Beating the Poverty Trap
Low-income families, especially single-parent households, often rely on state and federal benefit programs, such as the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), Medicaid, tax credits, and others. Many of these programs provide crucial support for low-income families, and nearly all of them have gradual phaseouts that wind down benefits as income rises. Independently, these phaseouts make sense.
However, at a certain point, there is a clear disincentive to bring additional earnings from work into the household. Because increasing earnings by one dollar results in the phaseout of almost one dollar and sometimes more of benefits, there is a potentially harmful impact on disposable income.
For instance, consider the scenario of a single mother with two children making $17,000 a year living in Wisconsin in 2009 who claims all available deductions and participated in all eligible benefit programs. If this single mother were to work extra hours or receive a raise so that her earnings increase to $21,000, she would only see $540 of that $4,000 in new earningsshe would have lost $3,460 in benefits. That amounts to almost an 88 percent effective tax rate, leaving the hard-working parent and her children little to show for the extra effort. Even more shocking is that if this mother received a raise or worked more to raise her earnings another $1,000 to $22,000, she would actually have less in disposable income than she had when earning $21,000.
How can this be?
It all comes back to benefit phaseout schedules. For instance, SNAP benefits for a single mother in some states gradually diminish as income rise and eventually stop when earnings reach $23,000 annually, leading to over 100 percent in effective taxation at some pointmeaning that you lose more than you bring in.
It takes a deep dive into the numbers for lawmakers and policy experts to understand the situation, but for millions of low-income families the results are an everyday reality. By comparison, a middle-class single mother of two making $55,000 a year whose salary rises by $5,000 would see approximately $3,500 of the increasefurther suggesting that hard work pays more for middle-class families than those at the bottom. This is surely not the message government should be sending.
Another consequence that at least in part derives from the substantial phaseouts built into current benefit schedules is the declining rate of marriage in the United States. According to a December 2011 report from Pew Research, Social and Demographic Trends, only 51 percent of adults are now married. This compares unfavorably with the 72 percent achieved in 1960. Viewed together with the increasing incidence of children being born into unmarried households, it is clear that these trends are headed in the wrong direction.
Several factors play into these negative social trends, and I do not suggest that government policy is solely to blame. At the same time, the impact of these disincentives built into our social safety net merit our consideration.
If our single mother making minimum wage decides to get married to someone making roughly the same income, this family would have approximately $8,000 less annually than if they were to live together unmarriedhardly a marriage incentive. And study after study shows that children are far more likely to succeed if they grow up in a two-parent household.
So, where do we go from here?
The problem has its roots in a lack of coordination of state and federal programs. Little has been done to coordinate or fully understand how multiple benefit programs and their phaseouts affect low-income families and their decisions to work harder or get married. There are many possibilities for reform, but ultimately a greater understanding of the problem is necessary before we move forward.
That is why I۪ve introduced the Making Work and Marriage Pay Act with Congresswoman Niki Tsongas (D-MA) to bring together governors, lawmakers, and policy experts to study the issue and recommend solutions. This bipartisan bill would signify that Congress recognizes the problem and is committed to doing something about it.
Social safety net programs are meant to be a last resort for those who fall on hard times, and were never meant to be a trap. Low-income families deserve to reap the rewards of their hard work and should be able to marry without the government holding them back.
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U.S. Representative Tom Petri represents Wisconsin۪s sixth congressional district.
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