“‘Why work?'”

Tyler Cowen links to a “scary comparison” that claims that “a one-parent family of three making $14,500 a year (minimum wage) has more disposable income than a family making $60,000 a year.”

Kaiser Fung looks into this comparison in more detail. As Kaiser puts it:

If we concede that the middle-income person would end up with less disposable income than the lower-income person, then we’d expect that the middle-income people will take lower-paying jobs so as to increase their disposable income. But I have not seen reports of such reverse social mobility. Theory needs to fit reality. This hole in the theory needs to be covered.

This argument sounds convincing at first, but I’m not completely sure it’s right. I’d just like to expand on one of Kaiser’s other points, which is that people don’t usually have a choice between a minimum-wage job and a $60,000 job. Also, my impression is that higher-paying jobs are more pleasant than lower-paying jobs.

Let me put it another way. For any particular job, it’s typically less pleasant to work more, so if you can choose your hours, you have a choice between more money and more leisure. But most people can’t typically choose between a minimum-wage job and a $60,000 job. So the short answer to, Why don’t people quit their jobs and work at minimum wage?, is that their working conditions would be less pleasant.

Beyond this, as Kaiser points out, the analysis is completely rigged, as can be seen by this quote from the following paragraph of the link:

Now we finally know that the very bottom of the entitlement food chain also makes out like a bandit compared to that idiot American who actually works and pays their taxes.

The analysis did not actually report what happens at “the very bottom of the entitlement food chain”; rather, it reports a hypothetical calculation of what someone could do. Also, the head of household of “a one-parent family of three” does indeed work and does indeed pay taxes. Unless you think that taking care of two children is not “work” and that sales tax is not a “tax.”

As Kaiser puts it, checking the numbers means more than checking just the numbers. I agree with Cowen that it would be interesting to see a more exact calculation of implicit marginal tax rates.

In the meantime, I don’t think I’m going to sit around being offended that some single parent operating the fry machine at the local McDonald’s isn’t suffering enough.

P.S. The consensus from the commenters who supply actual numbers seems to be that the numbers in the original blog are completely wrong, or maybe just made up.

38 thoughts on ““‘Why work?'”

  1. I'm a recent college grad making 50K. It very much feels like I have the same expendable income as I did when I was making 18K.

    But, even if that is true, which I often concede it might be, it is also true that I can't get to 80K without going through here, which keeps me from returning to waiting tables.

  2. I don't know whether the scary comparison is quantitatively correct, but I believe it is qualitatively correct: increasing your gross income does not increase your disposable income by the same amount, and in some cases it may it increase your disposable income at all.

    Certainly on the margin, when you're on the cusp of losing some benefit, the extra dollar is not worth earning.

  3. In the meantime, I don't think I'm going to sit around being offended that some single parent operating the fry machine at the local McDonald's isn't suffering enough.

    That's not the claim at all. The claim is that if that single parent tries to better herself, get some education and a better job, then she'll lose almost as much or even more in government benefits as the extra income, so she doesn't end up ahead.

    It's about being offended that single parents aren't rewarded for doing the right thing. Addressing this problem is why, for example, we have the EITC.

    Your characterization of the point presented is as unfair a caricature as someone claiming that your position is that single mothers "shouldn't try to rise about their station."

  4. You missed the whole point–it's not that people are choosing between a 60k job and minimum wage, but rather that there is a huge gap in the middle where the marginal benefit of earning more is very very low (and may be negative if the numbers are rigged right)!

    If you think people care about their marginal tax rate, this pattern is very concerning and screams of a "poverty trap".

    Maybe, as you point out, people are on net still better off by earning more because the work is better, etc so people don't move down the income scale. Fine. However, the fact that the marginal rates are so high gives very little incentive to earn more, so the poor stay poor.

    A better picture: http://gregmankiw.blogspot.com/2009/11/poverty-tr

  5. Similar concerns have been a big worry in the UK for some time. One way of looking at the problem is to consider what amounts to the marginal rate of tax for somebody on low or no income. In the extreme, getting a job or getting a better job could actually cost them money. In September last year a think tank published a suprisingly intelligent report by an opposition MP and a management consultancy – "Dynamic Benefits: Towards Welfare That Works" at http://www.centreforsocialjustice.org.uk/default….

    That MP is now Secretary of State for Work and Pensions and is charged with putting this sort of idea into practice.

  6. At the risk of "spamming" comments, I'll repost what I wrote in the comments at Junk Charts in the interest of highlighting that the real problem is with healthcare, and that ex-Medicaid, the numbers make sense. So you should really focus on the health care aspect. As a fully credentialed health care actuary, let me start by saying that the general cost for family coverage looks about right.

