The way government-welfare programs are structured, recipients face the loss of benefits if they earn money over a certain threshold. That is known as the “benefit cliff” problem. It’s real.
But of greater importance is the problem of “disincentive deserts” argues Professor Craig Richardson in this AIER article.
Here’s his explanation:
But there is a more subtle problem around how these welfare programs are constructed, and it’s far more insidious to upward economic mobility. Let’s take a closer look. When a person enrolls in a social safety net program, he cannot stay on it forever, regardless of salary increases. Otherwise the program would be prohibitively expensive to taxpayers. This means the benefit must roll back at some rate as income increases. A benefit reduction rate (BRR) is the rate at which benefits decrease for every dollar earned. For example, suppose SNAP (food stamp) benefits decrease by 24 cents for every 1 dollar a recipient earns. This is equivalent to a 24 percent income tax. Now suppose we add in a childcare benefit, which decreases in dollar value by 10 cents per dollar earned. Add the two BRRs together, and this acts just like a 34 percent tax on every dollar earned. Add in a 7.65 percent payroll tax and now we are up to a 41.65 percent tax on income.
By Richardson’s calculations, workers who are climbing the economic ladder often face effective tax rates of more than 80 percent. Government policies nearly always have unintended consequences, and here we see clearly that welfare acts to deter work (at least work that yields income the government knows about).
Richardson suggests that employers could help to alleviate this problem by compensating lower-income workers more with in-kind benefits.
Read the whole thing.