Economists call this an "effective high marginal tax rate" because the incentive to off welfare is reduced in much the same way that high marginal tax rates reduce the incentive to work harder.
So how do welfare recipients respond to these incentives? A randomized trial from Canada sheds light on the answer:
Basically, a group of welfare recipients were randomly split into a treatment group that received a supplementary payment that reduced the effective marginal tax rate on income from 100 percent to 50 percent for a three -year period, and were compared to a control group that was randomly selected to receive no change to the current program. (The details are available in an excellent program final report from 2002.)
People respond to incentives. During the period of the reduced marginal tax rate, reported work earnings and reported income rose for the test group vs. control during the experimental period.Marginal is not average. At the peak effect of the program (16 months after random assignment), about 30 percent of the treatment group were employed full-time versus 15 percent of the control group. — the vast majority did very little different than they would have done otherwise...This cost taxpayers more money, not less. In round numbers, as compared to control the treatment increased total reported take-home earnings by about $200 CD [Canadian $] per month, about $100 CD of which was greater reported wage income, and about $100 CD of which was the supplemental cash transfer from the governmentThe effect disappeared after the program ended. After the program period (... about five years after program entry), the treatment group had about the same level of reported employment and income as the control group.