A raise in wages and government entitlement programs can actually hurt a person’s incentive to work, according to a Congressional Budget Office analyst interviewed in the Washington Free Beacon on Saturday.
CBO analyst Shannon Mok explained, “When workers’ earnings rise but their after-tax income rises less—because of increases in their income and payroll taxes or declines in their benefits from government programs—their incentive to work typically declines.”
Earning a higher salary could put an employee into a higher tax bracket, actually lowering their after-tax salary. “The amount of tax an individual pays for an additional dollar of income is known as the marginal tax rate,” according to the report, which stated that low- and moderate-income workers in 2016 faced a marginal tax rate of 31 percent, “taking into account federal and state individual income taxes, federal payroll taxes, refundable tax credits, and the phaseout of government programs such as food stamps and subsidies for Obamacare.”
Mok said that the difference in after-tax income affects how much people decide to work. “Increases in marginal tax rates, on net, decrease the supply of labor by causing people already in the labor force to work less,” she stated, adding that government entitlement programs can also discourage people from working.
“As income rises, phasing out a benefit (such as food stamps) increases the marginal tax rate and reduces the incentive to work,” said Mok. “SNAP also effectively increases the after-tax income of its recipients—even as the benefit phases out—further discouraging work.”
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