Welfare Reform Reform

I have been promising to write something constructive and forward looking about how to undo the damaging effects of the 1996 welfare reform (which recently struck again).

I don’t really have anything original to say. Mainly I endorse the proposal made by Irwin Garfinkel, David Harris, Jane Waldfogel and Christopher Wimer in a Century Foundation report “a universal child allowance that provides $2,500 per child for all families with children”. They estimate the annual cost of replacing the current child tax credit with this policy as $109.3 billion.

Before typing on, I recommend you ignore this post and read this Washington Post article by Phillip Cohen
(via Brad DeLong).

In case anyone is interested, I share my thoughts after the jump.

OK first note that Garfinkel et al propose a program which has a huge budget but leaves many children in poverty. They make if fairly clear that they do this because they believe that programs for poor people are poor programs. The conventional, but accurate, wisdom is that it is politically easier to give money to the poor through a universal program which also gives money to the middle class. This is true even if the program is social security pensions or Medicare and financed by a regressive tax mainly paid by the middle class.

It is almost certain that a bill to repeal the 1996 welfare reform act and return to old AFDC would be overwhelmingly defeated (probably even if all Republicans missed the vote). Unconditional universal cash is not seen as cash for those people, even if those people receive it.

Personally, I think that the (pre-tax) benefit doesn’t have to be exactly the same for people with different incomes (if the benefit is taxable, the net benefit will decrease in income already). Only free market fanatics and the occasional economist worry about marginal tax rates well under 50% this means that an effective marginal tax rate consisting of benefit phase out plus the low marginal tax currently charged on low incomes should be both politically acceptable and economically sound. But I do think it is necessary to present the new benefit as a benefit for everyone and not just for the poor. Of course I think it can be financed by higher taxes on high incomes (I always type that).

I also found the Garfinkel et al report interesting, because I was ignorant about the history of the child tax credit. It provides a maximum of $1,000 per child (once a year). It was introduced in the 1996 bill, expanded by the W. Bush 2001 tax cut, and expanded again by the 2009 ARRA (stimulus). The ARRA expansion has been made permanent (part of the fiscal cliff deal IIRC). For some reason it has taken the place of the EITC as the tax credit even Republicans love.

One problem is that, even now, families are required to earn $3000 of labor income to get the credit. The origin as a work incentive — a carrot to go with the welfare reform sticks — means it is not available to the poorest children. However this means that further expansion (and conversion to taxable income received monthly) can be presented as completing the 1996 ACT not as repealing it.

Before posting, I suggest again that you read the Cohen article if you haven’t already. His point is that the child poverty gap is tiny compared to the US Federal budget

nearly 1 in 5 families with children in the wealthiest nation on the planet are living in poverty. My analysis of the latest federal data shows that, on average, these families’ income — including tax credits and all sources of welfare — is about $9,000 below the poverty line. That means ensuring no children grow up in poor households would cost $57 billion a year.

Just filling the poverty gap would imply an effective tax rate of 100% for 1 in 5 families with children. Even aside from politics, it is necessary to have post tax and transfer income increase in market income.

However, I agree with Cohen that the principal reason that the huge problem is not addressed is that “our policies to alleviate poverty still remain focused on correcting the behavior of poor people – especially their marital behavior – rather than addressing poverty itself.”

I think the only way to protect anti poverty programs from moralistic condemnation of the poor is to disguise them by merging them with middle class entitlements. I also have the impression that this is the consensus view among actual experts.