- September 2019
- Link to FF43-2019 (PDF)
Increases in family income for low-income families receiving public benefits can sometimes result in a sudden loss of program eligibility—known as benefit cliffs—or steep benefit reductions (or increases in tax liability)–referred to as marginal tax rates. Policymakers are concerned that benefit cliffs and high marginal tax rates may work against government efforts to encourage work and economic self-sufficiency; make work pay; and promote marriage, especially among couples with children. This brief shares an overview of the topic, including Congressional Budget Office and U.S. Department of Health and Human Services (HHS) simulations to estimate how low- and moderate-income families may be affected by earnings increases, and analysis from HHS on which low-income families are subject to high marginal tax rates. It concludes by summarizing research on how families experience and respond to high marginal tax rates and benefit cliffs and presenting a range of policy ideas to reduce them.
- A family hits a benefit cliff when a small income increase makes them ineligible for public benefits they had been receiving.
- A family faces marginal tax rates when their increased income triggers an increase in tax liability or loss of public benefits.
- Benefit cliffs and high marginal tax rates may work against government efforts to encourage work and economic self-sufficiency when increased earnings trigger reductions in benefits or increases in income taxes.
- Those with similar earnings can experience very different marginal tax rates because many different factors affect how increases in family income might trigger a household’s loss or reduction of benefits.