    And while it is strange that they would look at someone who makes $60K per year but has no employer sponsored health care, let's take that person. A more tax-efficient employer would pay the employee something like 50K, have $10K of employer paid benefit with the remainder picked up by employee contributions or higher copay/deductible. This would also decrease the tax burden of 13,034 by probably several thousand dollars.

    But let's take their case of a really dumb employer as a given. Assuming that "fairness," (as opposed to "equity") as defined by ensuring that the $60K earner gets more net benefit than the low earner, is your only concern, you could argue for more fairness by taking away Medicaid benefits from the low earner or give some benefits to the high earner. Luckily, when major provisions in the 2010 PPACA act come into force, the $60K earner will be entitled to something like a 60-70% subsidy for healthcare premiums when purchased on an exchange.

    Sorry for the long post, but if you want to increase the fairness (by reducing equity) in this scenario, and you want to be logically consistent, then you are either in favor of eliminating (or substantially reducing) Medicaid ("Let them eat cake") or you are in favor of the most important provisions of "Obamacare." And yes, I know that the kind of person who puts together this kind of analysis is a partisan hack that starts with their conclusion and puts together facts to support them and will never admit that PPACA was a good idea.

    But if you were a little taken aback by these findings (as I was at first), and were open to how it might be possible, then take comfort in the fact that the linchpin of the analysis (healthcare) proves almost exactly the opposite of what he wants, namely, that health care reform that looks a lot like the Romney-backed Massachusetts plan or the Obama-backed PPACA is a very good thing for the middle class.

  7. Unless you think that taking care of two children is not "work" and that sales tax is not a "tax."

    Yea, I think we nailed it. That he didn't use the word "employment" instead means we shouldn't actually discuss the fact that there are some bad incentives along the way.

    (Speaking as a progressive flat-tax-plus-citizen-income system advocate)

  8. As Kaiser points out, the assumption that Medicaid and CHIP are worth $16,500 in disposable income to someone on minimum wage is particularly strange. If we're really trying to compare disposable incomes, it assumes that the $60,000 family spends $16,500 of their annual net income on health insurance and healthcare.

    Also, I don't think that the minimum wage vs $60,000 "choice" is simply about the pleasantness of the work. There are plenty of crappy $60,000 jobs out there. No, presumably a family with $80,000+ annual income have more disposable income than families on $60,000 (or those on minimum wage even with all the assumptions included). The $60,000 job is more likely than the minimum wage job to lead to the $80,000+ income.

    I think that when choosing jobs, most Americans take an optimistic view of future career progression, and therefore choose the higher paying job that is more likely to lead to an even higher pay in the future.

  9. I'm not sure the analysis takes into consideration the amount and the value of spare time. For example, if you have to go to work, you have to pay someone else to take care of your children – the cost of paying someone has to also include the cost of finding the right person/organization, and checking that they're actually doing a good job.

    If you don't go to work, you get to take care of them yourself – and you aren't tired when doing so.

  10. Politics aside, the original article is strange. Calling it "disposable income" seems fishy to me (though I'm a computer scientist, not an economist). You don't get to spend that $6,312 of food stamp value on anything you'd like. There are even restrictions on what kind of food you can buy in a supermarket. If you only needed say $4,000 of that, you don't just get to spend the rest on a nice TV and xbox.

    Medicaid is another one – you don't use the resource unless you're getting shots, checkups, or otherwise getting sick. Some of those things are necessary, but $16,500 worth? You'd probably have to get pretty sick to actually use this resource.

    There are also side effects – it's not necessarily trivial to get support, and it's tough to say how dependable some of them are. There are also programs to prevent abuse, which you might see as a likelihood that the resource vanishes.

    All that said, the point about mixing support services with off-the-books income might still stand. Such people are going to try and avoid notice, so I doubt we'd easily observe their data (if they exist).

  11. Tg, Shaun: Yes, this makes sense.

    John C., Kevin, Andrew M: As noted in the second-to-last-paragraph of my blog above, I agree that it would be interesting to see an (accurate, non-rigged) calculation of effective marginal tax rates. I agree that the question of economic incentives is important, even if it's not the whole story when it comes to job choice.

    John T.: Yes, I think the blogger who got this started is indeed offended that the minimum-wage parent isn't suffering enough. How else can you interpret the bit I quoted: "makes out like a bandit compared to that idiot American who actually works and pays their taxes"?

    Njnnja: Interesting point. Now that you say it, I do seem to recall that some discussion of this sort of incentives came up in the health-care debate.

    Aleks: Yes, I agree. The problem is multi-dimensional. And if you're working at a minimum-wage job, you might well be more tired when you go home, compared to someone who is working at a $60,000 job.

  12. Sean:

    You seem to think I'm being picky by jumping on the blogger's choice of the words "work" and "tax." But check this out.

    Here's the original wording:

    Now we finally know that the very bottom of the entitlement food chain also makes out like a bandit compared to that idiot American who actually works and pays their taxes.

