Raising taxes and providing welfare programs decrease incentive to work, the Congressional Budget Office reported.
For low-income Americans, tax burdens that lower take home pay in combination with government programs that make it more lucrative for some earners to eschew working at all, are holding the economy back.
As the CBO notes:
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. The percentage of an additional dollar of a person’s earnings that is unavailable for such reasons is called the marginal tax rate.
In part, income and payroll tax rates determine marginal tax rates. But other features of the tax system do too, and so do some benefit programs. Certain deductions and tax credits reduce the taxes that eligible taxpayers owe and increase their after-tax income—but those provisions, if the amounts are based on the recipient’s income, also contribute to marginal tax rates. Those rates are similarly affected by programs providing cash and in-kind benefits, referred to as means-tested transfers, that target assistance to people of reduced means. The rate at which those benefits phase out with increasing income is also part of the marginal tax rate that workers face.
Discouraging workers from seeking higher pay is contributing to an overall state of economic stagnation.
As Americans for tax reform notes: “Over the next decade, the Congressional Budget Office projects the economy will continue to grow at a stagnant 2 percent, far below the historical average. This insufficiently low economic growth has resulted in too few new jobs and low wages.”