Step-function subsidies are evil. (A "step function", in math, is a function whose value changes sharply at a single point, like a stairstep.) They're evil for just the reason being discussed here, that they create a point where a small increase in earnings causes a large decrease in total income.
When it comes to income taxes, our legislators are smart enough to use piecewise linear functions, but somehow this very small amount of mathematical sophistication goes out the window when it comes to subsidies for the poor.
And people's lives are ruined.
Yes, but it's also hard to avoid when you are offering non cash welfare. An example for middle income people is affordable housing. You get into the unit (saving you $25k+ over market rate) if income below $X. Otherwise, you don't.
I haven't figured out a way to avoid this cliff that isn't exceedingly complicated or violates the intention of the program.
I don't have a solution, hence why I ask.
This also means that the family receiving the subsidy can live wherever they want. I think some of the smarter housing programs already work this way.
The extreme version is UBI, where everyone receives the full subsidy unconditionally, and the effective incremental tax rate is always just the income tax rate. I'm not sure that's a bad idea, but we could get rid of the current cliff much more easily than we could institute a full-blown UBI.
I wasn't referring to that; I was referring to the decreasing-subsidy-as-income-goes-up as being effectively a marginal tax. (I think the rest of your comment is recognizing it as one.)
>I would guess that as long as the total effective incremental tax rate is never over 60% — meaning that after the reduction of the subsidy plus income tax, one would never keep less than $.40 of one's next dollar in earned income — that would probably be good enough. Yes, there will still be people who will find that a barrier, but at least there won't be this point where your next dollar of earned income will be effectively taxed at 50,000%.
Even a 60% marginal tax is very strongly disincentivizing and makes it difficult to justify most any feasible long-term plan for increasing one's productivity from a poverty level.
>The extreme version is UBI, where everyone receives the full subsidy unconditionally, and the effective incremental tax rate is always just the income tax rate. I'm not sure that's a bad idea, but we could get rid of the current cliff much more easily than we could institute a full-blown UBI.
Right, that's the major upside of UBI. The downside is that it's really expensive (in terms of tax rate relative to benefits) and can't be concentrated on people who might need more help (temporary or otherwise) than others. And if you combine the two, then it's an even more punishing tax with its own effects.
Are you aware of any research that bears on this question? Right now we just seem to have dueling intuitions.
Anyway, I already agreed that some people will find it disincentivizing. But again, the disincentive can't be anything like the massive one we currently have with the cliff. Do you really not think that what I'm proposing would be an improvement over the status quo?
(You would be correct that you could have a poverty program that directly targets the high impediments that exist in the short term e.g. getting childcare for when you have the night classes, low-interest loans to cover short term expenses, etc. But those would also be different policies from simply giving stuff at a lower-effective-marginal-rate than the step function does, and it would be adding the kinds of incentive effects that I have been emphasizing as more important.)
If you model everyone as being the go-getter high-potential individual that you are, you'll have a different intuition on it; I don't think that model is accurate on average.
Citation needed. What I've read is that even an 80% marginal tax does not create strong disincentives.
Think of it this way. Most people spend 95-105% of every dollar they earn, and very few of those dollars are very elastic. The vast majority of those dollars are already allocated for taxes, rent/mortgage, food, car payments, et cetera and only a couple of pennies of every dollar made is discretionary. But if you're able to pick up an extra shift, the extra dollars you make from that are purely discretionary. So even 20 cents on the dollar is a windfall.
1. I personally am very attuned to marginal tax rates and opportunity costs. e.g.
a. I won't pick up the extra shift because I'd rather be doing something else than earning $0.2/dollar. (This happened to me in my lower-income days as a student. Due to X hours/week of being a TA giving a tuition waiver, I would never work more than X hours due to the marginal income beyond X hours being so much lower)
b. This happens to me today where I'll take long breaks between jobs I might otherwise not take. I take longer breaks than I would if we had a flat tax, because my loss of income is (1-marginal_rate) * salary, rather than the significantly higher (1-effective_rate) * salary. Similar thing applies in windfall years (e.g. IPO generating large taxable incomes), where I'll opportunistically take months off.
