(Revised) The War on Anti-Poverty (Slightly Mathy)

Paul Ryan has a column in the Wall Street Journal attacking anti-poverty programs of the type President Johnson introduced 50 years ago, saying that they encourage people to stay poor:

And because these programs are means-tested—meaning that families become ineligible for them as they earn more—poor families effectively face very high marginal tax rates, in some cases over 80%. So the government actually discourages them from getting ahead.

The first problem with his argument goes back to econ 101: the marginal benefit of money tends to be very high at low income levels. That means that even if poor families face an effective marginal tax rate of 80%, the extra 20% that they do get by earning above the poverty line is worth a lot — probably enough to incentivize the extra effort . After all, when your cupboards are empty or your child needs new shoes, taking home an additional $20 is really important; if you have to do $100 worth of labor to obtain it, so be it.

What is more, even if the marginal tax rate were 100%, it’s still a hard sell to say that people would choose to stay impoverished. To see why, consider a poor family of three, just at the threshold of poverty: they make $19,530 per year, and their actual income is $19,530 + B where B is benefits received from the government. A Ryan-type argument is that people are discouraged from earning $19,530 + B before benefits because their net income would not change: it would be $19,530 + B + B – B = $19,530 + B. They would have put in extra work for no real gain. The problem with that argument is that after the initial loss of benefits, the effective marginal tax rate for this family is much smaller again. When they earn $19,530 + B + 1, they get to keep much more of that extra dollar because they don’t have benefits to be taken away this time.

So, with little exception, no one has an incentive to stay poor. And is that really so surprising?

Anyway, let’s take a look at the actual effects of the War on Poverty. It’s definitely a debatable topic, but this data from the US Census Bureau tells us a lot:

Capture

The decline in the poverty rate indeed seems to have accelerated after 1964 (when the War on Poverty was announced), but whether Johnson’s programs caused that is up for debate. But this graph does tell us that the War on Poverty didn’t cause greater or stagnant poverty rates.

So, this whole War on Anti-Poverty thing is really quite unfounded.

 

3 thoughts on “(Revised) The War on Anti-Poverty (Slightly Mathy)

  1. zsalem

    I’m not following the logic here. Why is it:

    A Ryan-type argument is that people are discouraged from earning $19,530 + B before benefits because their net income would not change: it would be $19,530 + B + B – B = $19,530 + B.

  2. agolicz

    I agree with zsalem, I’m a bit confused by your notation. Given that B refers to benefits from the government, what it seems like your equation is saying is that the government caps how much money you could receive from them (makes sense right?) but I thought you were referring to a model where increased wages decrease benefits (for example an increase in wage “W” would lead to a decrease in benefits “B”). Is this closer to what you’re trying to say?

    I’m not sure that Ryan is against the anti-poverty policies, he seems to talk a lot about reviewing and changing the regulation of benefits and grants to make sure the incentives always encourage people to work harder (he mentions the British Universal Credit system and the education reforms in Indiana). I think what he might be getting at with the 80% tax example is that many people might not have a strong enough incentive to earn that extra 20%, given the time they would have to spend to earn it. For example, compare two people in poverty: a single person and a parent. Assume both take on second jobs to make an additional $100 per week, but because they only get to keep 20% of it (assuming ryan’s 80% tax argument is correct). It takes them both 10 additional hours to earn this salary, at 10$ an hour (but because of the tax they’re only earning 2$ an hour). In this case, the single person might value that 20$ a week higher because they don’t have any responsibilities at home (their 10 hours is simply leisure time), but the parent might have to decide between earning an additional 20$ a week and spending an additional 10 hours with their child. In this case, the best response is not so simple.

  3. mdbold Post author

    Let me try to clear things up:

    If you earn $19,530 + B, you will not receive benefits because you’ve earned above $19,530 (I’m not sure if that number is the actual cutoff, but the point remains). So, you can either work really hard and earn $19,530 + B without receiving any benefits, or you can work slightly less hard and earn $19,530, and then have that supplemented by the amount B which the government gives you in benefits. So, you have the same take-home income either way, but you work less hard by earning $19,530 and then having that supplemented with benefits. Ryan says that this discourages people from getting ahead.

    “I think what he might be getting at with the 80% tax example is that many people might not have a strong enough incentive to earn that extra 20%, given the time they would have to spend to earn it.”

    Yes, that is exactly what he is saying, and that is what I argue against by noting that that extra $20 means a lot to poor people. In fact, it probably means so much that it is worth earning $100 even if you only get to take home $20 (ie it is still worth it to work hard even if, at that particular margin, you are effectively taxed 80%).

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