NCPA - National Center for Policy Analysis

Dollars and Sense

September 2, 2015

Poor people are neither lazy nor stupid. When faced with the decision to either receive generous welfare benefits or to take a job where high marginal tax rates mean fewer dollars for your family, the choice is an easy one: working just doesn't make sense. In its latest study, the Cato Institute looks at a few European countries that are reforming welfare in order to move people off the dole and into the work force.

In Europe, welfare benefits in many countries exceed the income a worker could expect to earn after taxes at a low-wage or entry-level job. High marginal tax rates consume a greater share of disposable income from lower-paying jobs, taking away the main incentive for someone to leave the welfare system and go to work.

  • In nine European countries, welfare benefits for single-parent families exceed the minimum wage.
  • Denmark offers the most generous welfare benefits ($38,558) and spends nearly ten percent of its gross domestic product on social services.
  • Labor market regulations have a large effect on whether a welfare recipient will chose to find work.
  • In Denmark, Austria and Croatia, the marginal tax rate approaches 100 percent for individuals leaving the welfare system to join the work force.
  • Several European countries are attempting to address the issue with tax reforms similar to the Earned Income Credit in the United States.

Although experts may wish to argue the degree to which these perverse incentives distort the job market, there is no arguing their existence. When poor families are driven to make decisions based on short-term economic gains, they find themselves trapped in long-term dependency. In order to fight poverty, welfare reform must find a way to make work pay.

Source: Michael Tanner et al., "The Work versus Welfare Trade-off: Europe", Cato Institute, August 24, 2015.

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