“The Fed is not afraid or unaware of these issues but rather is going to be out front and providing a leadership voice in trying to make that progress,” he said. “I know that has not always been the case. We have in the last several years -- since I have been involved in this institution -- evolved in a pretty significant way.”
While the median low-income American family may have a marginal tax rate of about 45%, there’s a large dispersion of experiences, depending on age, family size, location and benefits. Some families face an exaggerated problem -- 70% tax rates or occasionally much more. Just $1,000 in higher pay for a single mother in Oregon, in one example cited in Altig’s research, would result in a devastating loss of $15,000 in housing subsidies.
The researchers characterize this consequence as a marginal tax rate because it leads to the government extracting more money from low-income workers through higher taxes or reduced spending on benefits. The richest 1 percent also face a high median lifetime marginal tax rate of roughly 50 percent, but they don’t face the housing, food and medical hardships endured by the poor.
The online tool suggests training strategies in some cases. For example, a nursing student may find that the extra time to study to become a registered nurse is far more beneficial than a smaller step to be a licensed practical nurse.
Tax Burdens
Some communities are putting up money to help as well. The East Lake Initiative, a community development organization in the eastern side of Birmingham, Alabama, recently began offering subsidies for food, utilities and child-care assistance to help offset loss of benefits.
“Most families reach out during a time of crisis,” said Pam Bates, executive director of the program. “Our aim is to help them move from crisis to thriving.”
Atlanta Fed’s Altig says the goal is to get other policy makers to step forward with funds when they understand how perverse the incentives for the poor are.
The research started two years ago as part of the Atlanta Fed’s greater focus on economic inclusion and mobility, an emphasis Bostic, the first Black Fed president in the central bank’s 106-year history, has pushed since taking over as president in 2017. It’s especially relevant because the Southeast lags the nation in income.
“These are crazy hurdles some people are facing,” Altig said. “This is a significant impediment to our capacity to move people into better and higher-paying jobs.”
This article was provided by Bloomberg News.