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First, the income-linked transfers reduce the incentive of low-income individuals to
earn, move up the income ladder, and escape poverty. The benefits from most of these
programs are scaled down and eventually eliminated as the recipients’ earnings rise. As a
result, many low-income recipients get caught in a poverty trap.
If they earn more, the
combination of the additional taxes owed and transfers lost means that they get to keep only a
fraction of the additional earnings. In 2018, the OECD reported that lost benefits as a result of
increased earnings equaled 93 percent of the minimum wage for workers in the Czech
Republic and 92 percent of this wage in Croatia.
(73)
In some cases, the additional earnings may
even reduce the recipient’s net income. Thus, the poverty trap substantially reduces the
incentive for many low-income recipients to work, earn more, acquire experience, and move
up the job ladder. To a large degree, the transfers merely replace income that would have
otherwise been earned, and as a result, the net gains of the poor are small—far less than the
transfer spending suggests.
This is not a new insight. Observing the English Poor Laws in 1835,
Alexis de
Tocqueville wrote in
Memoirs on Pauperism:
Man, like all socially-organized beings, has a natural passion for idleness.
There are, however, two incentives to work: the need to live and the desire to
improve conditions of life… Any measure which establishes legal charity on a
permanent basis and gives it an administrative form thereby creates an idle and
lazy class, living at the expense of the industrial and working class.
(74)
Second, transfer programs that significantly reduce the hardship of poverty also reduce
the opportunity cost of risky choices (such
as drug use, dropping out of school or the
workforce, childbearing by teenagers and unmarried women, divorce, or abandonment of
children by fathers), which often lead to poverty. As more people choose these high-risk
options, it is very difficult to reduce the poverty rate. The poverty
rate of single-parent
households is substantially greater than that of two-parent households. In the Czech Republic,
for example, 9.7 percent of the general population lived below the poverty line in 2017, while
37 percent of people in households with single mothers or fathers fell below this line. In
177
Belarus in 2013 the poverty rate among
single-parent households was 17 percent as
compared to 11 percent for the general
population. A 2009 study by Isabel Sawhill
and Ron Haskins of the Brookings
Institution found that in the United States a
person can reduce his or her chances of
living in poverty from 12 percent to 2
percent by doing just three basic things:
completing high school (at a minimum),
working
full time, and getting married
before having a child.
(75)
The effect of
personal choices on poverty is a vitally
important point that educators, parents,
guardians, and others need to discuss with young people, many of whom are making these life-
changing decisions. They should be considered by voters and members
of society in general
when adopting programs that alter incentives for behavior that can increase or reduce the
probability of harmful decisions.
Third, government antipoverty transfers crowd out private charitable efforts. When
people perceive that the government is providing for the poor, action by families, churches,
and civic organizations becomes less urgent. The Judeo-Christian
concept of tithing and the
Islamic obligation of zakat both emphasize individuals’ obligations to assist the less fortunate.
When taxes are levied and the government does more, predictably, private individuals and
groups will do less. Further, private givers are more likely to see the real nature of the problem,
be more sensitive to the lifestyles of recipients, and focus their giving on those making a good
effort to help themselves. As a result, private charitable efforts will tend to be more effective
than
those of the government, and therefore the problem worsens as the private efforts are
crowded out. Compounding these effects, studies have found that private charities deliver a
substantially larger share of their income to the eventual beneficiaries than government
programs, which have much larger overhead and administrative costs.
(76)
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From an economic viewpoint, the poor record of transfer programs ranging from farm
price supports to antipoverty programs is not surprising. Ideally, such programs should enable
those caught in poverty to sustain themselves as they work to no longer need such transfers. In
reality, the evidence suggests that transfer programs can achieve the first part of this mission
but may well do so at the cost of inhibiting the second. As a result, assistance programs in both
the developing and developed world are increasingly being designed as “conditional cash
transfers,” where support is provided only if the recipient engages in certain behaviors.
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