The House Budget Committee, chaired by Rep. Paul Ryan (R-Wisc.) released a report today demonstrating that welfare programs are keeping people in poverty by reducing incentives to work.
In short, Ryan’s report notes that the poverty rate, at 15 percent, is not much different than the 17.3 percent rate we had in 1965, when Lyndon Johnson launched to war on poverty.
The reason? Poor people are poor, but not stupid.
That is, they are currently presented with a system under which increasing their earnings forces them to lose benefits, essentially taxing their new earnings at rates that make working a dumb economic choice. And so people stay on welfare, and stay poor. But at least they don’t have to set the alarm clock.
From the report:
Today, the federal government’s anti-poverty programs are duplicative and complex. There are at least 92 federal programs designed to help lower-income Americans. For instance, there are dozens of education and job-training programs, 17 different food-aid programs, and over 20 housing programs. The federal government spent $799 billion on these programs in fiscal year 2012.
The very disarray among all these federal programs has created what’s known as the poverty trap. Because the federal government created different programs to solve different problems—at different times—there’s little to no coordination among them. And because these programs are means-tested—meaning that benefits decline as recipients make more money—poor families face very high implicit marginal tax rates. The federal government effectively discourages them from making more money.
Gene Steuerle of the Urban Institute has done extensive work on this issue.22 For example, he looks at the example of a single mother with two children living in Colorado. If her income jumps from $10,000 to $40,000, she will not keep much of that extra $30,000. Instead, she will lose most of it to higher taxes and benefit cuts.
According to Steuerle’s calculations, if she is enrolled in programs like food stamps, Medicaid, and SCHIP, her implicit marginal tax rate will be as high as 55 percent. And if she is enrolled in other programs—like housing assistance and welfare—the rate will reach above 80 percent.
So to increase your salary from $10,000 to $40,000, which is no easy feat for anyone, you may have to incur a de facto tax rate of 80 percent.
Ryan is hardly a libertarian, arguing that some programs are helpful. But we have somehow moved from using welfare as a safety net – because no one in the United States should go hungry – to making it a rational lifestyle choice.
Obama wants to pile on more welfare spending.
And incredibly, the Obama White House in recent weeks has embraced disincentivizing work, celebrating the notion that Obamacare and increasing the minimum wage help people work less and give them the option to take up painting or something.
That attitude ensures that today’s labor force participation rate of 62.8 percent, a 36-year low, isn’t going up. In fact, the Congressional Budget Office projects it will decline further, to 60.8 percent, over the next decade.
And Obama isn’t going to change that. Because in order to do so, you have to first think it’s a problem.