Last week, the House Ways and Means Subcommittee on Human Resources and the House Agriculture Subcommittee on Nutrition held a joint hearing on work disincentives in US social safety net programs. This was the first joint hearing held by these two committees, which together oversee much of the federal government’s social safety net programs. The topic was benefit cliffs and marginal tax rates.
Benefit cliffs refer to steep drops in means-tested benefits when income crosses a certain eligibility threshold. Many public benefit programs – like the earned income tax credit (EITC), the Supplemental Nutrition Assistance Program (SNAP), and Temporary Assistance for Needy Families (TANF) – phase out and avoid dramatic drops, but others phase out quite steeply (like Section 8) or do not phase out at all (like child care subsidies). A good illustration of the combined effects of these benefit “cliffs” is found in the testimony of Eugene Steuerle of the Urban Institute.
In another testimony, Erik Rudolph of the Illinois Policy Institute included a hypothetical scenario where a single mother of two would lose $34,000 in annual benefits if she increased her hourly wage from $12 to $18 per hour. He wrote:
“When you add up the value of those potential benefits [for the mother earning $12 per hour], it comes to an astounding $39,534, bringing the total net receivables – in terms of earned income and benefits – to $61,655. In comparison, suppose you earn $18 per hour, bringing home about $33,000 in net pay. That is a gain of about $11,000 in earned income. However, your potential welfare benefits will drop drastically to $5,236 from $39,534, for a loss of more than $34,000. Why would any sane person voluntarily give up $34,000 in benefits to gain only $11,000?”
Similar in concept, marginal tax rates refer to the combined effect of the loss in benefits and an increase in direct taxes as income increases. In hypothetical situations, the marginal tax rate can be as high as 90 to 100% of every dollar increase in earnings – meaning that the worker receives virtually none of the increased wage because they lose benefits and/or increase taxes paid. Common sense suggests, and economists like Casey Mulligan of the University of Chicago confirm, that high marginal tax rates reduce work effort.
But some argue that these marginal tax rates are overstated, largely because they rely on hypothetical situations that are relatively uncommon in practice. As Olivia Golden of the Center for Law and Social Policy (CLASP) argued:
“There are likely several reasons why these predictions do not in fact reflect reality. First, for poor parents moving from unemployment or very part-time employment into greater levels of employment, the reduced value of some benefits is offset by the increased value of others, particularly the EITC and the CTC [Child Tax Credit]. In fact, the very poorest families may find that their net income increases by more than a dollar for each dollar of additional earnings. Second, many of the calculations look at families who receive a very extensive package of benefits including health insurance, food assistance, child care subsidies, and housing assistance and conclude that they could face a daunting reduction in benefits if they earned more money. In practice, though, few families receive this full package, because child care subsidies and housing assistance reach such a small share of those eligible.”
A 2007 study by Steve Holt and Jennifer Romich using actual tax, program participation, and income data for Wisconsin families found that hypothetical marginal tax rates are overstated but actual rates are still quite high. For example, among families with children, one-quarter faced marginal tax rates over 40% and for single-parent families with two or more children, one-quarter faced marginal tax rates of nearly 50%.
Whether hypothetical or real, high marginal tax rates that result from benefit programs send the wrong message about work and likely decrease work effort. Many argue that efforts to fix the problem are useless because they require either substantial increases or cuts to benefits, neither of which are likely to gain bipartisan support. But witnesses offered suggestions worth considering, such as better coordinating phase-in and phase-out rates across programs, increasing work requirements in certain benefit programs, and allowing states flexibility to design programs that address these cliffs. All could be a good start.
These problems are not new, but it is encouraging to see the House Committees on Ways and Means and Agriculture still searching for answers. Hopefully, lawmakers can come together to finally address this problem.
from AEI » Latest Content http://ift.tt/1JCTEg2
0 التعليقات:
Post a Comment