How to read Megan McArdle part 46 -- the quotes

Via Joseph via Karl Smith, Megan McArdle (in a post entitled, "When it Comes to Taxes on the Poor, the Supply Siders are Right") quotes the following passage from Jeff Liebman:

"Despite the EITC and child credit, the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn't make ends meet any more. I told her I didn't know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000. I told her that she should first try to find a $35k job closer to home. Also, she apparently can't fully reverse her decision to take the higher paying job because she can't get the child care voucher back (the waiting list is several years long she thinks). She is really stuck. She tried taking an additional weekend job, but the combination of losing 30 percent in increased rent and paying for someone to take care of her child meant it didn't help much either.

The question is what is the policy solution here. Means-tested transfers have to be phased out at some point, so there is no easy answer.

Notice strangely brief second paragraph and the missing quotation mark at the end? Statisticians tend to be suspicious people, particularly when it comes to odd cut-offs for data ranges so I clicked through the link to the Jeff Frankels post that provided the original quote and saw a possible reason why McArdle had stopped so abruptly. Here's the very next sentence:

I think there are three things we might be able to do — all of which would, as you say, be a better use of revenue than tax cuts for the rich.

The whole paragraph is worth reading:

The question is what is the policy solution here. Means-tested transfers have to be phased out at some point, so there is no easy answer. I think there are three things we might be able to do — all of which would, as you say, be a better use of revenue than tax cuts for the rich. First, make child-related tax benefits equal for all families (now they are high at the bottom because of the EITC and high at the top because the dependent exemption is more valuable the higher the tax bracket you are in, and the dip in the middle raises marginal tax rates by 21 percent for a family with two kids — so eliminating the dip would get rid of this 21 percent portion of the effective marginal tax rate). David Ellwood and I analyze this first idea. Also Sawicky and Cherry have put forth a similar idea. Second, in designing universal health insurance, we need to be very careful not to phase out income-related premium subsidies over the same income range where all of these other benefits are being phased out. Third, implement a delay between income increases and rent increases in section 8 — allow people to save up a bit before they are hit with the rent increase (I believe I read that some states have been trying out something like this recently, but I am not up to date on these policies). There are some excellent papers that carefully model how the cumulative effects of the welfare system create a poverty trap. But I don’t think either of these papers includes all of the factors facing the woman above — so they would probably indicate that she faced a 60 percent marginal tax rate rather than the 130% (or whatever it really is) rate that she actually faces.”

I not entirely convinced that Liebman has made the case for counting personal expenses required for a new job as a tax increase, but it's a coherent and honest argument that's certainly persuasive on the reality of a poverty trap.

As for the rest of McArdle's post, after having spent a great deal of time arguing that a situation exists where supply siders predict a strong effect, her whole defense of her central thesis consists of this:

Note two things: first, that in this case, at least, the supply siders seem to be completely right. Everyone I've spoken to about the problem seems to agree that the poor respond to these high marginal tax rates by either taking lower-paying jobs than they could, or working less--not in every individual case, but in aggregate.

And second, that this is not a problem that supply siders seem to be applying much brain power or political capital to fixing.

The everyone-I've-spoken-to standard leaves something to be desired, particularly given the fact that the woman in the anecdote did the exact opposite of what supply side theory predicted; rather than "taking lower-paying jobs than [she] could, or working less," she "tried taking an additional weekend job."

(and to put way too fine a point on this, I don't see the predicted big dip for affected families in these numbers either)

On the bright side, this still isn't the worst thing to come out of the Atlantic recently.