Millions of low-income Americans are locked into poverty thanks to U.S. tax policy, Federal Reserve Bank of Atlanta researchers say.

About a quarter of lower-income workers effectively face marginal tax rates of more than 70% when adjusted for the loss of government benefits, a study led by Atlanta Fed Research Director David Altig found. That means for every $1,000 gained in income, $700 goes to the government in taxes or reduced spending. In some cases, there are no gains at all.

Poorer families may rely on Medicaid insurance, welfare payments, food stamps, housing vouchers and tax credits that are based on family incomes. Small increases in wages can bring big losses of benefits, reinforcing a negative cycle in which workers aren’t rewarded if they improve their skills or pay.

“This is a perverse incentive that says you shouldn’t try to make yourself better,” said Atlanta Fed President Raphael Bostic, who is leading a virtual conference Thursday intending to focus attention on the problem. “They are not dumb. It’s on us to actually change those incentives so that people understand what the potential is and move forward towards opportunity.”

According to the U.S. Census Bureau, 34 million Americans lived below the poverty line last year.

Median Tax Rates
The Atlanta Fed has developed online tools it calls “dashboards” that allow career centers across the U.S. to advise workers on how to increase their pay in ways that minimize or compensate for the loss of benefits. Career advisers can enter specific details -- for example, a mother with three kids along with their various government programs -- and suggest ways to make lasting pay gains.

The bank is in serious discussions with local partners in states throughout the Southeast, as well as New York, Connecticut, Colorado, Oklahoma and Wisconsin -- sometimes in conjunction with the Richmond Fed and Kansas City Fed.

Broward College in Fort Lauderdale, Florida, has been one of the first to test a prototype of the tool. The school has 63,000 students, two-thirds of them Black or Hispanic, and about half lower income.

Generational Poverty
“We think about the student who inevitably may make the decision unfortunately not to move up the economic ladder simply because of the benefits they may lose,” Broward President Gregory Haile said. “These are the kind of challenges that perpetuate generational poverty. That is inevitably the challenge we are trying to address, and the cycle we are trying to break.”

The Federal Reserve doesn’t have all the tools to fix the problem, but it’s important to highlight the issue as part of its congressional mandate to reach maximum sustainable employment, Bostic told the virtual conference Thursday. He said the Fed has become more focused on ensuring an inclusive economy that works for all Americans.

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