Does it Still Pay to Work?

In case you missed it, Jesse Singal at The New Republic savaged a recent analysis by Wyatt Emmerich about whether it pays to work. We did a similar analysis that found that because of the withdrawal of benefits at relatively low income levels, the working poor face higher marginal tax rates on wages than Bill Gates. For every additional dollar a low-income family earns, they only get to keep 20 cents.

Emmerich illustrates how income transfers can boost the disposable income of low-income families to levels on par with families earning several times more. For instance, Emmerich’s back-of-the-envelope calculations estimate a single mother with two children, earning minimum wage ($14,500), has $3,411 more disposable income than a family earning $60,000 — all due to income transfers. National Review Online previously covered it, as did we.

Most of Singal’s complaints are trivial, but he makes a couple valid points. One is that Emmerich overstated the value of Medicaid benefits by as much as $10,000 (the true amount is probably closer to $7,000). Another complaint is that Emmerich overstated the tax liability for a family earning $60,000 (by about $5,000). For the sake of argument, let’s agree to decrease each of these values by, say, $6,000. Emmerich’s basic premise still holds.

So the bottom line is this: Under these revised assumptions the family earning $60,000 would only enjoy about $8,600 more in “economic benefits” (the phrase Singal prefers to “disposable income”) than the family earning $14,500 despite having four times the income. This creates a very high marginal tax rate as low-income families climb the economic ladder.

So while there are problems with Emmerich’s analysis, his basis conclusion is correct. Do you agree? Let us know your thoughts in the comments.

Comments (10)

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  1. Joe Barnett says:

    The point Emmerich was crudely trying to make — that welfare benefits pay better than work — was made by Michael Tanner and Stephen Moore in a 1995 Cato analysis, which found at in 40 states welfare pays more than an $8.00 an hour job and in 17 states is more generous than a $10.00 an hour job.

  2. Vicki says:

    Good post, Devon. I totally agree.

  3. Ken says:

    The answer to your question is: It pays very little to work.

  4. Devon Herrick says:

    After the passage of Welfare Reform in the 1990s, most people probably don’t realize the extent of income transfers to low-income families that still exist (health reform will boost subsidies to low and moderate-income families even higher). Besides increasing the tax burden on everybody else; large income transfers also (as noted in the post above) create disincentives to work. The reason is that the benefits withdrawn as income rises means the marginal income of a poor family increases only a small fraction (maybe as little as 20 cents) for every dollar earned. Who has the incentive to go out and work for a living (especially at a menial job) when the increase in take-home pay is so small? These types of policies essentially trap people in poverty because the marginal benefit of working is so small. This cycle is also often repeated into future generations.

  5. steve says:

    Redo the chart with correct data and label it correctly. Then you can have a real discussion. First, as noted, the cutoff in Mississippi for Medicaid for family of three is about $8000, so remove that from the chart. Next, you need to decide how to handle health benefits for the $60,000 worker. If they get their benefits from their job, like most people, that should go on the benefits list where Medicaid is listed. Next, since few people actually get Section 8 benefits, multiply the benefit by the percentage of those eligible who actually receive the benefit. I believe that is standard economic practice, if one wants to be accurate (and honest).

    Last of all, I am very disappointed that someone who writes about economics is unwilling, or unable, to differentiate between disposable income and economic benefits. These are very different terms with very different connotations. No wonder he prefers disposable income.

    Redo the chart and post it. Then you have something to talk about. If you want a fact based discussion.


  6. Devon Herrick says:

    @ steve

    Income transfers are going to vary from one family composition to another; from one community to another; from one state to another. The important point is the unintended consequences from well-meaning, but misguided policies that penalize work and create disincentives to climbing the economic ladder by lot to moderate-income families.

  7. Linda Gorman says:

    While John is correct that the point of the comparison is not undermined, it should be noted that Singal is somewhat disingenuous.

    For example, he ignores income set-asides in his claim that a mom and two kids with incomes over $8,160 are not eligible for Medicaid. In fact, the mom can disregard $175 a month per child for childcare ($200 if kids are under age 2) plus $50 a month in child support. This makes gross incomes of up to $12,960 a month eligible for Medicaid. This is much closer to Emmerich’s incorrect eligibility limit that we are told. Food stamps, WIC benefits, and so on are also not counted.

    If the mom is pregnant, incomes of up to $33,876 are eligible for Medicaid, without set-asides. The kids are eligible for Medicaid with an income of up to $24,360. For SCHIP with an income of up to $36,624.

    Singal’s calculations of the value of Medicaid are underwhelming. Medicaid is a much richer policy than the private market individual policy that he says has a deductible of “only” $3,000 and is available for less than $500 a month of after tax income. A proper comparison would determine how much the family would have to earn, pre-tax, to afford that. Medicaid covers dental, vision, lots of ancillary services, transportation, and over-the-counter drugs. None of these are covered in the private policy.

    The good news? A writer for the New Republic obviously knows that individual policies exist and that people can buy health insurance on their own. This is progress.

  8. steve says:

    “The important point”

    No, the important point in this case is the willingness to pass on false information. When you are off by $12,000, just on obvious miscalculations, you should redo the chart. I suspect you could easily redo that chart to make it meaningful if you wanted. You could also explain why it is dishonest, actually an outright lie, to call it disposable income. But, it wont be done if it risks undercutting the narrative.

    The sad part is that when I did this, it still supports the idea that some welfare is probably too generous, it just is not as overwhelming.


  9. Devon Herrick says:

    The New Republic critique was about a graphic on income transfers created by Wyatt Emmerich. I described Emmerich’s analysis as “back-of-the-envelope.” Rather than re-create a graphic that we did not create in the first place, I prefer to call your attention to the scholarly work of Jagadeesh Gokhale, Larry Kotlikoff and Alexi Sluchynsky

    This graphic from their report illustrates how low-income families often pay marginal tax rates higher upper-income families. The reason is due to large income transfers to low-income families that are withdrawn as income rises – creating a disincentive to work.

  10. Let’s not forget one of the major errors that Mr. Singal found. He asserts that Mr. Emmerich overpriced premiums that one would pay for individual heatlh insurance, if one was not on Medicaid or SCHIP.

    Mr. Singal went to and was surprised at how low the premiums are. Like almost all Americans (including me), Mr. Singal has probably never bought his own health insurance. So, he didn’t think it was possible until he did his experiment.

    Also, Michael Cannon at the Cato Institute revisited the issue of high marginal income tax rates on low-income people in Cato Policy Analysis No. 656 (1/13/2010), where he examined the tax credits, subsidies etc. in Obamacare that create marginal income tax rates above 100% for some.