I recently finished the book “Maid: Hard Work, Low Pay, and a Mother’s Will to Survive”. The book was a New York Times Bestseller, on Barack Obama’s 2019 summer reading list, etc., and details how the author, Stephanie Land, goes from a homeless single mother struggling with a long bout of poverty to starting a college degree, which was the entre to being the author of a bestselling book. Along the way, she worked as a maid for some time (thus the title).
One interesting tidbit from the book: Several times in the book Ms. Land highlights a benefit of a particular job was that pay was received “under the table.” Since I often see the world through the lens of taxation, I assumed the main benefit was avoiding taxes, likely payroll taxes (as taxpayers at her level of income would rarely face income taxes). I was wrong. After referencing being paid under the table several times, it clarified the benefit of being paid under the table: In a world were a good portion of one’s subsistence comes from a variety of means-tested government programs, generating extra income often means the loss of some government assistance. Getting paid under the table is a way to generate extra income without losing those benefits.
It reminded me of a paper by Casey Mulligan at the University of Chicago that estimated the marginal tax rate under the Affordable Care Act. The ACA contained portions that were government assistance programs, and Mulligan estimated that “ACA’s addition to labor tax wedges is roughly equivalent to doubling both employer and employee payroll tax rates for half of the population.”
Means testing means that when a recipient increases their income, they face the equivalent to a tax increase, sometimes a big one. High-income people are not the only ones who try to minimize reported income in order to maximize their after-tax and government subsidy related wealth (although tax noncompliance is, indeed, concentrated at the top of the income distribution).
