Recently, a lot of attention has been paid to rising income inequality in the U.S., especially among the top 1 percent of income earners. The reason for this fact is clear: Globalization and mass media have increased the returns to productivity, and the market has rewarded these people accordingly.
Unfortunately, very little attention has been paid to what keeps the poor mired in poverty. Our own government has created a poverty trap for the bottom 40 percent of the population that will do more to keep this group poor than any selfish Wall Street banker.
Consider a family of 3 working to try to get ahead. They want to contribute to society but also want to make decisions that are best for their family financially. If neither parent works, they get a little above $30,000 a year in welfare cash grants and subsidies.
Now let's say the father gets a minimum-wage job working full time. Depending on the position, he might be able to get about $15,000 a year. The total value of this family's income is now a little above $40,000 because the earned income-tax credit, section 8 housing voucher, Medicaid and food stamps fully kick in.
These policies so far have created a somewhat positive incentive to work.
Contrary to popular belief, however, very few heads of poor households actually make the minimum wage, which is largely earned by suburban kids working at Hollister. In fact, workers above age 24 make up 47 percent of those who earn the minimum wage, and only 23 percent of this group lives in poverty. A more realistic assumption is that the main income earner of a poor family would make between $10 and $20 an hour.
Assuming a 40 hour work week for 52 weeks a year, the salary of someone making $10 an hour is $20,800 and at $20 an hour it is $41,600. Around that $20,000 income level, the family's income is maximized until it reaches about $40,000 a year in income because every additional dollar it earns is replaced by a loss in $1 worth of benefits.
If the father starts off working in construction as a laborer and starts at $10 an hour, he might acquire new skills which cause his wage to rise. As his income goes up, he pays more in Social Security and Medicare taxes. He must then start paying some federal and state income tax, and the earned income-tax credit is phased out. As he rises to the job of foreman, perhaps making $20 an hour, he loses food stamps, medical coverage for his family through Medicaid and completely loses his housing assistance.
In other words, his family is just as well off making $20,000 a year as they are making $40,000 a year because of government programs. Every extra dollar in income he makes from $20,000 to $40,000 is in effect taxed at 100 percent, far higher than the top 1 percent. Why try to work harder when it makes no difference to your economic well-being?
Many people I speak with who support heavy expenditures on governmental poverty programs say that the poor aren't smart enough to get ahead in our cut-throat capitalist system.
I would beg to differ; They can't get ahead because they are indeed intelligent and realize that there is zero incentive to do any more work after the $20,000 a year level until they are average-income earners. A family whose father works full time is just as well off with the mother staying at home as it is with the mother working full time as well, assuming they both make $10 an hour.
If Occupy Wall Street has its way, more programs designed to redistribute wealth will be created, which will do more to stratify the impoverished condition of the bottom 40 percent of income earners than any greedy member of the top 1 percent ever could.
Travis Hornsby is an economics and statistics senior at UF. His column appears on Mondays.