    Here's the new wording:

    Now we finally know that the very bottom of the entitlement food chain also makes out like a bandit compared to that idiot American who actually is employed and pays income tax.

    It doesn't sound so impressive now.

    I don't think the image of someone not working and not paying taxes is a good description of someone singlehandedly taking care of two kids and, yes, paying sales tax.

  13. I took apart Mankiw's completely false claims about his marginal tax rate (and received the response from the blogger that I'm a statistician, not an economist) so I'm not going to go through this article, but I would like to make a larger point (which this hack has evidentially picked up on, though with the goal of punishing the lower income individual rather than helping the middle-class individual).

    This point is simply that the middle-class in this country faces a horrendous marginal tax rate of (with all taxes thrown in, including state and local) northward of 60%. How is this? Federal (30% tax bracket), SS/Medicare (15.65%), state taxes (sales, income, property, car, etc–maybe 15%?). On the other hand, someone living off dividends is paying 15% federal and (depending on the state) 0 to 10% state tax (some states have no income tax). So you can have a difference in the tax rate of _4_ times.

    To say this is insane is putting it mildly. The "theory" is that we need to privilege capital to ensure that the rich provide jobs for the little people (though how a dividend provides for this job creation is beyond me, because by definition it is money taken away from a firm and cannot be used for job creation). But there is no evidence of this (do a simple correlation of tax rates of capital versus job formation over historical periods in US history). Furthermore, the world is awash in money, and this was a fundamental cause of the last bubble.

    Democrats would be better off arguing for a flat tax that includes _all_ taxes (and all economic activities–which includes services, which is how the rich escape most sales taxes). A flat rate of 30% would fund all governmental activities, and make the tax code simpler.

  14. You're missing an obvious answer. If this analysis were true, a major reason that people in the $60,000 group don't move down is because they would be completely unaware that they would have more disposable income.

  15. There is a difference. But the article was talking in terms of income and income taxes. You're picking nits.

    Now, the way that he wrote that was certainly reflective of a political tic. But your and Kaiser's reaction and focus on it is just as much of a tic. That's particularly annoying. I'm also a bit worked up because Felix Salmon just joined the big band of people (e.g., Krugman and Silver) calling Mankiw disingenuous for no other reason than he brought up using our existing knowledge of economics as applied to payroll tax cuts (apparently all good thinking people know more economics than Mankiw).

    The original article has got a point, one that should be worrisome no matter your politics. Yes he was framing it in a particularly political viewpoint, and it was a grating. But are you really missing the point that there's a range between 14k and 60k income where incentives to work could be either zero or negative? Can you not say something like, "He's pushing a political viewpoint I disagree with a lot, and I'm doubtful of a lot of the numbers, but as Cowen said it is indeed worrisome if our current income tax and means-tested benefits are deadening the incentives of escaping poverty."

    A solid saftey net is good, though many would disagree where that should be. As I said above, I am for a citizens income. However, if the safety net creates a system where there are few incentives to grow income, if it creates more trouble for people trying to improve their lives by working more, then that is a BAD THING.

    It's like there's some brain tic where people see something said from a political opposite, framed in a political way, and they immediately have to take the opposite side. To see you do it pushed me over some kind of edge, leading to the curt and ill mannered comment.

    …. Whew, glad that's out.

  16. Sean:

    To you I'm picking nits. But to me these nits are important! People at the low end of the income scale pay taxes other than income tax. And, the idea that taking care of kids is not really "work" . . . to me, that's a big problem. I've seen some of the research on single mothers, and these people do not seem to have a lot of available resources.

    I agree with you that the issue of the marginal tax rate is important, and the blogger who got all this started will have done a service if he motivates people to pay more attention to the issue, ideally with less-doubtful numbers.

    Regarding Mankiw, all I can say is that he invites this sort of reaction. For example, after blogging about his 80% or 90% or 93% effective marginal tax rate, Mankiw wrote how it was fun to "inflame the left-wing blogosphere." That's fine, but if you go around inflaming people you shouldn't be surprised if they flame you back! Personally, I try to be polite on this blog and not inflame anybody, but that's just a stylistic preference more than anything else.

  17. This is an idiotic comparison. First of all, it leaves out the equivalent benefits that the hypothetical $60k income earner receives, such as having their insurance paid for by their employer (like 85% of Americans). It also leaves out the large number of deductions you can take to reduce your income tax including things like medical expenses, mortgage interest, business expenses, etc.

    Also, it uses a very novel idea of the word "disposable" as almost none of those benefits listed are cash, rather they can only be used for specific needs (healthcare, food, cheap housing, etc.), and the only benefit that exceeds 10k is the allowance for Medicaid.

