Government Makes Work Costly, Especially for Lower Income Families
DALLAS (March 6, 2003) — The decision to work in America is costly, according to a study released today by the National Center for Policy Analysis (NCPA). The study finds that most Americans lose more than half of the income they earn to taxes and lost government benefits, with the highest penalties imposed on low-income workers.
The study calculates the cost of work by including such forgone government benefits as welfare, Medicaid and Food Stamps, as well as the loss from higher income, payroll and sales taxes. The study also calculates future costs and benefits, including Social Security benefits earned by working and taxes on those benefits.
“Our system offers generous benefits for people who do not work, but as soon as they begin to earn money we strip away those benefits at a steep rate,” said NCPA Senior Fellow Laurence Kotlikoff, professor of economics at Boston University and co-author of the study with Jagadeesh Gokhale, senior economic advisor at the Federal Reserve Bank of Cleveland.
Kotlikoff and Gokhale measured the net effect of working versus not working for a couple with two children. They found that:
- If neither spouse works, the family can expect to receive government benefits over their lifetimes worth $490,000 at today’s prices.
- If both spouses work and earn minimum wage ($5.15 per hour), however, lost government benefits plus taxes will combine to cost them more than 80 percent of their income over their working lives.
- Of the penalties for working, two-thirds consists of loss of government benefits.
“The system is highly progressive,” said Kotlikoff. “But the price of our generosity is that we have made work very unattractive for low-income families.”
Kotlikoff and Gokhale also found that disincentives to work progressively worsen the more hours of work there are, again due to the sacrifice of government benefits and taxes:
- At the minimum wage, two spouses working full-time rather than half-time lose 97 cents of every extra dollar earned.
- At $7.73 per hour (1.5 times the minimum wage), working full-time rather than half-time costs the couple $1.06 of every extra dollar – literally working more and earning less.
“At a time when our national welfare policy is designed to encourage work,” Kotlikoff said, “our nation’s fiscal system makes work very unattractive.”
High-income families are also penalized for working, mainly through higher taxes. However, the penalties for working – although high – are much lower than for low-income families. For example, a family earning about $100,000 a year will lose 58 percent of income because of government policies.
Overall, Kotlikoff and Gokhale also found that the fiscal system is highly progressive, as measured by share of lifetime earnings paid in net taxes, especially at low-incomes.
- For workers earning the minimum wage, the government supplements lifetime income by 32 cents on the dollar.
- But those earning 1.5 times minimum wage pay 15 cents on every dollar earned in net taxes.
This lifetime net tax rate gradually rises to 51 cents on the dollar for those earning 40 times minimum wage.
Click here for the complete study.