2. I've generally found others to be much less in tune to marginal rates, etc. So my hunch is that marginal rates are not that disincentiving as GP might suggest.
That is, if every $100/month gain in wages comes with a $30/month decrease in subsidy, that's effectively a 30% marginal tax (on top of all their other taxes).
(And I don't know what you mean by "just tweak the numbers"; the more generous benefits you want, the more you have to disincentivize work; no amount of "tweaking" avoids the core tradeoff.)
Personally, I would prefer if all welfare was unconditional and we did all of this tweaking through the explicit tax code, but that is an implementation detail.
>The more generous benefits you want, the more you have to disincentivize work;
What disincentives work is the marginal decrease in benefits. Assuming you have adequate funding, there is no need to increase the rate of marginal decrease. If you don't have adequate funding, then you will need to fund the increased benefits to the not-as-poor by decreasing benefits to the poorer.
There is, admitadly, a decreasing marginal value of money that does behave like you are describing, but its effect is dwarfed at the level of income we are talking about.
The argument, "I don't want more income because I will lose some % of it due to [tax | benefits reduction]," makes no sense to me.
If so, I'll gladly hire you next weekend to paint my garden fence.
The real problem is that we do taxes wrong. We have a progressive tax schedule on the tax side, but then we want to have benefits phase outs on the benefits side. But these are really opposites that cancel each other. It's also very hard to reason about, because if you have multiple benefits programs that phase out in the same place, you can accidentally produce these >100% marginal rates at specific income levels.
And progressive tax schedules are very expensive. If you e.g. reduces taxes by 10% on incomes under $40,000 then someone who makes $40,000 pays $4000 less in taxes. But so does everyone who makes more than $40,000, because they now pay $4000 less on the first $40,000 of their income.
The answer is to not phase out benefits whatsoever, let that be the progressive component of the system, and use a single uniform tax rate. The uniform rate supplies the revenue to compensate for the lack of phase outs, but will never produce a cliff.
For what it's worth though, we already have waitlists, you can just skip them by having sufficient money.
I personally don't understand the value landlords contribute to society so I'm curious what a society without them looks like. I expect I can get sarcastic answers about failed Communist states, but I'm hoping someone has spirited examples.
In other words, a stepwise/linear function that means it is always worth making more money.
Since something like this is so obvious, what am I missing in this solution?
The affordable housing programs I'm mentioning aim to help people at roughly the median income afford expensive areas to ensure income diversity.
Cash based methods can significantly hurt that goal as such people generally would be better off living in a cheaper area anyway. Or the program handles subsidies building by building which seems administratively complex.
However, affordable housing is inherently a terrible idea. There is no reason to subsidize retired people living in highly desirable areas for example. But subsidizing cops is also ineffecint when you can simply pay them more directly and avoid overhead.
Affordable housing is not an unfunded mandate. The landloard still receives the full rent; the only difference is who is paying it.
Further, we are talking about changing the welfare system. If we had a system where the landlord made substantially less from affordable housing units, we would likely already need to switch systems, because I cannot imagine that being a functional program.
That's how this works in California. Unfunded mandate on developers. Developers agree to it so they get their development permits.
(The system is then administered by the successor management office and occasionally audited by the city. Directing excess rent to the government is possible, but introduces a number of calculation and administrative complexities. )
Finally you get the problem that this system is going to push up the median income in affordable housing (income rising, landlords preferring higher income individuals for stability, etc.), hurting the program's intention.
That said I think this solution is better, but I don't understand how high the admin cost goes.
Even continuous functions can create high effective marginal taxes with most of the same (mal)incentive structure.
> Even continuous functions can create high effective marginal taxes
Agreed (as we're discussing in another subthread). So, what are you saying? The cliff is fine as it is? You have a better idea? What?
