If benefits were gradually eliminated it would eliminate the cliff. For example, cut benefits 60 cents for every dollar a beneficiary earns above $20 per week. This plan already exists in the Unemployment system.
Originally posted on International Liberty:
I wrote last year about the way in which welfare programs lead to very high implicit marginal tax rates on low-income people. More specifically, they lose handouts when they earn income. As such, it is not very advantageous for them to climb the economic ladder because hard work is comparatively unrewarding.
Thanks to the American Enterprise Institute, we now have a much more detailed picture showing the impact of redistribution programs on the incentive to earn more money.
It’s not a perfect analogy since people presumably prefer cash to in-kind handouts, but the vertical bars basically represent living standards for any given level of income that is earned (on the horizontal axis).
Needless to say, there’s not much reason to earn more income when living standards don’t improve. May as well stay home and goof off rather than work hard and produce.
This is why income redistribution is…
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