When It Comes to Taxes on the Poor, the Supply Siders Are Right

A couple of days ago, I referred to the fact that poor people face some of the highest marginal tax rates in America. I received several emails from economics professors, gently correcting me: they face all the highest marginal tax rates in America. Because they lose benefits and tax credits, it can actually cost them money to get better jobs. That some of them take those better jobs anyway is a stunning testament to the power of character. This is what those high marginal tax rates look like in graph form: Screen shot 2011-12-16 at 8.21.20 AM.png And this is what they look like in narrative form:

 
"Despite the EITC and child credit, the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn't make ends meet any more. I told her I didn't know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000. I told her that she should first try to find a $35k job closer to home. Also, she apparently can't fully reverse her decision to take the higher paying job because she can't get the child care voucher back (the waiting list is several years long she thinks). She is really stuck. She tried taking an additional weekend job, but the combination of losing 30 percent in increased rent and paying for someone to take care of her child meant it didn't help much either.

The question is what is the policy solution here. Means-tested transfers have to be phased out at some point, so there is no easy answer.
(Thanks to Jonathan Meer for the pointers)

Note two things: first, that in this case, at least, the supply siders seem to be completely right.  Everyone I've spoken to about the problem seems to agree that the poor respond to these high marginal tax rates by either taking lower-paying jobs than they could, or working less--not in every individual case, but in aggregate.

And second, that this is not a problem that supply siders seem to be applying much brain power or political capital to fixing.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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