Robert Culp, Economist | May 14, 2015
Rethinking the Safety Net
The primary purpose of this proposed program is to make most Federal Welfare programs unneeded by rewarding work through changes to the tax code.
This is the idea behind the Earned Income Tax credit created by President Reagan. It was inspired by the work of great free market economists Milton Friedman, Frederick Hayek, and Henry Hazlitt. They recognized that numerous overlapping programs are wasteful and that most people receiving benefits work, but their work does not buy them control over their lives. Housing programs dictate where you can live, Food Stamps dictate what food you can purchase and prohibit restaurant served food. Medicaid dictates where you can get treated. Want better housing but cheaper food or vice versa? You are denied any choice. This diminishes the individual and the value of their work.
Try it for yourself! Calculate Your Taxes under this program! Just fill in the first part of table below:
Many conservatives applaud these restrictions believing that no American could find them tolerable—thus increasing the incentive to escape from these programs. However,
People are not escaping welfare programs. In fact, more are joining them; a record 46 million Americans collect Food Stamps.
Why are people not escaping these programs? These programs change work incentives and these incentives fundamentally change people. Would you work hard to earn an extra $10, if you lost $6.62 in benefits—only getting to keep $3.38? This is exactly the choice– or worse– faced by most program recipients. It’s a trap. Once on these government programs it is very difficult to get off. President Obama claimed he would “make work pay”. Federal programs do not “make work pay”, they, in fact, discourage work.
Current Social Welfare Spending
There are over 89 federal means tested “welfare” programs: Earned Income Tax Credit, Food stamps, public housing, low income housing, homeless housing, utility support, child care, women with infant children (WIC), school lunch programs and Medicaid –among many others.
These programs cost over $1 Trillion: $750 Billion for the Federal share and $250 Billion for the states1. Millions are aided by these programs, but at what cost? $1 trillion each year is a lot of money.
Welfare costs enough to make one million people millionaires—every year.
Empowering Individuals for Growth
Under my proposed program, which is basically an expansion of the Earned Tax Credit to amounts sufficiently high enough to reduce or eliminate the need for other welfare programs, the reward to work is always substantial. Workers always get to keep no less than 80% of any increase in earnings after Federal income taxes (excluding Social Security)–unlike current welfare programs where recipients might only get to keep 34% of any additional earnings. This removes the disincentives to advancement or recipients turning down additional hours of work. It provides individuals the proper incentives to improve their lot in life.
Additionally, since, under this proposal, states will shoulder the financial burden of increased welfare rolls, they will have a tremendous incentive to help the unemployed find work, limit fraud, and only help those in need. Finally, this program should also constrain future welfare spending because states, unlike the Federal government, have to balance their budgets.
Tax Program Details
Income taxes under this system are calculated based upon your Adjusted Gross Income (AGI) so Health Savings Accounts (HSAs) and retirement accounts reduce taxable earnings. For tax purposes any government aid is added to your AGI. The only other deduction is for dependent children. Under this system, even a person only earning the minimum wage ($15,000 annually) would be above the poverty line. While the amounts found below seem generous, these higher rewards only go to those who work– unlike today’s welfare system. For example, the CATO institute found that:
Today, welfare recipients collect more than starting secretaries earn in 39 states!
They also found that under the current welfare system, welfare recipients in 10 states collect more than $35,000 in benefits. This is wrong. Work should always pay more than welfare. This program achieves that result. (See for yourself. Fill out the sample tax information above)
Incomes are matched to reward the productive and inspire independence. Specifically,
◊ The first $14,000 of wage income is matched for the individual.
◊ The first $21,000 of wage income is matched for single earner married couples.
◊ The first $28,000 of wage income is matched for dual earner married couple. (No marriage penalty)
◊ 20% Individual tax rate. Additional 5% rate on earnings over $75,000.
◊ $3,000 per child reward. (regardless of income)
◊ Everyone pays tax on every dollar including match.
If the income matches above seem astounding, keep in mind $1 Trillion currently spent on welfare. This is a lot of money! This program simply uses the money to reward work instead of welfare.
◊Under this program, all Federal means tested welfare programs will be generally unnecessary and therefore ended.
◊States would cover the remaining needy–Mostly the temporarily destitute and those unable to find work. States already administer most welfare programs so they are ready for the job.
◊ Funding for this program would come from the savings from the cut programs and ending most transfer payments to states.
◊ Specifically, $427 Billion in aid by the Federal government, $457 Billion in state transfers (primarily used to fund state welfare programs that would be mostly unneeded by this program), $60 Billion in state transfers for education, and $65 Billion in state transfers for transportation.
◊ This program is budget neutral—meaning that it does not increase the deficit.
Additional Proposal Details:
- No other deductions (other than HSAs and IRAs)
- Recipients of Social Security or Medicare are not eligible for income match.
- Social Security including disability and all social security Medicare taxes unchanged.
- Pell Grants for college unchanged. (We want people to learn valuable skills)
- Income matches make most federal programs unnecessary.
- Corporate and other taxes unchanged. (These taxes can be changed separately)
- This program lifts even minimum wage workers who work full time above the poverty line. Poverty line is $11,670 for individual, $15,730 for two, $19,790 for three, and $23, 850 for four household members.
If this program is adopted, fewer people will be on welfare. More people will seek out and find work, people who work will be better off and the government will have less influence over American lives. This is why President Reagan wanted to move the country to this type of system and why we should demand an end to the current welfare system.
Note: The costs under this program were estimated using the most publically available income, population distribution including dependent children, employment statistics, and using what I consider to be high end estimates regarding the potential increase in income match individuals. Revenues did not consider how this program would improve national output. In other words, the assumptions used in this analysis tend to over-estimate program costs while underestimating any tax revenue.