    So what this means is that, if you have a job where you make $60k a year, have no insurance, and are forced to pay $16,500 a year or more in out-of-pocket medical expenses, you may be better off working part time and letting Medicaid try and pick up the tab for the expenses instead. But then again, if you have that many expenses you, or one of your dependents, probably has some chronic illness that no insurance plan will cover. So you may not be able to work full time anyways.

    Or to put it another way, no one is going to quit their $60k a year job so they can collect $6k / yr in food stamps unless there is something major going on in their life.

  18. Gelman comments

    Regarding Mankiw, all I can say is that he invites this sort of reaction. For example, after blogging about his 80% or 90% or 93% effective marginal tax rate, Mankiw wrote how it was fun to "inflame the left-wing blogosphere."

    It is certainly "fun" to state falsehoods (go back and read my posts on where I actually calculated Mankiw's marginal income–the concepts are very simple and it doesn't require any real economic knowledge to go through the argument). I would argue that it's even more "fun" for elites to crash the system and let the little people suffer–this was essentially Orwell's point in 1984–the elites made life terrible for everyone else but it was a lot of fun for them since they got to make everyone else suffer. Orwell's theory has a lot more explanatory power than most social science theories.

  19. Emerich and Mankiw both engage in a kind of thought experiment, showing how under very specific and unusual conditions and definitions we can get surprising results. There's nothing wrong with this; it's a useful mental exercise.

    But it is wrong to leave the impression that these theoretical possibilities are common or even representative. This is similar to the arguments about tax changes devastating family farms and small businesses. The scenarios are theoretically possible but when you run the numbers you see they apply to few if any actual cases.

  20. If you don't think the marginal tax rates makes a huge difference to those of us who have owned businesses and created jobs, you're crazy. We used to run a business that polished motorcycle parts. We paid the minimum wage, which was $5.85. When you added on social security, medicare, fica, state withholding, etc., and factored in 2 weeks vacation and the inevitable something crazy happened with an employee on any given day, insurance, property taxes, utilities, etc., we were essentially clearing $.75 per piece based on routine fixed costs. Each person had a 40 pieces per day per 8 hours. We had 18 people. Woo-hoo, $132k/year (if everything else goes perfect, which it never does, equipment wears out, someone quits). Add that to our other 125K salary, we're Obama-rich! Jump to late 2008. We're doing budgeting for next year. Mandated jump to $7.25 per hour min wage, but everything else based on salary amount goes up too. Shave off 45 cents per piece from the original 75. Property taxes go up 30% from 11.5K to $15k. Shave off 2 cents per piece. Utilities (and running this equipment, utilties are a huge fixed cost) cost increases on current trends takes off another 3 cents. Now we're making a quarter per piece. (And no, we can't raise prices, in case you haven't heard of this country called China). An OSHA inspector showed up in late 2008 and "suggests" we buy everyone extremely expensive respirators to wear with HEPA filters instead of using dispoable masks. (Bloody stupid). Cost? $23K for the year, since everyone must get a medical examination at our cost before using respirators per OSHA regs. Leaving us looking at effectively $16K after taxes for 2009. What did we say? Screw it. Wasn't worth the hassle or the liability risk if someone fell, decided to sue us for discrimination, etc. Accurate Polishing shut down, paying everyone a month's salary as severance. We're still looking for buyers for the equipment. No-one else will make much money at it either, so not much of a market. So yeah, we were really such awful greedy capitalist pigs, making those 18 little people suffer for their minimum wage. I'm so glad you enlightened democrats made sure you engaged in appropriate redistributive justice so you could feel good about how "caring" you are. I'm sure I could introduce you to a few former employees who would love to chat with you.

  21. John T.: I don’t understand why the claim is not symmetric. If the claim is that the lower-income person has no incentive to get a higher-paying job because of the economics, the same economics should encourage the higher-income person to take the lower-paying job to impove her economics.

    Neal W.: and this is not due to ignorance. Again, if the lower-income person is aware of such a gap and thus does not take a higher-paying job, then the assumption is that this gap is common knowledge. Otherwise, we need an explanation as to why this economic fact is only known to the lower-income person but not the higher-income person.

    Sean: We are not missing the point. We are merely pointing out that the evidence seems to be that people are not reacting to this incentive: otherwise, please explain why the 60K income person would not quit that 60K job and take the 14K job. Also, if economists can’t convince smart people in other fields why they’re right, then maybe spend a little time thinking about how you can explain this better. We are unlikely to be convinced by “you can’t disagree with X because X knows more economics than you.”

    Deeg: Nobody is arguing that marginal analysis is unimportant in all circumstances.

    I think Andrew nails this one when his essential point is that economics (disposable incomes, marginal tax rates, etc.) is simply not the only consideration for someone taking a particular job or pay level. Anyone who ever had to choose between job offers understand this fact. Anyone who has spent time in the corporate world understands that a lot of other factors like work-life balance, the corporate culture, your boss’s management style, etc. etc. are much more significant than pay scale when considering jobs. I think a theory that incorporates those types of factors will be better able to model the world as we find them.

