Marginal tax rates for poor people

Today I was in Washington, commenting on an excellent paper by Stephen Holt that - well, why go through it myself when Vic Fleischer has live-blogged it already? (I saw him typing away on his laptop at the session, but it didn't occur to me, technological primitive that I am, just why.) And apparently Neil Buchanan will be blogging it here on Friday.

The topic - stunningly high marginal tax rates (MTRs) on the poor and near-poor due to rapid phaseout of their various benefits (TANF, Food Stamps, EITC on the downslope, Medicaid, etc.) - is very important and little discussed. As I mentioned in the session, while optimal income tax analyses in the Mirrlees tradition suggest high MTRs at low ranges (still progressive overall if poor people get a large grant), they certainly don't suggest rates so high that moving, say, from a $7.50 per hour full time job to one offering $17.50 per hour should leave a single parent with two children no better off financially, after taking account of the effect on taxes and transfers.

Holt's paper makes good use of a great data set from Wisconsin, permitting matches between the income tax and welfare rolls to figure out what is going on overall. One "mitigating" factor to the high MTRs, except that it really isn't mitigating, is that take-up of the poverty programs by eligible claimants is so low that most poor households don't face such high MTRs after all. But this of course means that people aren't getting the aid we want them to get, in part due to budget-conscious lack of outreach along with unduly onerous administrative obstacles.

I remember, back in early 2001, attending a DC conference that mixed policymakers with academics and (mainly) business lobbyists in tax. Because I was due to talk next, I got to hear Larry Lindsey giving a pep talk re. the 2001 Act (then still percolating through the House) to the lobbyists. What he was saying, back then, was "You guys had better not dare put your special interest stuff into our big tax cut. If you do, and it causes the tax cuts to fail, we'll rip your lungs out, and then we'll go to your house and shoot your whole family." (Not an exact quote, or even an approximate one, but this was my reading of the gist.) "But fear not," he continued (still in paraphrase), "your turn will come." I didn't believe him, given the budgetary picture. I doubt anyone in the room did. But actually he was telling the truth, as the Bush Administration subsequently showed - they didn't care if it was fiscally reckless to keep on cutting taxes, and were willing to give the business folks their turn anyway.

I seem to have gotten sidetracked here, however. That story has nothing to do with today's ATPI session. What I meant to dredge up from that trip down memory lane is Lindsey's statement that day that the Administration's big policy goal was to cut MTRs for people earning $30,000 and up. His words, I'm pretty sure. My thought at the time was, why start at $30,000 when the highest MTRs are below that point? Why aren't you concerned about the lower tier as well?

Not a hard question, I suppose. Although here it is only fair to note that the Republicans have plenty of Democratic company in ignoring the problem. And also only fair to note that the easiest way of doing it - cutting benefits - is not quite right either. Decent-sized grants, followed by non-insane MTRs based on taking an integrated view of all the various fiscal rules' combined effects, is not a very exciting course politically, but it might have great social benefits.