Arnold Kling

Re-drawing the Poverty Line

Arnold Kling, Great Questions of Economics
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The Washington Post reports on research that suggests that the official poverty line understates the needs of the poor and near-poor.

in almost any city, small town or suburb in America, an annual income of $18,100 -- the 2002 poverty figure for a family of four -- is nowhere near enough to cover housing, food, clothing, child care, transportation and taxes.

The article cites the work of Diana Pearce, a researcher at the University of Washington, who developed a "self-sufficiency standard," which she defines as the level of income needed for a family not to require government assistance. For a two-parent, two-child household living in Washington, D.C., this amounts to $57,289 a year, broken down as follows.

CategoryMonthly Expense
Child Care$1549
Net Taxes$1014
Health Care$242

Note that the largest expenses are for child care and taxes. If one parent stayed home to take care of the children, this would reduce the required income to less than $39,000. Net taxes (which I computed by subtracting tax credits from taxes) amount to more than $12,000 a year. I would think that you would compute the point of self-sufficiency as the point where what you pay the government exactly matches what you receive from the government, which in this case would mean no net taxes. Taking away the taxes reduces the self-sufficiency standard to something under $27,000 a year.

I could quibble with some other items in the table (how does this two-income family not have employer-paid health insurance?). However, I think that $27,000 a year is not an unreasonable point at which the head of a four-person household living in the District of Columbia should neither receive a government income subsidy nor pay net taxes.

Discussion Question. Should government transfer payments take into account the fact that the cost of living is higher in some cities, or would this amount to an incentive for poor people to live in expensive areas?

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