  22. Post dishonest on numerous accounts. First, $125K plus $132K is $257K so Obama's tax increases (which didn't happen) would only affect the last $7K. Miniscule. Second, all of these additional costs Deeg complains about happened under Republicans (if Deeg doesn't recall, from 1994-2009 Reps had total or partial control in Washington). Competition from China has wiped out most high-intensity, low value jobs, and these trade policies were primarily pursued by elites who profited mightily (financial traders, mostly). These policies made certain that Chinese workers, making 1/10th of American workers, would be able to undercut American labor. This is particularly true when you consider Chinese workers have little or no safety enforcement on their behalf.
    Blaming Democrats for the non-economic viability of your enterprise is simply false.

    The top 1% now receive 24% of the national income, in 1976 it was under 9%. This has soaked up most of the potential income gains for the middle class. Even Andrew Carnegie was in favor of an estate tax and Teddy Roosevelt also. Societies where one's life is determined by how fortunate your ancestors were have a name–feudal.

  23. First, I think this is a prank by the dudes at Zero Hedge. They've played them before, I assume to see if anyone bothers to do the diligence. (One of their constant complaints is financiers who take thins on faith.)

    But if you really run the numbers, it doesn't work out.

    The far right column is defective. First, the tax bill for a single parent family of 4 should be $4,953–they claim 3 dependents and file as head-of-household. They also receive $3,000 in child tax credits (singe, income under $75,000). Mississippi income tax should only run about $1,200, not $3,000.

    Just running my numbers really quickly, I'd give them a disposable income of $44,547. But there's also the problem that we've assumed all the benefits on one side of the equation (the poor) but nothing on the other. For example, a single-parent family of 4 making $60,000 would likely receive a large health insurance benefit. Anecdotally, had they worked for the Feds (my last employer) that plan would be worth as much as another $15,000 with $200 out-of-pocket, boosting their "income" to almost $60,000.

    Those freeloading college educated single mothers!

  24. Well, if you accept that marginal tax rates will influence behavior, then that undermines Andrew's assertion that "higher-paying jobs are more pleasant than lower-paying jobs." My higher-paying job is far less pleasant than my executive secretary's. My job has massive hours, hers are fixed. Mine is high-stressed, hers are not. Currently, on a per hour basis, I make more than her, and my consulting work allows me to be the boss. But once you start ensuring that my per hour take home pay combined with the risks of running a small business will produce ever-diminishing returns, yes, there will be a point where I say screw it, I could do a much easier 9-5 job, where I don't have to work weekends, travel from home, pay extra for child care, dry cleaning, and the like. I've lived off 12k a year (without govt assistance), and I've lived off 20 times that amount, and if the tax rates means that I'll have a much easier lifestyle for my work output, yes, there will come a point in time where I'll choose the lesser-paying job. But you might call it a lifestyle decision, it is still a tax decision. Which is exactly why you should want to minimize tax rates, govt benefits, etc., so that you don't have people who might do something very productive, very well, worth 240k in value, incentivized to do the "lifestyle" work that is valued at 60k. I have 3 business ideas I'd love to get going. I don't have the time, I wouldn't recognize income for at least 2-4 years given the capital expenditures, and given the current government, I'm not interested in putting my liquid cash reserves at risk for hiring people to implement them because I want it available to protect against my current assets being devalued.

  25. Honestly I am in the same boat as tg, I used to work as a clerk in a liquor store, I made about 12-15k a year, while going to college full time. After I graduated and started working, I'm up in the 60k range.

    A large part of the fact that my disposable income is near zero, is that I moved out of my parents home upon graduation. Rent and utilities. Then there is paying the piper with paying off student loans. The overall economy means I've been trying to help out family and friends who are in difficulty. Add that to taxes and commute costs, fully funding my 401k, health insurance (corporate plan) I find myself skipping lunch and putting myself on a budget, not eating out, taking mass transit etc… All the things I did when I was making $12k a year.

    60k after taxes HI SSI medicare 401k and other deductibles is about 800 a week. Rent in NJ runs about 250 a week, another 70 is student loans 20 in utilities and 20 in commute costs. That's about 440 a week after reoccurring expenses.

    Compare that to a take home of around 250 a week under the table while living at home with parents. $190 difference when you consider food and other purchases (bed blankets dishes cry goods laundry). Of course that's still good extra per week. But so is $250.

    Taxes are a huge chunk of it, but "independence" comes with a price. Now of course 80k if one did not increase their "steady needs" would be totally a tax difference, since the gain would be independent of other benefits.

