Sunday, February 24, 2008

Poverty as a way of life

Jeff Frankel and Jeff Liebman over at Harvard's Kenedy School of Govenment discussed effective marginal tax rate facing low-income workers.

Jeff Liebman is an expert on the subject and an economic advisor to Senator Obama. The tax structure makes it more expensive for some low-income workers to find a higher paying jobs.

In one case, a woman's $10,000 salary increase ended up costing her several hundred dollars per month.

Liebman says:
Despite the EITC and child credit, the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000. I told her that she should first try to find a $35k job closer to home. Also, she apparently can’t fully reverse her decision to take the higher paying job because she can’t get the child care voucher back (the waiting list is several years long she thinks). She is really stuck. She tried taking an additional weekend job, but the combination of losing 30 percent in increased rent and paying for someone to take care of her child meant it didn’t help much either.

Our future president needs to restructure the tax code to prevent the loss of child care vouchers to single parents and two-income households. Why not provide comprehensive health care to care for the children of low-income workers? They are kids who need medical service! And the Earned Income Tax Credit should not penalize workers for getting a raise!

Of course there is the potential for abuse in any system. The US does not want to wind up like the UK, giving state handouts to millions of able-body families. Let's open the way for low-income workers to get services without penalizing them for getting a pay raise!

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