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:
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.