Back in 2011, I linked to a simple chart that illustrated how handouts and subsidies create very high implicit marginal tax rates for low-income people and explained how “generosity” from the government leads to a tar-paper effect that limits upward mobility.
Earlier this year, I shared an amazing chart that specifically measured how the welfare state imposes these high implicit tax rates. Unbelievably, some people would be better off earning $29,000 rather than $69,000.
Simply stated, the multitude of redistribution programs are worth a lot of money, but you begin to lose those goodies if you begin to live a productive and independent life.
And since we know that rich people respond to high tax rates by declaring less income to the government, we shouldn’t be surprised that poor people also respond to incentives.
We also shouldn’t be surprised to learn that other nations have these same perverse policies. Here are some excerpts from a powerful piece for the UK-based Spectator.
…today’s Sunday Times magazine has a long piece asking whether there is a “fundamental difference in our attitudes to work”. It’s still one of the most important questions in Britain today: what’s the use of economic growth if it doesn’t shorten British dole queues? And should we blame these industrious immigrants; aren’t the Brits just lazy? …The quality of the British debate is so poor that we almost never look at this from the point of view of the low-wage worker. Every budget, the IFS will dutifully work out if it has been “fair” – ie, gives the most to the poorest. The LibDems will judge a budget by this metric. That’s a nice, easy, simple graph. But what about destroying the work incentive? Each budget and each change to tax should be judged on how many people are then ensnared in the welfare trap. I adapted the below (nasty, complex) graphs from an internal government presentation, which still make the case powerfully. The bottom axis is money earned from employer and the side axis is income retained. The graphs are complex but worth studying, if only to get a feel for the horrific system confronting millions of the lowest-paid in Britain today.
Here are the two charts. the author is correct. They are quite complex. But they show that there’s no much incentive to work harder, whether you’re a young person or a single parent.
After showing these amazing charts, the author makes some very powerful additional observations.
…if I was in a position of a British single mother I have not the slightest doubt that I would choose welfare. Why break your back on the minimum wage for longer than you have to, if it doesn’t pay? Some people do have the resolve to do it. I know I wouldn’t. …So let’s not talk about “lazy” Brits. The problem is a cruel and purblind welfare system which still, to this day, strengthens the welfare trap with budgets passed without the slightest regard for its effect on the work incentives on the poorest. …Meanwhile, the cash-strapped British government is still creating still the most expensive poverty in the world.
The final sentence in the excerpt really sums it up, noting that the government is “creating the most expensive poverty in the world.” Sort of like a turbo-charged version of Mitchell’s Law. The politicians create a few redistribution programs. Poverty begins to get worse. So then they add a few more handouts to address the problems caused by the first set of programs. Lather, rinse, repeat.
In other words, this poster applies in all nations.
P.S. If you want some real-world examples of the horrible impact of the British welfare state, you can see how the welfare state destroys lives, creates perverse incentives, and turns people into despicable moochers.
P.P.S. We have the same problems in America, and even leftists are beginning to admit this is bad for poor people. Heck, just look at this chart showing that the poverty rate was falling until the War on Poverty began.
[…] the same problem exists in other nations as […]
[…] the same problem exists in other nations as […]
[…] the same problem exists in other nations as […]
[…] the same problem exists in other nations as […]
[…] Sometimes that can be explained with wonky discussions of marginal tax rates orwelfare traps. […]
[…] Sometimes that can be explained with wonky discussions of marginal tax rates or welfare traps. […]
[…] if they chose productive behavior, they would get hit with punitive taxes and have less disposable income (we have the same self-destructive policy in America, and it’s getting worse thanks to […]
[…] Just in case you think that’s an isolated example, look at this remarkable chart revealing how life on the dole can be much more remunerative than a life of striving and work (you can see similar charts for the U.K. by clicking here). […]
[…] people in dependency because of very high implicit marginal tax rates. And that’s true in other nations as […]
[…] The same problem exists, by the way, in other nations such as Denmark and the the United Kingdom. […]
Typisk blusen fra Moncler kan være bemærkelsesværdigt fredeligt, typisk lavet af uld i denne Moncler bluse ser ud til at have overlegen. Det tvinger dig til at hæve temperaturen på og kan også få dig til at føle formular. På det tidspunkt du er faktisk ud af din vores varmere tempuratures og / eller vinterlige vejr, måske købe nogle Moncler bluse være anstændigt for ikke at nævne behageligt.Disse såkaldte, selfacclaimed musikere vil også møde den samme skæbne. Den mørkeste time af natten er lige før daggry. Derfor denne dag er ikke langt væk, når Oriya filmmusik vil vende. Så hvorfor skulle vi efterligne denne oplevelse ved at tage del i udlånt og ved at vælge at placere os i vejen f fristelse. Jeg tror for mig, og det er kun min mening, det er at gå gennem oplevelsen af at stole på Gud. For at komme tilbage til kernen i os, og se, at gennem denne Gud har giver.
