Wednesday, December 4, 2013

Almost Too Much Logic

Peter Orszag, former head of the Obama administration's Office of Management and Budget, proposes a way to help low-wage workers. It would have the side benefit of getting the economy moving through more consumer spending.

A low-income single parent can experience a marginal rate as high as 95 percent — for each dollar earned, the person takes home only 5 cents. And for married parents, the marginal rate for the family’s secondary earner can be almost as high.

This happens mostly because various means-tested benefit programs are phased out as income increases. A secondary earner who raises a family’s income to $30,000 from $15,000, for example, will trigger a decline of about $1,500 in the family’s Earned Income Tax Credit and a drop in food stamp benefits of almost $3,000. Factor in the child-care costs necessary for the second parent to work, and the family will take home less than 40 cents of each additional dollar earned.

If we care about encouraging work, these high marginal tax rates for low-income families deserve as much, if not more, attention than the rates for the biggest earners.

One way to boost work incentives for secondary earners is to create a new tax break for them. This is what University of Maryland economists Melissa Kearney and Lesley Turner have proposed. (Kearney is also the new director of the Brookings Institution’s Hamilton Project.) They recommend a deduction of up to 20 percent of a secondary worker’s earnings.

This proposal is similar to a tax provision that was briefly in effect during the 1980s. And it could be paid for, as Kearney and Turner suggest, by paring back other, less important tax breaks. It would encourage employment among secondary earners, who are still disproportionately women, by increasing their net income when they work outside the home.
The income cut-offs for safety net programs have never made sense to me—child care subsidies, for instance. When Daughter Number Three-Point-One was in child care, I knew a single mom who had to turn down a raise because it would put her over the top end for the child care subsidy, but wouldn't pay anywhere near enough to cover the cost of child care either. The gap between the two amounts was glaringly large.

It doesn't seem like it should be that hard to make those transitions more gradual. Why haven't we figured this out by now?

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