Well, we're talking about effective marginal rates, not the listed amounts. The next dollar would be taxed at 20% or whatever the listed rate is. However, if you also lose a dollar of welfare, the tax rate is actually 120%, at least in terms of how incentives influence someone's marginal decisions.

It is a little bit worse than this in many cases actually, you pay tax on your earnings AND you have to cover the costs of getting to and from work and things like childcare while you are at work.

That being said, my experience is that among the poor there are very few that are not interested in working but I know of at least one person who did pull out of the workforce after finding that they were further behind with a job. Make of it what you will, I think it is a condemnation of low-skill labor rates, not of the welfare state.

It's not that hard to figure out - you just set a tax-free threshold of at least the amount of the minimum income. Minmimum income is $10k? Then the first $10k of any private income is tax-free.

To entice people to work, you'd probably do it so that it takes a bit more than a dollar of private income to remove one dollar of minimum income, so that you're always better off if you work, and if you properly set up your tax rates, there will never be a point where you are a cent worse off for earning an extra dollar.

This idea that the 'first $x is non-taxable' doesn't generally influence the withholding policies - you can change deductions, etc, but rarely - especially at low-paying jobs - does anyone ever give you actual useful direction on how to manage withholding values. But... telling someone that the first $10k is non-taxable, and they might get a refund 9 months from now - doesn't really help all that much in the day to day world of living expenses.

You still might face very high effective marginal tax rates, though, even if below 100%: instead of an hour of work costing you money, an hour of work might effectively be worth $2.00. Still a huge disincentive.

That's really hard to avoid when you do have conditional benefits that phase out with higher income. To "properly set up your tax rates" amounts to not having conditional benefits, which is a basic income under another name.

The problem is that a lot of welfare programs are means tested. So if your income goes up by a dollar, each of your 4 welfare benefits might be reduced by $0.30. So it sticks people in these plateaus where there is a substantial required jump in income needed to actually increase disposable cash.

I worked for a short time at a gas station, while having unemployment. The job paid minimum wage, and had no benefits or perks.

The first thing: when reporting wages, you had to report the untaxed amount to unemployment, even though I never saw that. I only received 87% of what I was paid.

Second: I now have wonderful costs, like driving to work, wear and tear, and other costs associated to working. This lowers my effective 87% even lower.

Third, I was on foodstamps. The moment I touched a job, which reduced my benefit by amount before taxes, I also had deducted from my foodstamp balance. I'm now down, by 2:1.

So, I did what many do in my situation: dump the job and go to school. I have less of a problem with myself with taking public assistance if I better myself.

The even bigger problem is parents. As long as you have no job, you don't need any help taking care of your kids. As soon as you have a job you find that a huge chunk of your income goes towards taking care of your kids.

Its worse than that. If you go over a certain threshold you might no longer qualify for certain types of assistance that are worth a lot more than that threshold, healthcare especially.