    But what I would say is that there is a pay vs disposable income curve that flattens between 30-50k where the cost of getting into the middle class "car clothes residence responsibility" In return for that investment, you get a 401k health insurance and unemployment insurance (almost $600 a week for 99 weeks in NJ if your making $50-60k). Of course once one gets into the middle class, then one can expand via marriage children etc… Thus expanding ones investment base.

    All this to say that the man making $50k a year has more benefits then the man making $12k. Even if they have near the same disposable income. This is less true between $80k and $150k, at which point the only expansion that could turn disposable income into an expanded personal worth would be a large house or stocks (or vanity objects). So while the person increasing his income from 12k to 60k increases mainly in personal magnitude, one increasing from 60k to 240k increases mainly in disposable income, which he must fin ways to invest which is more effort. Of course the disposable income is more attractive, so people may want to get from 60-240k more, but the actual difference in stability from 60k-240k is pretty minor.

  26. There's one more reason that's been missed for preferring a $60K/yr job to a $12K/yr one: sliding down the scale is easy, sliding back up is harder and circumstances change. If you've been flipping burgers for five years and want to go back to, say, corporate law, are you going to get hired? I'd look at a five year stint at minimum wage as a red flag hiring a professional.

    So even if we accept that there's currently a negative incentive (and the commenters have giving good arguments for why this isn't true), you have to factor in the risk that when you're relying on someone else's largess, they may withdraw it. I know I'm much happier having an in demand skill than hoping somebody doesn't decide to cut food-stamps.

  27. Deeg, I probably shouldn't rise to the bait, but here I am.

    First, you were not "Obama-rich", if you are referring to the $250K level at which Obama proposed to allow taxes to return to previous levels. You weren't even remotely close. Not even halfway there, in fact. You will not persuade many of this blog's readers, of any political persuasion, by making wildly inaccurate statements like that.

    Second, I can understand being unhappy or even enraged about having to pay FICA — I mean, who wants to pay for a bunch of freeloading old people who aren't even working — but I think it's kind of ridiculous to blame the government for having to pay insurance and utilities. And complaining about taxes in general…c'mon, somebody has to pay for the roads that your customers ride on, and that are used to deliver your parts; and to pay for the military that protects your customers' oil supplies; and, for that matter, to pay to educate your employees so they can at least read and do simple calculations.

    I don't disagree with you on everything, I don't think; and I don't know enough about taxes on businesses to know if I even disagree with your main point! Maybe you're right, and taxes on businesses (or small businesses, or motorcycle-parts-polishing businesses) are too high. I don't know. I do know that complaining about paying insurance and utilities does not make you sound like someone I would trust to think rationally about this issue.

    Finally, here is an article about working conditions in Chinese factories. It will be almost impossible for a U.S. business to compete against a Chinese business that can hire workers much more cheaply AND treat them so badly (and cheaply!) in working conditions, medical care, and other ways. If the options are to let the Chinese do the important work of motorcycle-parts-polisihing, or make wages and working conditions and retirement plans here match those of China, I'm afraid I think the former is the better answer for our country. I'm not convinced that that's really the choice — perhaps if policies were re-jiggered a bit, your business would still survive or hopefully thrive, which would be far better than either of the two possibilities above. But there will always be marginal businesses that would be able to get by if only they didn't have to pay this or that; the solution cannot be to let every business pay nothing.

  28. Leaving partisan agitprop and exceptionally bad math aside, I think this post is useful. It does and should infuriate us when government benefits can be gamed. Free riding by those not actually in need does and should make people angry.

    This tends to agitate, interestingly, for policies that I estimate are the diametric opposite to those likely espoused by the innumerate who first concocted this comparison. You can't game universal programs like Social Security, so let's make child care, health care and similar benefits universal. You can get them whether you make $0 or $1m a year. You can't game a universal program, and there is no incentive to hide income and free ride if the benefit never goes away.

    My anecdote, pace Deeg's carping (jeepers — closing an unprofitable business is the lifeblood of capitalism), also is as an employer. We had Mister Toddler in share-care for his first couple years, and we paid taxes. Our employee has three kids, of whom one has severe medical issues. She lost some free government benefits for him as a result of our getting her on the books for a change. Which sucks. And which argues for universal benefits for all parents whose kids face severe medical issues.

  29. WCW,

    Why should that infuriate us? It's a single mother with three children. "Gaming the system" in these calculations works mostly through in-kind benefits to the children in the form of CHIP and Medicaid. Perhaps you think that the mother shouldn't have access to healthcare, fine, but I don't see how you can justify the children not having access to healthcare.

