The Welfare trap can be destroyed by Milton Friedman’s negative income tax

The best way to destroy the welfare trap is to put in Milton Friedman’s negative income tax.

A Picture of How Redistribution Programs Trap the Less Fortunate in Lives of Dependency

I wrote last year about the way in which welfare programs lead to very high implicit marginal tax rates on low-income people. More specifically, they lose handouts when they earn income. As such, it is not very advantageous for them to climb the economic ladder because hard work is comparatively unrewarding.

Thanks to the American Enterprise Institute, we now have a much more detailed picture showing the impact of redistribution programs on the incentive to earn more money.

It’s not a perfect analogy since people presumably prefer cash to in-kind handouts, but the vertical bars basically represent living standards for any given level of income that is earned (on the horizontal axis).

Needless to say, there’s not much reason to earn more income when living standards don’t improve. May as well stay home and good off rather than work hard and produce.

This is why income redistribution is so destructive, not just to taxpayers, but also to the people who get trapped into dependency. Which is exactly the point made in this video.

P.S. Most of you know that I’m not a fan of the Organization for Economic Cooperation and Development because the Paris-based bureaucracy has such statist impulses. But even the OECD has written about the negative impact of overly generous welfare programs on incentives for productive behavior.

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