Friday, November 13, 2009

Yes, In Virginia There is a (Bad?) Santa Claus

One of the topics in our Economics of Compassion course is domestic poverty, and one of the issues that we've always noted were the unintended consequences of assistance to low income families. One of the big problems is that as the parent(s) work more, they lose some of their existing assistance, so that the "effective marginal tax rate" is high, even though poor people pay almost none of the U.S. personal income tax. Doug wanted to discuss this issue more in the course this year, and then (thanks to Instapundit) I stumbled onto an actual estimate of these effects, in a blog by Thies. *

What this study estimates, is that for a family of 3 in Virginia, total income (earnings less taxes plus assistance programs) for a totally destitute family appears to be just above $30,000. A small amount of earned income raises that to about $40,000 per year. However, as the family increases its earnings, total income actually falls due to the loss of various government entitlement programs. The family doesn't get out of this government dependency trap (that is, they don't recover their lost income) until employment earnings surpass something around $50,000 per year.

Doug and I were staring at these numbers in amazement. The economic implications of this are staggering, but so are the ethical and moral implications. Look for us to ponder this and expand our thoughts in future posts.

*Disclosure: I always like to see and refer to original sources. The Thies page provides the technical details of the graphs. I found this original source by working backwards from Instapundit through blogs by TaxProf, Mankiew, and Kling.