The Disincentive Factor

What keeps the welfare rolls long? One answer may be that Government programs and the tax system work to reduce the incentive for the deprived to take jobs, at least in areas where welfare benefits are high. That is the conclusion of an analysis of inner-city family income in Los Angeles by Economist Arthur ("Curve") Laffer, who has popularized the theory that lower tax rates lead to increased business activity and therefore to higher tax revenues.

Laffer found that a family of four in which no one works receives $739.33 a month if it takes advantage of all available welfare benefits and other payments, such as food stamps and housing subsidies. If one member works, family earnings are not much higher, because taxes go up and payments go down. If the job holder has wages of $100 a month, the family has an additional $31.54 of spendable income. If he has wages of $500, the extra income is only $65.77. At $700 the added income dips slightly, for various reasons, to $65.28.

If his wages are $1,000, he adds a mere $167.98 to the family income. Although other economists have shown that changes in taxes and benefits have little effect on poor people's motivation to work, Laffer argues that the system clearly provides scant incentive to get off welfare.

Laffer added up all the disincentives for the working poor. Employee Social Security taxes take 5.85% of wages; up to 10% goes to state and federal income taxes. Aid to families with dependent children, which amounts to $423 a month for a nonworking family of four, is progressively reduced by 35-c- to 50-c- for each dollar of wages earned. The rent subsidy for a family with no one employed is $273 a month for a three-bedroom apartment in an elevator building. If a family member takes a job, the subsidy is gradually lowered, to $110 a month at an income of $1,000.

Any family that earns more than $567 a month forfeits free medical care. Food stamps worth $48 a month are progressively reduced to zero at an income of $500 a month. Concludes Laffer: "Far from being an assault on the poor, a tax cut, along with some changes in benefit programs, would help lower-income groups."

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