Welfare, Cash Grants, and Marginal Rates
New York University School of Law
Southern Methodist University Law Review, Forthcoming
NYU, Law and Economics Research Paper No. 06-21
Marginal rates are frequently analyzed based solely on taxes, without regard to benefit phase-outs that have exactly the same incentive and distributional effects as increasing positive taxes. This myopia reflects the notion, rooted in our current fiscal language, that "taxes" and "spending" are fundamentally different. In fact, however, the difference is purely one of labeling.
Among the ill consequences of this confusion between substance and labels is the political unfeasibility of demogrant or negative income tax proposals. These proposals often are criticized for seemingly providing universal and unconditional cash grants. In fact, however, cash grants can be just as conditional or selective as benefits that are labeled as "welfare." Clearer thinking about these matters would expand the realm of politically feasible policy choices, and make excessively high marginal tax rates on people who are escaping poverty easier to avoid.
Number of Pages in PDF File: 28
Keywords: marginal rates, welfare, demogrants, negative income tax
JEL Classification: H20, H21, H24, I38
Date posted: April 25, 2006