Does the American welfare system adequately encourage the
poor to achieve self-sufficiency, or is it a “poverty trap” that locks welfare
beneficiaries into a lifetime of dependency? The question has been debated endlessly
with no clear win for either side.
In large part, the dispute turns on a concept known as
the effective marginal tax rate (EMTR) faced by poor and
near-poor households. The EMTR is the percentage of any additional earned
income that a household pays in taxes or loses in government benefits. Critics
argue that high EMTRs leave little incentive to work, and even for those who do
work, they mean that their efforts do little to help them to lift their
disposable incomes above the poverty level. What is the point of getting a job
if taxes and benefit reductions are going to eat up 75 percent or more of your
earnings, even without figuring in expenses like child care, commuting, or work
clothes? Supporters of the existing welfare system argue that punitively high
EMTRs are rare. They emphasize that the current welfare system, despite its
flaws, does raise millions of families out of poverty.
Recent research revives the longstanding debate over EMTRs.
This commentary reviews studies that suggest that despite some changes for the
better, critical segments of the low-income population, especially those with
incomes close to and just above the poverty line, continue to face weak work
incentives. Simply expanding eligibility for existing welfare programs will not
fix the problem. As explained in the conclusion, a more effective approach to
mitigating the poverty trap would be to cash out and consolidate current
welfare programs, replacing them with a combination of universal income
supports, universal child benefits, and wage subsidies for the lowest-paid
workers.