I don't think people need "social pressures" to get them out of poverty — the idea is ridiculous and, frankly, offensive. [Edit: that was too strong, and I withdraw it. I'm not sure how effective it can be, though, for the government to try to apply social pressure, and I don't think it's most of what's needed, anyway.] What they need is a little more help. Case in point: In 2015, Montana implemented a bipartisan, state-funded employment initiative that offers Medicaid recipients a range of services, including career counseling, on-the-job training and tuition assistance. The program is voluntary — people can sign up when they enroll in Medicaid — and it’s paired with targeted outreach so that those who stand to benefit most from the program are aware of their options. So far, more than 22,000 Montanans have participated, and employment among nondisabled Medicaid recipients is up 9 percent in the state. 
I have seen this first hand. When I was broke in community college I became eligable for $200 month food subsidy which quickly dropped off a cliff if I worked more than 26 hours a week. So I worked just under that. Any more would be a net loss until ~35 hours due to my low wage per hour not making up for benefits lost. I did some more math, and it turned out I would make only ~10% less money if I could find a job with very high hourly pay and very low hours per week.
With the incredibly broken way the system was set up, I ended up finding a website admin job that paid 18 hourly but only 4 hours a week to maximize the benefit. Some would say I "messed with" the system, but I was going to be broke either way and it made zero sense to work more for less money when I was going to school.
I quickly moved out of Illinois from this and a hundred other political happenings that convinced me the government there was just unfixably corrupt and broken.
I'm not surprised this is coming from Illinois, at all. Incredibly high taxes from benefits allocated absurdly. Laughable benefits for students and other blocs that don't "bring in the vote". The state has a shadow governer Madigan who has run the state for two decades no matter who was in charge on paper.
Illinois is teetering on bankrupcy and the only state with a shinking population due to so much out migration. And the average person leaving makes almost $30,000 more a year than the average person moving in. Because anyone that can afford to leave is on the way out due to extremely high taxes. Businesses have been fleeing in droves for over a decade, and it's rated in many small business polls as one of the top 5 worst states to run a business.
The state has turned to raiding the public universities and local governments in recent years. Cutting funding so severely that several large public universities are almost bankrupt. My education grants dropped from 10k a year from my low income to zero in a single semester because of budget cuts, and I have about 20k in student loan debt as a result.
Basically, don't move to Illinois, it has easily the crappiest most corrupt government of any state. The financials are so bad they've narrowly avoided bankrupcy and have a junk credit rating. If you move there be prepared to pay down the previous decade of uncontrollable debt to the state in taxes due to the inability of Madigan and friends to balance a budget while maintaining their staggering level of corruption
There is no grand plan anywhere. Regulations are a hodgepodge of legislation and executive decisions made by people with conflicting incentives, little to no feedback and expertise, limited resources, and very real abuse/exploitation.
There would be no step functions, no mishmash of overlapping agencies, no complicated eligibility tests, no massive bureaucracy to navigate.
Buy health insurance, which costs less than $20k/year (because the average person receives less than that amount in benefits).
Moreover, the general point stands: what does UBI do for people who currently receive more $ benefits than what the UBI level would be?
That's the point. It doesn't cost $20,000/person to provide Medicaid because healthy people are eligible for Medicaid. If you take average amount of money and hand it to the same people as cash, it should be the amount needed to buy the equivalent insurance.
But then people have the option to buy only catastrophic coverage and put the rest of money in their pocket, if that's what they want to do, which should on average save money (and in the catastrophe case you still have the catastrophic coverage).
> Moreover, the general point stands: what does UBI do for people who currently receive more $ benefits than what the UBI level would be?
Half the point is to get rid of that sort of thing. Someone who makes $35,000 shouldn't ever be receiving more government assistance than someone who makes $15,000, because they have $20,000 more of their own money to spend on whatever it is.
The purpose of a UBI is income redistribution, not insurance against misfortune. If you want insurance you use your money to buy insurance.
While this approach sounds good on paper it wouldn't work in real life. Another example--what if I'm getting the equivalent of $50k/yr in unemployment benefits under Social Security? That becomes $10k/yr under UBI. Or someone getting $60k/yr on Social Security retirement income--again $10k/yr under UBI.
Yes, you can say "Well you should save for retirement." Well, what about all the people who hit 65, and haven't saved for retirement? Or all the people who get laid off and don't have more than 2 weeks of savings? Tough luck?
