Thursday, March 4, 2010

"Stimulus Law" Reduces Supply: Food Stamp Edition

Another part of the "Stimulus" law spends $21 billion increasing food stamp spending.

It is well known that the food stamp program acts as an implicit tax on earning, because fewer food stamp benefits are awarded to people who earn more.

This paper (Appendices B & C) calculates some marginal tax rates as a function of income, which I have translated into economy-wide average marginal tax rates from food stamps for the program BEFORE the stimulus law (the average includes zero marginal tax rates for the large number of people not eligible):

person-weighted average marginal tax rate (pre-stimulus): 4.1%
income-weighted average marginal tax rate (pre-stimulus): 1.1%

The stimulus increased the food stamp budget by 13 percent, so impact of the stimulus was to increase marginal tax rates from the food stamp program by:

0.5 percentage points (person-weighted)
0.1 percentage points (income-weighted)

The impact may seem small, but this is just a sliver of the stimulus law. If the rest of the stimulus ($766 billion in addition to the $21 billion on food stamps) were offering the same kind of incentives, the overall impact on marginal tax rates would be:

19.9 percentage points (person-weighted)
5.6 percentage points (income-weighted)

In case you think that adding 20 percentage points to marginal tax rate would not reduce employment during a recession, take a look here.

No comments: