Is The American Economy Already Dead?

This post at Legal Insurrection is stunning to me:

Is it possible to pay more than 100% of your last dollar of income in taxes? And if it were, would you bother to earn that last dollar?

Herein lies the key to how Democrats will obtain a permanent, economically-enslaved majority if universal income-based health care subsidies are enacted. And it is much worse and more nefarious than even the Wall Street Journal recently pointed out in Confessions of an ObamaCare Backer.

The key distinction is between marginal tax rate and implicit marginal tax rate. The marginal tax rate is the rate we all talk about – what absolute percentage of your last dollar earned will be taken by the government.

The implicit marginal tax rate is the absolute percentage of your last dollar taken by the government plus the loss of government benefits resulting from that last dollar. This implicit marginal tax rate can, and does, exceed 100% for the lower-middle and middle classes., and will expand under Democratic health care proposals.

Here's an explanation, plus a chart, from an article titled The Dead Zone: The Implicit Marginal Tax Rate (h/t The Right Coast):

To say that antipoverty programs in the United States are perverted may be an understatement. When you take into account the loss of means-tested benefits (e.g., cash assistance, food stamps, housing subsidies, and health insurance), and the taxes that people pay on earned income, the return to working is essentially zero for those in the lower two quintiles of the income distribution.

For many of the working poor, the implicit marginal tax rate is greater than 100 percent. The long-run consequence of undermining the positive incentive to work is, of course, the creation of an underclass acclimated to not working; the supplement of cash and noncash benefits with income from crime and the underground economy; and the government resorting to negative incentives such as mandatory work programs….

Everywhere, the government's desire (meaning the left-liberal do-gooders' desire) to be generous to the poor is destroying the positive incentives to work and to save that are so necessary for a well-functioning economy. What they have done to Detroit, and are doing to New Jersey, they will do to the entire cuntry.

Here is the chart showing the effect. Note the impact in the $20,000-$50,000 range. Note also that the bump up in the $80,000-$100,000 range. Keep in mind these are only federal taxes:

This situation will only get worse as Obama implements universal income-based health care subsidies and other goodies which will phase out as income rises. As The Right Coast puts it:

And those rates, which exceed 100 percent for many people, are calculated under existing law and before the health care monstrosity is passed, which makes matters much worse.

In addition to all the other problems with highly subsidized, income-tested health care benefits, will come an even more permanent underclass which, being economically rational, will choose not to earn another dollar rather than lose more than a dollar of benefits.

Conservatives often speak of the Obama-Pelosi-Reid axis as seeking to create a permanent Democratic majority through big government handouts. This implicit marginal tax analysis shows that it is much worse than it seems; the permanent big-government majority will not be there by choice, but by government-created economic necessity.

Lower income voters, who pay no federal taxes and who are very voters facing this government-benefits trap, voted for Obama overwhelmingly, as this chart from the Tax Prof

A permanent, Democratic-voting majority living off government benefits with no way out. It really is that bad, and this really is a once-in-a-lifetime chance for the Democrats to achieve a permanent, economically-enslaved majority.

I have posted before on the tax tipping point (here, here), but this is new to me.  I thought we still had a shot to roll things back, but if I understand this correctly, we're already beyond the tipping point, at least in terms of the implicit marginal tax rate for the lower and middle class.  So, this begs the question: is America's economic corpse already dead, and we're just being fooled into thinking that any current movement is only the twitching of rigor mortis?

Your thoughts?

There's my two cents.


I'm a gun-owning, Bible-thumping, bitter clinger conservative in the heartland. You can disagree with me if you want (you do, after all, have a right to be wrong)...just don't be rude or stupid and we'll get along just fine! :)

Posted in Economy

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