It's not as if the day UBI starts is also going to be the day everything else suddenly stops. The transition period can be made longer or more gradual.
Then make the hard cut off something like age 30, even though most people under ~50 would still choose the UBI.
And "what if someone was getting $60K" is not a thing that actually happens. The maximum monthly social security retirement benefit at full retirement age is $2788, less than $33,500/year.
$10,000 is not much less than what many people live on from their full time jobs. In combination with even modest retirement savings, it's plenty to live on in a low cost of living area, and people who desire more can save more or supplement it by teaching at a community college or local high school.
If you want to live your retirement in Manhattan or San Francisco without working then you'll need a lot of retirement savings, no different than it is now.
The existing design of social security is quite ridiculous and should be changed. A safety net shouldn't be giving more to wealthier people than poorer people. If the payment is good enough for the poor then it's good enough for the rich. Anyone who made a lot of money and wants to live a lavish retirement has every opportunity to have saved up.
Of course that said much welfare and tax policy is intentionally designed to distort society's preferences.
They teach how the US is imperialist and how they only care about money and some other soviet stories.
To give out some money is one thing, we have that in Brazil, but to give out so much money it is better not to work is shocking.
You miss the point. It's not that welfare is so much, it's that the jobs you get that knock you off welfare don't pay enough to be able to live. America has a lot of very low paying jobs where people need to work 70 hour weeks for multiple employers to get enough to live. In a modern country it is shocking that basic employment standards are not guaranteed and that when you have a job it doesn't cover the minimum needed to live.
The money comes from the fact that they have one well-paid manager per thousand employees instead of having one per five employees as a small business does, which makes getting that opportunity for advancement a one in a thousand shot for their employees instead of one in five. What you want isn't for big companies to pay more, it's for small companies to replace them.
If you pass laws like increasing the minimum wage that disproportionately impact smaller businesses "because big companies can afford it" then you make that problem worse.
If you really want better wages, make things tougher for bigger companies. Condition regulatory burdens and taxes on high total revenue. Eliminate regulations at the federal level that are typically highly complex and whose uniformity favors large interstate businesses, in favor of simpler local regulations that benefit local businesses and allow locals to carve out a profitable niche.
If laws were introduced to artificially stop this sort of efficiency, the country's productivity drops. Thus will actually cause more harm than good.
A much more sound way of redistribution is to close tax loop holes and aggressive hunting down of those who evade (piercing the veil and all). Recover lost tax revenue, and use it to improve social welfare or infrastructure.
> If laws were introduced to artificially stop this sort of efficiency, the country's productivity drops. Thus will actually cause more harm than good.
These are basically the talking points of big corporate lobbyists, but they don't bear out. Efficiency doesn't help real people unless it results in better products or lower prices. If the surplus is going to executive salaries, Wall St and foreign investors then it has no value -- or negative value, if those people then use that money to e.g. bid up real estate prices so that real people have to spend more of their income on housing.
And having less of something isn't always more efficient to begin with. The thing may be producing more value than it costs. For example, people love to go to a store and talk to a knowledgeable person about what they need. A few minutes can save hours of research or years of using the wrong product. But what if one store has that and consequently has higher prices, and another store doesn't have it but has lower prices? Customers go to the store that can answer their questions, determine what they need to buy and then compare prices and buy it from Amazon or Walmart. That isn't more efficient, it's just free riding. And when the smaller stores go out of business, "the country's productivity drops."
> A much more sound way of redistribution is to close tax loop holes and aggressive hunting down of those who evade (piercing the veil and all). Recover lost tax revenue, and use it to improve social welfare or infrastructure.
But that's just an example of what I'm talking about. The tax code is highly complex federal regulation that benefits large companies at the expense of small. Replace the complicated income tax with simple no-exceptions VAT and they can't do that anymore. If you sell something in the US, VAT is collected and it doesn't matter where the rest of your operations are. It's basically corporate income tax where the jurisdiction of "profit" is the location of final sale rather than a bunch of complex rules that international corporations can game to pay less tax than local businesses.
