Nancy Folbre, UMass economics professor and contributor the NY Times Blog, Economix, describes what she calls the “resentment zone” in a recent Economix entry. Low-income workers who get married, work more hours or pick up a second job, may lose means-tested benefits that they once qualified for. According to Folbre, this has the same effect on households as paying more taxes. In fact, when you account for both taxes paid and benefits lost, the marginal tax rate for low-income households often exceeds 35 percent. This is the same rate applied to taxable income over $372,950 of married couples filing jointly for 2009.
The rate at which benefits are phased out depends on which benefits people are taking advantage of. Participation rates for many programs, like food stamps, fall far short of 100 percent of those eligible.
Most government surveys don’t collect data on program participation. One that does, the Survey of Income and Program Participation (SIPP) is widely considered inaccurate.
But an innovative study of Wisconsin households that merges data from tax returns and state administrative data shows that some low-income families faced a combined state and federal marginal tax rate of 44 percent in 2000. Some fell off a cliff when they earned just enough income to disqualify them from the state’s public health insurance program.