[…] The U.K. welfare system also makes work unattractive compared to living off […]
[…] The U.K. welfare system also makes work unattractive compared to living off […]
[…] The U.K. welfare system also makes work unattractive compared to living off […]
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[…] did share these two amazing charts (here and here), so the audiences did get some powerful data showing that the welfare state is dramatically […]
[…] Just in case you think that’s an isolated example, look at this remarkable chart revealing how life on the dole can be much more remunerative than a life of striving and work (you can see similar charts for the U.K. by clicking here). […]
[…] if these info-graphics are any indication, there must be lots of people in the United Kingdom who make similar […]
[…] We also have a remarkable example of labor supply economics. This is the real-world example of these charts showing how the British welfare state destroys incentives. […]
[…] We also have a remarkable example of labor supply economics. This is the real-world example of these charts showing how the British welfare state destroys incentives. […]
I have just posted a blog post that highlights exactly what you have posted here – The Poverty Trap of the Hardworking Single Mother.
It’s ridiculous that even though I give my job my all – more than most would – I will still never actually get to see the cold hard cash as payment for the efforts I put in. I want to work – I need to work – but at times like this I wish I was brought up with less of a conscience.
Great post.
Hi Dan,
Here`s the reason for the apparent “failure” of the welfare state in the UK:-
In the late 1960s influential US economist Milton Friedman came up with the term “the natural rate of unemployment” and claimed that if unemployment fell below this rate then inflation would increase. Friedman understood that low levels of unemployment give confidence to workers, who can fight for better pay and conditions. When they`re successful, the profit margins of capitalists are reduced, causing them to put their prices up in response.
It has been the policy of every UK government (and those of most other countries) for over 30 years to ensure that unemployment is prevented from falling below what is often described by economists as a “sustainable”, “natural”, “structural” or “equilibrium” rate of unemployment (these terms are interchangeable).
On the rare occasions that this policy is discussed in the mainstream media we find that economists, journalists, and politicians usually reveal themselves to be in favour of using unemployment to exert what is deemed to be the necessary “downward pressure on wages” in the name of controlling inflation.
During the last boom the ruling class became very nervous about falling unemployment – a Financial Times editorial published on September 11, 1998 told its readers that unemployment would have to rise, “perhaps by 500,000”! Three months earlier the Bank of England`s Monetary Policy Committee (MPC) had raised interest rates to 7.5% after concluding that “it was probable that unemployment would have to rise to hit the inflation target”.
Click to access Mpc9806.pdf
Higher interest rates are used to increase unemployment during booms by reducing consumption and new investment.
The economists on the MPC not only want “enough” unemployment, they also want the “right type” of unemployment. Six months after Chancellor Gordon Brown created the MPC, in its December 1997 meeting the Committee asked itself “did short-term unemployment exert more downward pressure on earnings than long-term unemployment?”. They concluded that “short-term unemployment was more important”, on the grounds that “when the proportion of long-term jobless was high…..workers would probably realise that they could not be replaced so easily, and hence that their bargaining strength was higher”.
Click to access mpc9712.pdf
Further reading:
The Bank of England is licenced to rig the labour market
Reblogged this on News You May Have Missed and commented:
How the Welfare State Traps the Poor in Dependency, the British Version
It limits upward mobility as staying mediocre is made more comfortable — in the hopes that not too many will find comfort and complacency in mediocrity — and that some distant other, someone smarter, someone more competent, or someone simply harder working will labor to support the transfers. Alas, having a system that is simply “not too bad” or “not as bad as others” is grossly insufficient for a country to maintain top prosperity. England declined and continues to do so. America has also started down the same irreversible path, though voter lemmings see hope at the end of the tunnel.
In the end, you end up like Greece where everyone is simultaneously recipient and contributor to a great many transfer and regulation programs, all passing through the state bureaucracy that extracts its fair share yet more unmotivated salaries and benefits. But in that environment, and slow growth desperation, who will let go of the subsidies first? No one.
Its like a room full of people where everyone is holding and squeezing everyone else’s cojones. At a personal level, squeezing ever more is your only leverage. If you let go, you are left with your cojones being squeezed and no leverage. What do you do? You squeeze ever harder. That is how HopNChange and class warfare end.