  30. "Then we'd expect that the middle-income people will take lower-paying jobs so as to increase their disposable income. But I have not seen reports of such reverse social mobility"

    Clearly, if you have not seen such, then you have not been living in the middle class. We have in our own circle of friends a married couple with four children. The husband earned a degree in accounting, took his first job, and discovered it exceedingly boring. Instead, he quit the job, which paid well, and opened his a video gaming parlor. Years later, it has made no profit, but thanks to three babies on medicaid, lots of WIC, and any federal aid they can possibly qualify for, they are living better than ever, they proclaim. Plenty to eat, they live in beautiful subsidized housing, he works short hours, they both have gym memberships now, a big TV with all the gaming systems (for "work") and never have to pay any healthcare. It's just being smart and working the system, they say.

    This makes me exceedingly upset, but I admit it is brilliant. I think THAT is what people underestimate — the anger of the working middle class because evidence of such abuse is rampantly available. Why is MY hardworking husband supporting their lifestyle? A single mother has a tough lot, but I've got a neighborhood full of perfectly capable folks who live a lot nicer than we do, because they choose government aid over the long term commitment of education and years of investment in a career.

  31. Wait — what? Did I write extra incomprehensibly today? Rereading.. no. I think it's you.

    In Powerpoint form:
    – one kid has severe medical issues
    – we put her on books
    – she lost some benefits for him
    – this sucks

    Could you do me a favor? Copy my post to a friend of yours and ask him what I'm saying. If he reads it the way you did, let me know — I don't like the idea that I am that easy to misread.

  32. "the anger of the working middle class because evidence of such abuse is rampantly available."

    That seems to me to be such an extraordinarily rare example.

    It's clever and more enjoyable to earn a six figure plus income and live off a low five figure income. But most people can't do that, and are majorly constrained by their own impulse control problems, it seems to me.

    I'm for policing against waste, but I think we have to look comprehensively, not at the salacious variants of the welfare queen driving the cadillac.

  33. Phil,
    I think you and I are of a similar bent, but I'm open to businesses paying nothing if we're net beneficiaries of their existence. I think that's the principle behind pigovian taxes?

    I think we should feel a little ambiguous-to-negative about taxing income and capital gains for all the partisan conservative reasons that we want people to have a maximum incentive to increase wealth. Taxing inequality is tricky because to a degree it does punish enterprise, work, and thrift. On the other hand, properly structured, it can help optimize public risk-taking.

    Motorcycle part polishing sounds fairly wasteful to me, but I'm sure there's a relationship between efficient hedonic satisfaction and population productivity. Who researches that?

    Anyways, always a please to read your (and Prof. Gelman's) comments.

  34. I am a bit of an expert on this because we are a family of 4 with an income of $62,500 a year. For starters, the official tax rate is 15% not 30% as the “expert” above claimed. But we paid nothing (We will this year because our kids are older) We were not evading taxes, and we went to H&R block not a special tax-shelter accountant or lawyer. That is just what the middle-class parents of two young children pay.

    Here is how this works: everyone is taxed on their ADJUSTED income. If we use Emmrich's scenario, the adjusted income would be right around $32. Here is how that would happen. Most employers have "cafeteria funds" so all of the child-care, healthcare premiums and co-pays would also be taken out pre-tax. So now the family's adjusted income is *at most* 45k.

    Now, if this family is young enough to need the full-time daycare for which it pays, they are probably within the first ten years of their mortgage. That means that their monthly mortgage payment is probably 80% interest, and all of that is tax-deductibe. If they have a house payment of 1,000 per month, their adjusted income would drop another $9,6000. State taxes are also taken out of their adjusted income, so if they paid the 3k he suggests, that brings it down to 32,400. This is the highest it is reasonable to assume that their adjusted income would be. They would likely be able to take other deductions for student loan payments or business expenses, but since we gave them a pretty good credit for their mortgage interest, I'll leave it at this.

    With the deductions for 2 children and 2 adults the family's taxable income is only $21,000 (according to H&R Block's calculator). The tax rate for 21k is 10%, meaning that the family would have a tax bill of 2,100 total for the whole year. Now we apply the tax credit of $1,000 per child under 17, and you have a grand total tax bill of $100 for all of your federal income taxes for an entire year.

    Since Emmerich puts federal and payroll taxes at 22% of the family's income, I am going to assume that he had 15% federal and 7% payroll taxes. Those are $4,200, bringing the ACTUAL total of payroll and federal taxes to a grand total of $4,300. That is $8,734 less Emmerich's bogus claim. In other words, he had calculated the family's tax burden at 3 times what it actually was!

    Mississippi allows all of the same deductions as federal taxes, with the exception of the per-person credit and of course the state tax-credit. The taxable income in Miss would be $32,500. Their tax rate (which is figured incorrectly at a flat 5% rate by Emmerich) is 3% for the first 5k, 4% for the next 10k and 5% on everything after that. So, this family would pay $150 on the first 5k, $400 for the next 10k, and for the remaining $17,500 of their income they would owe $875 for a grand total in state taxes of $1,425.

