Tuesday, February 19, 2008

Life on the Margins, 'Winger Style

We’re doing the economic nerd thing this week. My original headline was above but the editor improved it.

East Valley Tribune, Feb. 17, 2008

This week’s column is indebted to the blog of Harvard University
Prof. Jeffrey Frankel, which I stumbled upon while researching recessions. Frankel serves on the Business Cycle Dating Committee of the National Bureau of Economic Research. Rather than fixing up lonely graduate students, the committee reviews economic data and officially designates when recessions begin and end. It’s all retrospective; the committee announced the end of the last recession, in November 2001, in July 2003. NBER will tell us if we’re in a recession; unfortunately, they won’t tell us for 2 years.

Recent blog posts by Prof. Frankel also had some interesting insights into a bit of conservative dogma, the effect of marginal tax rates on work incentives.

You can take a basic principle -- people need to drink water -- but can push it to deadly extremes of water intoxication or hyponatremia (the physiological version of the fraudulent claim, “cutting taxes boosts revenue!”). So, too, with marginal tax rates. Yes, if additional earnings faced 100 percent tax, people would lack incentive to work more.

But we don’t have 100 percent rates, or anything close. Current rates, in the mid-thirties, don’t generate those outsized incentives. So while marginal tax rates affect behavior, the effects at current rates are rather small. Do you
personally know anybody who stopped working because of a tax hike -- or who started working harder because of a tax cut?

Conservatives profoundly believe that marginal tax rates have a huge effect on work incentives, but they have a rather narrow attitude toward those affected by those incentives. It’s well-known that effective marginal tax rates on people at the bottom, trying to escape poverty, are often much greater than the rates on the really rich. Unfortunately, the tax cuts enacted by the Republicans over the past seven years went overwhelmingly to those at the top, and ignored those trying to lift themselves by their proverbial bootstraps.

It’s called the “poverty trap,” and Frankel and his colleague Jeffrey Liebman recount the story of a woman doing her part to achieve the American dream, but it was backfiring. She had a $25,000 a year job, then got a $35,000 a year job but had less money.

The new, higher-paying job cost her hundreds of dollars each month. She no longer qualified for Medicaid, and instead had $230 per month deducted from her pay for health insurance. Her subsidized rent increased by 30 percent because of her increased income. She also lost her access to child care vouchers, which helped subsidize her child’s after-school care by $280 per month. Her increased income also reduced her Earned Income Tax Credit payment by an additional $1,600 per year. The new job required a longer commute, with about $300 per month in gas and parking that she didn’t have to pay before. And, of course, her payroll taxes at the new job were higher. Add it all up, and her marginal tax rate was closer to 130 percent.

Maybe the heartless libertarians among my readers think the poverty trap is just big, bad government at work, and that there just wouldn’t be any disincentive for work if the single mom hadn’t had access to subsidized health care, rent, and child care. But then the single mom and kid couldn’t have survived at $25,000 a year. Maybe you consider their lives irrelevant, even disposable, simply not worth your time or taxes.

But wouldn’t your anger be better directed at those who did benefit so much from the tax cuts of the past 8 years, and their political servants who sent that largess to them? Wouldn’t it have been better to do something about the poverty trap than to shower yet more tax breaks on the wealthiest?

Was it really so utterly miserable to be a millionaire in 2000 that we just had to cut their taxes -- without doing anything to help the single mom with the new, better-paying job, who now has less money and can’t make ends meet?

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