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The Welfare Trap

One thing conservatives constantly worry about is the danger of creating a welfare trap: a situation in which the welfare state is so entrenched that working is actually less profitable than being dependent on the state.

Check out this amazing graph from The Spectator on the UK’s welfare system:

How’s that for a perverse incentive? Lost benefits and increased taxes mean that, for a single mother, increasing her earnings from 0 to 15,000 pounds only increases her net income by 5000 pounds. Would you work for 1/3 of the wages? At certain points, she is losing 95 pence for every new pound she earns.

if I was in a position of a British single mother I have not the slightest doubt that I would choose welfare. Why break your back on the minimum wage for longer than you have to, if it doesn’t pay? Some people do have the resolve to do it. I know I wouldn’t. …So let’s not talk about “lazy” Brits. The problem is a cruel and purblind welfare system which still, to this day, strengthens the welfare trap with budgets passed without the slightest regard for its effect on the work incentives on the poorest. …Meanwhile, the cash-strapped British government is still creating still the most expensive poverty in the world.

Keep in mind that to get out of the welfare trap — to get to income levels where it does pay to work, you generally have to work your way up. You might spend years at low pay building your resume for a higher-paying job. So the real cruelty is not just that this traps people in dependency, but that it puts grease on the bottom rung of the socioeconomic ladder. It pulls back the possibility of rising above minimum wage.

OK, that’s Britain, you say. It could never happen here. Wrong. The CBO just issued a report showing that marginal rates for low-income workers are about 30-35%. And that’s an average. At certain inflection points, the marginal rate is over 100%, once the Obamacare subsidies kick in. And, even now, the marginal rate is over 60% as you cross the poverty line.

As with the UK, these traps in the tax/welfare system are created because politicians are not doing their damned homework. They have created a system so complex that only a bevy of CBO accountants can untangle it all. But look at those numbers and ask yourself: could this maybe be contributing just a tiny little bit to exodus of so many people from the work force?

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  1. InsipiD says:

    How true. That said, when I worked for a government agency, you could literally hear some of the folks voicing the very same thing. Their laments were different but the statements the same.

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