But you also have to make sure they don't absorb that revenue on the spending side. As soon as the feds have money to spend, large corporations devise corruption schemes like the one where government-funded research is patented and transferred for pennies on the dollar to big business, so the public is paying for it twice. Which is why spending should be local -- a billion dollars of corruption sticks out much more in a city budget than the federal budget.
>Large companies are making absurd profits while paying their employees a pittance
Take a look at profit margins on some big companies. You will definitely be surprised. E.g. Over the last 5 years Walmart averaged <3% profits , Amazon averaged <1% . Some tech companies are a lot higher (Apple, NVidia, etc.) but these are not the companies you hear about when people discuss low wages. Imagine Amazon trying to give all of their workers a 10% raise. With ~566,000 employees  making a median salary (sorry, could not find any mean or total amount so I'll pretend like it's the mean) of $28,446 , a 10% raise would amount to 566,000 * $28,446/10 = $1,610,043,600. This would more than slash their net income in half  and would only increase the median income by a modest $2800. Obviously these numbers aren't perfect because we don't have means or an accurate list of who earns what, but I think you can see my point here: if every Amazon employee earned a true "living wage", the company would probably go out of business pretty quickly. And that's a big deal when half a million people's lives rely on it (not to mention the millions of shareholders, many of whom likely own the stock as part of their pension plans). And that's not really in anybody's control. It's not like Jeff Bezos is the wealthiest person alive because he's making some massive salary and taking cash out of the company. His personal compensation was $1.68 million last year, most of which was the cost of his personal security team . What makes him wealthy is all of his shares in Amazon, which is pretty worthless if he goes ahead and dumps all of it. Not to mention that his wealth often fluctuates by 10s of billions in a matter of days because of that.
>Migration isn't causing this but it useful for rich people with vested interests to make it seem like it is.
I can agree with you that blaming things on migration is often incorrect and used as a red herring, but the previous commenter is somewhat correct. Immigrants (both legal and illegal) often settle for much lower paying jobs or much harder labor because of how much it pays relative to what they would earn in their home country. This doesn't really cause most people to earn less money, because for the most part few "natural-born" Americans are willing to do those jobs, but it does increase the proportion of jobs that pay these tiny wages. There are certainly many American-born workers who are getting minuscule wages, but an even bigger percentage of these people are immigrants. Of course, it doesn't change the fact that people are getting paid those jobs in general, but for a vast majority of them something as simple as raising the minimum wage is just going to make their jobs go away.
But the truth is that the US is a huge machine and the government already spends too much money.
Amazon is nothing compared to $4T a year the US spends. You need 4 Amazons a year, people don't seem to understand you can't just eat the rich.
Some concerned with the companies "absurd" profits while they are dwarfed by the US spending.
Wow, great answer btw, with sources and all.
There are cases where welfare will double your income, it's a lot of money for free.
Anyways, I was comparing to Brazil, where the assistance is very low, and you are way better off with a job.
Yet the propaganda there is that the US is terrible for the poor.
Google welfare cliff and you'll see people getting thousands of dollars a month.
I've known people in the US that say they can't afford to get a raise.
And when I tell Brazilians that some Americas are better off without a raise they don't believe me.
That's not what's shocking, what's shocking is that the living wage isn't high enough given costs (health care in particular). Welfare exists not out of kindness, but because people need a minimum before they naturally are going to do anything needed to survive. Welfare keeps people alive and cuts down on crime. If we don't like welfare systems, then we need to make sure that private businesses pay wages that are sufficient to afford the basics: health, housing and education.
Could you define what a living wage is? I see that a lot but I'm not sure what it means exactly. On this reddit link I see people with several special needs kids. Should the minimum wage be set to sustain a single adult? Or should it be an adult with a kid? Two kids? What if I have 5 kids some of them with special needs? That sets the minimum wage as a "living wage" super high. How could any small business or even big business compete with 6 or $10k minimum wages to sustains these families?
Unless you have severe disabilities, getting a job at McDonnald's or the tons of other low skill jobs available is not what I would call something hard to achieve.
It is possible, I've done it and so have my wife. More on that here:
> I hope you are clearer about what that means now.
