Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. A simulation of safety-net benefits for a single mother with two children in North Carolina shows net income rising faster than earnings below $30,000 a year, then dropping abruptly as benefits phase out. She would need to earn $70,000 to exceed the net income available at $30,000.

Angela Rachidi, Matt Weidinger, Joshua Bandoch, Nic Dunn, et al. American Enterprise Institute
Date Posted:

A non-working, non-disabled mother of two in North Carolina can collect $50k in benefits. Due to benefit phase-outs, she would have to earn $70k in market income to exceed her net income from earning $30k alongside $40k of benefits.

How much must a single mother earn to surpass benefit-level income?

Core argument: A simulated single mother with two children in North Carolina would need to earn $70,000 per year to reach a higher net income than earning $30,000 per year while keeping her full safety-net benefits.

Figure 3 simulates actual safety-net benefits a single mother with two children in North Carolina would receive based on different earnings scenarios. Notably, the mother in this example generally experiences a work incentive at earnings levels below $30,000 per year—that is, her net income grows even more than her earnings alone due to the way benefits phase in. This is primarily because the EITC and CTC—and to some extent SNAP—grow with additional earnings up to a certain point. However, this work incentive shifts to a disincentive as this mother reaches earnings levels at which benefits start to phase out. The top line of Figure 3 reflects net income (i.e., total benefits plus earnings less taxes) and shows that the combined effect of phasing out all of these benefits over a similar earnings distribution results in an abrupt drop in net income as the family starts to earn more than $30,000 per year. In North Carolina, a mother receiving this package of benefits would have to earn $70,000 per year from work to reach a higher net income than if she earned $30,000 per year from work and kept her full benefits. This is a substantial work disincentive.

Takeaways by Macro Roundup® AI

  1. A simulated single mother with two children in North Carolina would need to earn $70,000 per year to reach a higher net income than earning $30,000 per year while keeping her full safety-net benefits.
  2. Below $30,000 in annual earnings, the simulated North Carolina mother's net income grows by more than her earnings alone, primarily because the EITC, the Child Tax Credit, and to some extent SNAP phase in with additional earnings.
  3. The combined phase-out of these benefits above $30,000 in earnings produces an abrupt drop in the simulated family's net income, which the analysis characterizes as a substantial work disincentive.

Related Articles:

  • Mitigating Benefits Cliffs for Low-Income Families: District of Columbia Career Mobility Action Plan as a Case Study — The authors estimate that a hypothetical low-income family with children receives $68,686 in government support at an income of $11,000 but only $22,709 at $65,000, while its tax liability rises from $842 to $12,835. The lost assistance plus higher taxes fully offsets the $54,000 income gain.
  • “Compensate the Losers?” Economic Policy and Partisan Realignment in the US — The authors argue that partisan realignment by education reflects Democrats' declining supply of "predistribution" policies such as job guarantees, higher minimum wages, protectionism, and stronger unions, which less-educated Americans favor while more-educated Americans prefer taxes and transfers. They estimate changing views of the parties' economic policies explain roughly half the shift.
  • Welfare Is What’s Eating the Budget — The U.S. redistributes 29.4% of its gross domestic product through transfers and taxes, a larger share than any developed country except France at 30.1%. Counting transfers as income and taxes as income lost and adjusting for household size, average households in the bottom, second, and middle income fifths have roughly equal incomes despite large differences in work effort.
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