The Grumpy Economist: Taxes and cliffs

John Cochrane does a superb job of walking through the unfairness at the low end of the income tax system

Written into law is a much larger welfare state than we actually have. Americans don’t fully play the game. Yet. Witness the recent ad campaign to get more people to use food stamps. Once more people take more full advantage of the programs available to them, first the budget explodes. And second, they start to feel larger and larger marginal tax rates against growing out of the programs.

All of this is official confirmation of the point Casey Mulligan has been making in his new book: Our system imposes huge disincentives for low-income people to move up.

He reproduces the graph from the CBO study showing the very high marginal rates lower income people experience net of transfer programs:

The Grumpy Economist: Taxes and cliffs

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