ANTIPOVERTY PROGRAMS AND WORK INCENTIVES

Many policies aimed at helping the poor can have the unintended effect of discouraging the poor from escaping poverty on their own. To see why, consider the following example. Suppose that a family needs an income of $15,000 to maintain a reasonable standard  And suppose that, out of concern for the poor, the government promises to guarantee every family that income. Whatever a family earns, the government makes up the difference between that income and $15,000. What effect would you expect this policy to have The incentive effects of this policy are obvious: Any person who would make under $15,000 by working has no incentive to find and keep a job. For every dollar that the person would earn, the government would reduce the income supplement by a dollar. In effect, the government taxes 100 percent of additional earnings. An effective marginal tax rate of 100 percent is surely a policy with a large deadweight loss The adverse effects of this high effective tax rate can persist over time. A person discouraged from working loses the on-the-job training that a job might offer. In addition or her children miss the lessons learned by observing a parent with ~.full-time job, and this may adversely affect their own ability to find and hold a job.

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