Dan Mitchell describes how withdrawal of welfare benefits as your income rises can create a tax cliff that discourages the unemployed from seeking more work.
A graphic from British newspaper The Spectator gives this example:
John 21, works 25 hours per week at a gross wage of £5.70 per hour.
Of which 63p in tax/National Insurance and £4.18 in benefits (housing and council tax) is withdrawn.
Net income from work: 89p per hour.
84% of wage is lost in tax and benefit withdrawal!
Read more at How the Welfare State Traps the Poor in Dependency, the British Version « International Liberty.
There is another form of welfare handout that no-one recognizes as such, and because it is ignored productive enterprise is crippled and poverty is institutionalised. The concept of “economic rent” is lost in today’s mainstream economics but not in this article by Professor Michael Hudson:-
http://michael-hudson.com/2012/09/incorporating-the-rentier-sectors-into-a-financial-model-3/
The following are some excerpts:-
“Rentiers are those who benefit from control over assets that the economy needs to function, and who, therefore, grow disproportionately rich as the economy develops. These proceeds are rents – revenues from ownership “without working, risking, or economizing”, as John Stuart Mill (1848) wrote of the landlords of his day, explaining that ‘they grow richer, as it were in their sleep’
Just as landlords were the archetypal rentiers of their agricultural societies, so investors, financiers and bankers are in the largest rentier sector of today’s financialized economies: finance controls the economy’s engine of growth, which is credit in all its forms.”
The financial sector has become the leading rentier sector.
In its interactions with the government, the financial sector buys bonds (and also makes campaign contributions). The Federal Reserve pumps money into the banking system by purchasing bonds and, when the system breaks down, makes enormous bailout payments to cover the bad debts run up by banks and other institutions to mortgage borrowers, businesses and consumers. The government also enhances the real estate sector by providing transportation and other basic infrastructure that enhances the site value of property along the routes. Finally, the government acts as direct purchaser of monopoly services from health insurance providers, pharmaceutical companies and other monopolies. In the other direction, the U.S. Government receives a modicum of taxes from real estate (mainly at the local level for property taxes), not much income tax but some capital gains tax in good years. In fact, tax policies favour unearned income.”
END OF QUOTES
Welfare recipients can hardly be denigrated as lazy or cheating when our economic system actively enables the parasitising of the productive many to support unearned wealth at one end of the social spectrum, and with their taxes pay for the resulting need for welfare.