Obviously, this is a severe disincentive to work and get off welfare. The table illustrates the problem, using, as an example, figures for the state of Pennsylvania. This is equivalent to a tax rate of 31.25 percent on the earnings. In other words, out of each additional dollar she earns, her disposable income rises by less than 20 cents. This is equivalent to an effective tax rate of 70 percent.
Similar situations arise across the country, with only the degree varying from state to state.
De facto marginal tax rates are inherent in the nature of all means-tested welfare programs. Reducing benefits gradually reduces the tax rate, but necessarily raises the level of earnings one can have and still receive benefits. The Congress is making a major effort to reform welfare to enable states to try alternative systems, and this is commendable. However, the best answer to this problem is strong economic growth and a sharp increase in higher paying jobs. Other steps, such as deductibility of payroll taxes to ease that tax's burden on low income workers, would be helpful as well.