Scott Grannis wrote in his blog, Calafia Beach Pundit, ObamaCare: punitive marginal tax rates on the poor, 4/8/2009.
According to the CBO, for families earning at the poverty line in 2016 ($24,000), government subsidies for healthcare insurance would be worth about $16,500 per year. If a family managed to double its income to twice the poverty line ($48,000), healthcare subsidies would drop to about $9,072. That means that a family earning $24,000 would face a 30% marginal tax rate just from the impact of reduced federal subsidies. But on top of that, the same family would find that the earned income tax credit would be phased out, and it would be subject to the 15% income tax rate, payroll taxes of 12%, and state income taxes. Add it all up and a poor family struggling to rise up out of poverty could face an effective marginal tax rate of up to 80%.
Bottom line: schemes which redistribute income massively from the very rich to the very poor can end up enslaving those at the bottom rungs of the income ladder, by imposing huge effective penalties on additional work. As Milton Friedman said, “there is no free lunch.”
This does a lot to explain why poverty has grown in spite of the enormous amount we have spent to reduce it. When you add other subsidies to the poor such as food stamps, housing allowances and educational allowances the marginal tax rates for those on the lower rungs of the economic ladder are prohibitive.
the ‘Free Cheese ..’ title came from one of the reader’s comments to Scott’s blog.
Calafia Beach Pundit is a regular read for me and one of the better economic blogs out there.