Must-Read: Isaac Shapiro et al.: It Pays to Work: Work Incentives and the Safety Net: “Some critics of various low-income assistance programs argue that the safety net discourages work…

…In particular, they contend that people receiving assistance from these programs can receive more, or nearly as much, from not working — and receiving government aid — than from working.  Or they argue that low-paid workers have little incentive to work more hours or seek higher wages because losses in government aid will cancel out the earnings gains…. Such charges are largely incorrect…. Adults in poverty are significantly better off if they get a job, work more hours, or receive a wage hike….

There are really only two options to lowering marginal tax rates.  One is to phase out benefits more slowly as earnings rise; this reduces marginal tax rates for those currently in the phase-out range. But it also extends benefits farther up the income scale and increases costs considerably, a tradeoff that many policymakers may not want to make. 

The second option is to shrink (or even eliminate) benefits for people in poverty so they have less of a benefit to phase out, and thus lose less as benefits are phased down. This reduces marginal tax rates, but it pushes the poor families into — or deeper into — poverty…. The ‘solution’ that some who use marginal-tax-rate arguments to attack safety net programs advance — block grants with extensive state flexibility — doesn’t resolve these difficult tradeoffs.  Instead, it passes the buck in making these trade-offs from federal decision-makers to state decision-makers.