How Government Limits Upward Mobility

By :: July 19th, 2012

Upward mobility has been a foundation of America’s self-image since the 18th century. If you work hard enough, nothing can stop you from getting ahead. That, at least in the minds of many Americans, is what distinguishes us from much of the rest of the world.

Yet, according to my always-provocative Tax Policy Center colleague Gene Steuerle, our tax and spending priorities not only fail to promote mobility for those who are starting at the bottom, but they often actively discourage the hard work and savings that help us climb the socio-economic ladder.

Oh, the federal budget is loaded with subsidies that encourage work and savings. But they are almost always aimed at improving the lot of middle- and upper-income households, not those who most need a leg up.

In testimony last week to the Senate Finance Committee, Gene estimated that of the nearly $750 billion in mobility-enhancing tax and spending programs in 2006, $540 billion--or nearly three-quarters-- went to higher income households. Those with low-incomes received only about 2 percent of the benefit of subsidies for home ownership and almost none of the benefit of employer-related work subsidies or incentives for savings and investment.

Some of these programs not only fail to help poor and lower middle-class households, they actively hurt them. For instance, if home ownership is a key to upward mobility (an arguable proposition, but one many believe), we need to acknowledge that subsidies such as the mortgage interest deduction inflate home prices and make it harder, not easier, for poor families to buy.

Worse than that, Gene argues, once low-income households reach poverty level, government policy discourages work.  True, social welfare programs provide a valuable safety net for the very poor. For instance, the Earned Income Tax Credit and the Child Tax Credit are important income supports for low-income families.

But because these safety net programs phase out as incomes rise, some people face marginal tax rates as high as 80 percent for getting a better job or even a raise.  A new Urban Institute calculator shows how this works.

With a budget that encourages consumption rather than work and savings, the gap between the American Dream of unfettered mobility and the reality will only widen, Gene fears. His solution: Rethink those tax subsidies and spending programs that too often hinder mobility, paradoxically in the name of enhancing it.

This debate over mobility is a key subtext in the presidential race between Mitt Romney and President Obama. Each happily talks about the importance of the American Dream and upward mobility. Yet, neither seems willing to tackle the issues that Gene is raising.

8Comments

  1. Jacob  ::  3:54 pm on July 19th, 2012:

    I was trying to use the calculator you linked to reveal how someones marginal tax rate would somehow jump to 80% but it doesn’t appear that the calculator you linked deals with marginal rate. Unless I’m missing something it only shows the increase in income compared with the decrease in benefits and increase in taxes combined. While it’s true that net income can go down as the result of a raise in hourly rate, I don’t think it’s accurate to call loss of income because an individual no longer receives a government benefit a tax.

  2. Vivian Darkbloom  ::  6:44 pm on July 19th, 2012:

    Good observation, Jacob. It is not the marginal *tax* rat and to suggest it is is extremely misleading. That term is misnomer used by economists who don’t have the imagination to think up a more accurate, descriptive term. it suggests that if you are a low income citizen who faces the loss of transfer benefits by earning another dollar, you can join the ranks of” taxpayers” without paid a dime of tax. Something like “marginal disincentive rate” would do nicely, I think.

  3. Michael Bindner  ::  8:07 pm on July 19th, 2012:

    I made comments on this hearing and came up with options through tax reform, including replacing SNAP (formerly food stamps) with a robust refundable child credit taken against a VAT-like Net Business Receipts Tax that goes to anyone who works, is on UI or is taking an adult education program or earning a college degree (with such education always carrying some kind of stipend for living expenses for low income individuals).

  4. Michael Bindner  ::  8:10 pm on July 19th, 2012:

    http://www.facebook.com/notes/michael-bindner/hearing-on-how-welfare-and-tax-benefits-can-discourage-work/264927680280307

  5. Tax Roundup, 7/23/2012 « Roth & Company, P.C  ::  10:58 am on July 23rd, 2012:

    […] How Government Limits Upward Mobility (Howard Gleckman, TaxVox): True, social welfare programs provide a valuable safety net for the very poor. For instance, the Earned Income Tax Credit and the Child Tax Credit are important income supports for low-income families. […]

  6. Around The Dial – July 27, 2012 | South By North Strategies, Ltd.  ::  3:08 pm on July 27th, 2012:

    […] TaxVox explains “how government limits upward mobility.” […]

  7. Glendale Real Estate  ::  6:28 pm on September 25th, 2012:

    Oh, the federal budget is loaded with subsidies that encourage work and savings. But they are almost always aimed at improving the lot of middle- and upper-income households, not those who most need a leg up.

  8. anchor hocking 2  ::  10:12 pm on November 5th, 2014:

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