Is a bailout a tax?

I'm sure that by now, a bunch of people have piled on to this instantly notorious Casey Mulligan blog post. But let me add my voice to the chorus.

Mulligan's thesis is that because poverty rates didn't rise in the Great Recession (once you factor in government transfers), poor people now face an effective 100% marginal tax rate on their income; make one dollar more, if you're a poor person, and your government benefits go down $1. Here's Mulligan:

When measured to include taxes and government benefits, poverty did not rise between 2007 and 2011, and that shows why government policy is seriously off track... 

[W]hen someone loses $10,000 by not working, he should get some help from the government or from others in the forms of reduced taxes and enhanced benefits but still should bear a portion of that loss himself... 

If people with declining incomes found them entirely replaced by government help, that amounts to 100 percent taxation (providing more benefits as income falls is sometimes called “implicit taxation”)... 

Erasing incentives is not the way to a civilized society but rather to an impoverished one.

Casey Mulligan's general point - that the expiration of government benefits is a form of implicit taxation - is a good one. But I don't agree with his conclusion about the Great Recession. Just because poverty rates didn't rise doesn't mean that the government imposed a 100% implicit tax rate.

Why not? Because individual incentives don't (necessarily) depend on aggregate outcomes.

Suppose that the government gave out cash to poor people in order to keep the poverty rate at or below 15%.  Would that make it impossible to become poor? No. Because you'd still have a chance of becoming one of the 15%. If you work less than the poor guy next door, it's possible that you'll fall into the 15% and he'll rise out of it. The aggregate poverty rate will stay the same, but now you'll be poor. In other words, there is still an individual incentive for people to work, even if the aggregate poverty level is held fixed.

Or take another, even simpler example. Suppose the poverty level is $10,000 per year. Suppose the government decided to hand every citizen exactly $10,000 per year (raised with an income tax on people making above the median income). The poverty rate would then be permanently fixed (at 0%), and yet for everyone in the lower part of the income distribution, the implicit marginal income tax rate would be unchanged from whatever it was before the policy.

(Now, if poor people could somehow coordinate - if they could get together and say "Hey guys, let's all not work, and then the government will give us all bigger checks!" - then the government policy would indeed produce a 100% tax rate. But poor people can't coordinate like that in real life. And if somehow they did, the government could probably see them doing it, and change the policy to avoid getting ripped off.)

Note that in my example, the antipoverty programs are permanent. They are not temporary recession-fighting measures. My argument does not depend on the temporary nature of the incentive structure.

But in real life, the programs that Mulligan is talking about are temporary, and that actually makes my argument even stronger. Programs to keep the poverty rate constant during a recession are like bank bailouts - they are only likely to be used in a time of systemic crisis. If the overall economy is doing well, the government will be much more likely to allow the poverty rate to grow (this is basically what happened in the Bush years). And poor people know this. Since incentives depend on the future as well as the present, this means that we can't just look at what happened during the Great Recession in order to make conclusions about incentives.

In other words, I think Casey Mulligan makes two mistakes here: 1) He confuses individual incentives with aggregate outcomes, and 2) He assumes that poor people are not forward-looking.

Now, remember, Mulligan's more general point is still correct: The phase-out of antipoverty programs as income rises acts as an implicit marginal tax. But there is little we can deduce about the strength of this incentive just by looking at aggregate incomes during the Great Recession.