Low-wage workers face shockingly high marginal tax rates as they earn more once the loss of government benefits are taken into account, according to researchers at the Federal Reserve Bank of Atlanta.
“Our findings are striking,” the researchers say. “One in four low-wage workers face marginal net tax rates above 70 percent, effectively locking them into poverty.”
That means that some low-wage workers will keep just $30 for every extra $100 they earn, due to tax payments and the loss of benefits such as Medicaid, food stamps and housing vouchers. In some cases, the tax rate is even higher, such as when a few hundred dollars in extra income results in the loss of thousands of dollars’ worth of housing aid.
“This is a perverse incentive that says you shouldn’t try to make yourself better,” Atlanta Fed President Raphael Bostic told the Bloomberg. “They are not dumb. It’s on us to actually change those incentives so that people understand what the potential is and move forward towards opportunity.”
As part of an effort to reduce intergenerational poverty, the Atlanta Fed is working on tools that allow low-wage workers to earn more while minimizing the loss of support payments. “These are crazy hurdles some people are facing,” Atlanta Fed Research Director David Altigsaid said. “This is a significant impediment to our capacity to move people into better and higher-paying jobs.”