Regardless of what your definition of a living wage is or should be, it also doesn't solve the problem of people with kids who are the most vulnerable to the welfare cliff so even by your definition, making the minimum wage a living wage would not solve the issue for most affected people.
I support welfare and free healthcare etc. to help vulnerable people at a sliding scale rather than a hard cutoff which has the strange incentives discussed in the original article.
It's not theoretical, fanciful or rocket science, for such things exist in many countries already. France and Germany come to mind.
That's not how it works.
The U.S. welfare is multifaceted. Try to shift to a stack oriented model. The real picture should include both indirect subsidization and multiple direct benefits/subsidization.
Income, rent, food, medicine, childcare, transportation, utilities. There are what someone in poverty would consider sweet spots under certain conditions.
Now, Not all welfare programs stack. Local cost of living changes the stickiness point. But, imo, the most overlooked problem is poor people get good at being poor. There are ways to exchange benefits and untaxed labor for value, even if it's not explicit or monetary.
I've lived it. I know people who are scared to lose benefit X if they earn over Y. The bigger problem is that the government can't manufacture meaning and purpose no matter how much cash they pour out. No marketable skills develop, no local capital accumulation, no gaining experience and moving up. There are no good jobs to escape to. The cliff is doing what you know. What you consider unlivable is life for a lot of people.
Also, I can give some sweet spot scenarios if you want hard numbers.
It's the first sentence of the link guys, come on.
This is completely anecdotal, but olbrecht isn’t wrong. A lot of the problems with the system have only anectodal evidence, but that’s because of generations of practice playing the game.
Whoa whoa whoa. It's fine to make a general point based on personal experience but gussying it up like this just for effect is not only abusive, it's vicious. Please don't degrade HN like that.
I grew up in Northern California (moved here for college and have stayed for 15 years). I have nothing but the utmost respect for the environment, for minority rights, and for helping the less fortunate.
But here in Shitcago, I get shouted down as a traitorous, MAGA-loving nazi because I criticize the very obvious flaws that we have in our welfare programs, pensions and unions. Welfare cliffs like these ones are borderline inhumane, robbing people of their ability to improve themselves as human beings and to have the self-respect of being a great as they would like to be. We arguably hurt people with these programs, and we PAY TO HURT them.
Now this isn't to say that there aren't great programs that we can undertake to help those in need by redistributing wealth in productive ways, but it is not at all clear to me that supporting our current welfare and educational system is at all synonymous with supporting the idea of helping and educating people.
Yes, though, the spirit of the thread is correct: the health care costs and insurance mechanisms are absurd and hit the lower-middle class the hardest.
Very, very few. Even on some of the "deep" subreddits, they went off the rails years ago and are now echo chambers where the most insightful comments are just re-statements of the article's main point. The closest thing you get is the heavily moderated subreddits like askscience or history or space, etc. But even then, good luck navigating any discussion, because 9 out of 10 comments will be "this comment was deleted by a moderator", with a few now-contextless comments thrown in here and there.
It keeps me from taking side jobs because I’d immediately have too much money and would have to buy inferior insurance. I know this is very different from the much more difficult and real circumstance in the OP but having heard of welfare entrapment for a long time it was odd for me to realize that it had sort of happened to me too. Welfare, man.
Why? I'll offer a reason; unlike many of their competitors they've deftly avoided unionization. I offer no proof that this is the reason, and you offer no reason at all. Only "they're successful so they're right." What do you hope to achieve with this simple minded assertion?
> What would "disrupting" poverty be, if not enabling the poor to afford things they couldn't before?
Walmart isn't magical; equivalent goods are not an order of magnitude lower in price then elsewhere, and the benefit of the small difference in cost applies only to consumer goods Walmart sells; not housing, utilities, vehicles, taxes, healthcare, etc. These represent a vastly greater burden than the marginal savings obtained shopping at Walmart. At best Walmart is minor mitigation.
This sophistry appears in every discussion of poverty, welfare, etc.
You have some good points, but please don't use quotes to make it look like you're quoting someone when you're not. That's an internet trope that makes it hard to continue serious conversation. Attributing it to them explicitly as a "simple minded assertion" is even worse, and also breaks the site rule which asks you to "respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize."