on all of their income. These sorts of interactions tend to give me some cynicism about whether or not we academically-oriented people are imposing our own value-laden economically rational points of view on the world around us.

Isn't it arguable that getting poor people to hospitals may raise their level of well-being while exposing them to world outside the ghetto/trailer park? IN all seriousness. I don't think most people "want" to sit around all day -- I think it is a concession to helplessness. (And, certainly, some are just lazy).

Posted by: Hmm | Nov 12, 2009 9:27:46 AM

I'm also curious where the data came from. Does it include retirement-age benefits? In order to support the larger conclusion, it needs to focus on people who are of working age, since for the elderly the limiting factor may be the labor itself rather than how their taxes are changed.

Then there's the applicability of various benefits. In a naive analysis, I could easily see [Benefit only for married couples with children] being combined with [Benefit for aged seniors], leading to a spike on the graph which virtually never actually occurs.

Posted by: Terr | Nov 12, 2009 1:16:09 PM

"Seriously. The working poor sit down and do a cost/benefit analysis on how "milking" the system is more advantageous than earning a living. "

My experience working with iliterate welfare recipients and addicts taught me that the ignorant and all but the most chemically-addled can count their money.

They have a very firm, if intuitive, grasp of microeconomics and short-term cost/benefit relationships. Add to that the aggregate, "it takes a village" wisdom of an entire community, and yes - they'll do an analysis. They'll use personal experience and anecdote rather than graphs and equations, but they'll come to the same conclusion. It's not about laziness or immorality; when it's simply easier and safer to stay where you are and take the subsidies, most people will make that choice.

Also, there is the "normalization" aspect: The "perfect storm" the author describes will extend the dead-end dependency of the underclass on government up to nearly the median household income level. Once a single generation grows with that and half - or more - of the new generation of voters think of that situation as "normal", it will become permanent.

Finally, ask yourself: What is the endgame for the elites? An even-more-permanent political ruling class and corporate oligarchy. If the current Administration has its' way, our future looks a lot like Europe.

Whether that comforts or horrifies you will have a lot to do with whether one values freedom or security; whether one values the individual or the State; whether one thinks intentions or results are what really matter.

Posted by: rocinante | Nov 13, 2009 8:33:05 AM

Not to mention a future dominated by countries with rapidly expanding economies and growing populations. (Hint: they aren't in Europe or North America.)

Posted by: rocinante | Nov 13, 2009 8:35:58 AM

Jay Gleason - In a sense, yes they do, but it is empirical, not analytical. You don't have to do a cost benefit analysis, you simply have to look around at members of the community and see who is doing what, and how it works out for them. You'll find this especially in areas where the concentration of poverty is large enough to insulate the young from examples of more successful approaches.

Posted by: Chris | Nov 13, 2009 8:52:22 AM

I am not that worried. In this globalized world, capital and talent can flee to a better climate rather quickly, causing the tax base to shrink. There are checks that get triggered long before this ever gets that far.

Posted by: Toads | Nov 13, 2009 2:55:46 PM

Jay Gleason,

the people we're talking about do not have the option of being a $150K/year professor---they may have the option of continuing to make $22K or taking a promotion with more responsibility, more work, and better prospects, and make $28K. And they may very rationally decide that the extra $6K isn't worth it, thereby also foreclosing the possibility of someday breaking thru the top of the trap at around $40K, which may just seem too far off and speculative to be credible, compared to the extra work next week if they take the promotion.

Posted by: Marty | Nov 13, 2009 10:20:18 PM