A similar family earning $93,699 (400% of poverty) gets a subsidy of $14,799. But a family earning $1 more—$93,700—gets no subsidy.
Economists call large, discontinuous changes in program benefits like this "notches." Although notches might be administratively convenient, they have terrible incentive effects. As Prof. Raj Chetty of Harvard points out in a recent National Bureau of Economic Research working paper, prior research on notches show that they induce sharp reductions in labor supply.
Consider a wife in a family with $90,000 in income. If she were to earn an additional $3,700, her family would lose the insurance subsidy and be more than $10,000 poorer. In addition, she would also pay more in income and Social Security taxes. Taken together, these policies impose a substantial punishment on work effort.
Notches also lead to unfairness. The principle that families of the same size with similar incomes should be treated similarly by tax law and transfer programs has deep philosophical roots and appeals to basic notions of equity. The notch turns this principle on its head. Next-door neighbors with virtually identical circumstances could receive very different levels of government assistance, depending on which side of the notch they happen to fall. This feature will justifiably increase public cynicism about the law and government in general.
Economists call large, discontinuous changes in program benefits like this "notches." Although notches might be administratively convenient, they have terrible incentive effects. As Prof. Raj Chetty of Harvard points out in a recent National Bureau of Economic Research working paper, prior research on notches show that they induce sharp reductions in labor supply.
Consider a wife in a family with $90,000 in income. If she were to earn an additional $3,700, her family would lose the insurance subsidy and be more than $10,000 poorer. In addition, she would also pay more in income and Social Security taxes. Taken together, these policies impose a substantial punishment on work effort.
Notches also lead to unfairness. The principle that families of the same size with similar incomes should be treated similarly by tax law and transfer programs has deep philosophical roots and appeals to basic notions of equity. The notch turns this principle on its head. Next-door neighbors with virtually identical circumstances could receive very different levels of government assistance, depending on which side of the notch they happen to fall. This feature will justifiably increase public cynicism about the law and government in general.
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