How Our Welfare System Can Discourage Work

Low-income families often receive benefits from multiple welfare programs, such as assistance with food, housing, and day care costs, help with medical costs, or cash payments to supplement or replace earnings from work. While these programs nominally support and encourage employment, program "phase-out rules" - especially when combined across multiple programs - mean certain households may not be significantly better off if they work or increase their earnings from work. Economists have studied the interaction between earnings and benefits under various programs by focusing on what are called "effective marginal tax rates," which refers to the portion of an additional dollar of earnings effectively lost due to rising taxes and benefit reductions. Due to effective marginal tax rates that can approach or even exceed 100 percent when individuals receive benefits from multiple programs, it is possible that some individuals can be little better off financially-and in some cases even worse off-if their earnings increase.