    So state taxes are less than half of what Emmerich claims, and federal taxes are about a third of Emmerich's claims. Emmerich places the total tax burden, for state, federal and payroll taxes at $16,034. It is actually 5,725. It is actually $10,309 less than that.

    Emmerich claims that the middle class family has a total of $34,366 in "total economic benefit." It is actually $44,675.

    The only way this could be anything other than flat-out lies is if he uses the worst case for the middle-class family (too damned stupid to follow the instructions on a tax form or take your taxes to someone who can) and the absolute best case scenario for the working class family (somewhere in all of Mississippi we were able to find all of these benefits including Section 8 housing which is exceptionally rare.)

    Geez, I hate it when people lie using bad numbers.

  35. Regardless of earnings of $60K or $80K, this money is earned by hard work and long hours. Should I have to pay more taxes so irresponsible single women with 3 or 4 kids get free health care from medicaid ? Or they can just go to the ER and don't have to worry about deductibles or copay's that I have to worry about, they can get free care because the hospital can't refuse them service. Who do you think pays for these services ?? We do! Example: I was in the ER a few months ago because of post op complications and while I was in the waiting room a woman walked in with 4 kids, no insurance, and told them her oldest daughter was sick and needed to be seen by a ER doctor, and I quote, then she added I know the other 3 will probably catch what she has so I want the doctor to see all 4 of them. ( I had to pay my $200 deductible before I was seen and my condition was not a runny nose or fever etc, I was actually admitted for inpatient care) This mother didn't have to worry about that, just have a seat we will get your 4 children in to see the doctor as soon as we can. Then about 20 minutes later a pregnant woman rushed in with her boyfriend and said she was having hard contractions and was told to come to the ER and come prepared to stay overnight so we can deliver the baby. When the ER nurse asked for her insurance card both the boyfriend and the mother said we don't have any insurance and when we called they said no problem just get here as quick as possible you will receive the care you need regardless. The nurse replied ok just complete this admit form and we will call admissions so we can move you straight to your room after the doctor examines you. I thought WOW, it must be nice to not worry about paying for insurance, copays, deductibles, have a stack of medical bills you pay as much as you can each month to keep from ruining your credit. And just think my son in college would get pell grants and other assistance, no more student loans, no more monthly rent, no more outrageous book prices, with assistance I wouldn't have to pay any of this. Instead of owing the IRS every year I could actually receive EIC, and everything they held out of my check during the year! NICE!
    It doesn't take a rocket scientist to figure out a person making minimum wage getting free health care, child care assistance, free school lunches, no outrageous college tuition to worry about paying, assistance paying monthly rent where they live, etc has a lot less worries and at least as much free income as a person making $60K with a family that receives none of this assistance. I have to much pride to let someone pay my way, and was raised if you want something you have to work for it, you are not owed anything by anyone, you are responsible for yourself.
    Having ranted about all that I agree everyone needs health care at times but — Should the middle class that works long hours, pays for child care assistance, owes IRS every year, has to borrow student loans and pay money they really can't afford to send kids to college, Should these people have to pay for all this ???

    Well time for me to write bills I owe, forgot to add thats why I woke up at 4AM this morning worrying if I would be able to pay them all. Great life working hard all these years so I could make over $60K a year … So many people that don't want to work, and some that I have actually heard them say I can't make over this amount or I will lose my food stamps, rent assistance, I can't afford for my rent to go up I am paying $35 a month for this 3 bedroom apartment as it is, and might lose free school lunches.. no way gonna lose all that.. Doesn't it make you feel good that your hard work increased your income so you could pay this for them ? :)

  36. This is a correct and noncontroversial argument that is a well-known problem in labor economics (see link below), but it is true only for a small subset of the population, typically single mothers of young children. So one should not blow it out of proportion. Moreover, as someone said, the way to a high-paying job is usually through a medium-paying job, so it still makes sense to do it.

    Link to discussion from labor economics literature:

  37. Though there's still room for debate on the bigger question, this TNR article by Jesse Singal suggests that the original analysis was largely based on errors like this:

    "For starters, Emmerich overestimated the federal tax liability of the $60,000 family by failing to distinguish between gross and taxable income (the $60,000 family only has $40,400 in taxable income, according to the CBPP) and by ignoring the child tax credit, which benefits wealthier families more than poorer ones. The family making $60,000 would actually pay only about $8,043 in payroll and income taxes, not $13,034. As for Medicaid, CBPP pointed out that a family making $14,500 wouldn’t actually be eligible in Mississippi, where the cutoff level of qualifying income for a family of three is a paltry $8,064 per year. Even if that family were eligible, however, Emmerich’s estimate of their benefits is way off. Medicaid is a relative bargain for Mississippi—the state spends, on average, $2,510 a year per adult beneficiary and $1,659 per child beneficiary, according to the most recent numbers."


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