A long-standing criticism of anti-poverty programs is that they make work unprofitable by providing a better income if you reject employment. This is the principal line of argument in the Ryan anti-poverty report.
The simplest version of the idea is that when you add up the benefits for which people with no income qualify, it can exceed what they could earn by working, so they choose welfare over work. There are certainly a bunch of anti-poverty programs, so could this be true?
The first question that arises is the extent to which people are eligible for so much in benefits that they are discouraged from working. To answer this you can’t just add up all the money that goes into the programs. The question is the maximum amount somebody could actually receive.
The second question is how many people actually participate in multiple programs, and how many of them are able-bodied adults who could be expected to work. Note that if those who participate are working, despite any alleged work disincentives, it does not follow that the system is obliging them to choose welfare over work. If their incomes are above the poverty line, it does not follow that the system generates poverty.
The third question is, given any such disincentives, what is the evidence that it affects behavior? One type of counter-evidence has already been noted: the extent to which households have labor earnings, notwithstanding any poverty traps.
And the fourth question goes back to our previous post. Suppose somebody does face significant penalties (a high implicit marginal tax rate) for some additional earnings? The arithmetic of the problem leaves solutions to the imagination.
Despite a multiplicity of programs that purport to address poverty, most of the money goes to a few programs that provide cash or near-cash to able-bodied adults. They are Temporary Assistance for Needy Families (TANF, formerly Aid to Families with Dependent Children), Supplemental Nutrition Assistance Program (SNAP, formerly ‘Food Stamps’), the Earned Income Tax Credit (EITC), and housing assistance. Page 9 of Ryan’s report has a graph that shows these programs in terms of benefits relative to earnings. The source is the reliable Eugene Steuerle of the Urban Institute.
So how reasonable is it to conclude that these benefits keep people from working? TANF benefits are conditional on working. That was the whole point of the 1996 welfare reform. So they are not available as a substitute for work. State governments decide that, in which respect the Ryan proposal is superfluous.
Medicaid and subsidized ObamaCare are provided to people who do work. ObamaCare eliminated the Medicaid “cliff” (abrupt loss of eligibility at the program’s income threshold) by providing a transition to subsidized private insurance. Thanks, ObamaCare! It’s true there is a phase-down of the subsidy, but the severity of it is graphically exaggerated. The reason the chart is misleading is that as earnings increase, the availability of employer-provided health insurance is more likely. The value of the tax exclusion for employer-provided health insurance goes up with income. The higher your marginal income tax rate, the more you save from the exclusion of employer-provided health insurance from taxable labor earnings.
The Child Tax Credit, the dependent exemption, and the Child and Dependent Care Credit are also available to those who work, up to earnings of $100,000 and beyond. On its face, the chart exaggerates the number of programs that pertain to a poverty trap. Insofar as benefits are not lost altogether, or at all, if one works, they cannot be work disincentives. Some of them — provisions of the individual income tax — increase along with earnings.
The real action in terms of working versus not working is all about SNAP, the EITC, and housing benefits.
Unlike SNAP and the EITC, housing benefits are not available to everyone who is eligible. Funds for them are limited, so there are relatively few beneficiaries. Fewer than ten million souls get Federal housing benefits, and well over half are the elderly, the disabled, and children — people who would not be expected to work. More than half of the households receiving benefits have some income from work (Table 11). So one half of a limited program’s clientele might be deterred from working by virtue of a housing benefit. The most recent poverty count for 2012 is 46.5 million. There is no way that housing benefits could explain much of the poverty rate.
Ryan professes to like the EITC, so the real focus of his plan is SNAP. Food stamps are the ground zero of the Ryan plan. More on this tomorrow.