How Earnings Affect Benefits for Households with Children: The More Universal CasePosted: October 31, 2012
Many government programs automatically grant eligibility to all families with children, depending only on their income. As their incomes increase, however, these families often, but not always, receive fewer benefits. Some restrictions operate on a schedule: earn $1 more, get 30 cents less in benefits. Medicaid provides eligibility up to a given income level, then denies eligibility when one more dollar is earned (though usually with a delay). The dependent exemption only is available to those owing taxes, and only at high income levels is removed by the alternative minimum tax.
How do these programs interact?
The figure below considers a single parent household with children and shows how these various benefits vary as the earnings of the household increase. Because every household with children, including you and me if we are raising children, is eligible for these programs if our income falls in the right ranges, we can be said to belong to this benefit and benefit reduction system. For instance, as income increases from $10,000 to $40,000, our household would lose most earned income tax credits, SNAP (formerly known as food stamps), and much Medicaid, though under health reform other health subsidies would still be available. Note that in addition to these losses of benefits, direct tax rates from income and Social Security taxes would apply, though they are not shown here. For further detail see my testimony before the House Subcommittees on Human Resources and Select Revenue Measures on June 27, 2012, “Marginal Tax Rates, Work, and the Nation’s Real Tax System.” My next short describes the extreme welfare case.