June 27th, 2012 at 9:44 am

That’s how I’ll be spending my morning, presenting this testimony to a House subcommittee. 

I’ll summarize later when and if I come up for air, but though obscure sounding, this is a really important topic–the impact of high marginal tax rates on the benefits of means-tested programs.  Like I said, sounds obscure, but those who would like to cut large holes in the safety net cite these as a reason to do so, despite the fact that the evidence points sharply in the other direction.

My central theme is this:

…it is essential to broaden the question at the heart of this hearing.  For policy makers to gain a full understanding of the impacts of the policies under review, we must investigate not solely any work disincentives they may engender, but also work incentives, and most importanly, poverty reduction net of any incentive effects.

Key findings:

–While benefits of means-tested programs are, by definition, reduced as incomes rise beyond a certain point, their work disincentives differ, and a number of significant programs, including the EITC and SNAP (formerly Food Stamps), are found to have either positive or neutral impacts on labor supply. 

–A recent, exhaustive review of the poverty reduction effectiveness of our safety net and social insurance programs found that “…the combination of the means-tested and social insurance transfers in the system have a major impact on poverty, reducing deep poverty, poverty, and near-poverty rates by about 14 percentage points in the U.S. population as a whole in 2004.”

–Importantly, the study concluded that “…this impact is only negligibly affected by work incentives which, in the aggregate, have almost no effect on the pre-transfer rates of poverty in the population as a whole.”

–Recent research also finds positive generational effects of safety net programs on later education and earnings outcomes of children from families that received such benefits.  In the full accounting that I’m advocating, these benefits too must be assessed against any costs of work disincentives.

Finally, to the extent that work disincentives exist, policy makers should consider ways to reduce or eliminate them.  In the final section of my testimony I offer three ways to do so:

–lower marginal tax rates by extending phase out ranges (though this increases costs);

–provide work supports, such as child care and transportation assistance;

–increase the number of jobs available to low-income workers through demand side policies.

Given the persistent weakness in the low-wage labor market in recent years, I want to be sure to stress the importance of this last point.  Research over the last few decades has shown that the most effective work incentives for working-age members of low-income families are tight labor markets with rising pre-tax wages.  In this regard, policies such as the job creation measures in President Obama’s American Jobs Act will prove far more effective in incentivizing work than lowering marginal tax rates on safety net benefits.

Conversely, it would be a significant policy mistake to require recipients of benefits to work without first ensuring adequate job availability.  Even in a climate of strong work incentives, without adequate job availability, this is a policy recipe for rising poverty and the accompanying strain on families and children.

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3 comments in reply to "Testify!"

  1. Auros Harman says:

    This is perhaps not a high-priority research topic compared to simply making sure we reduce poverty, but when we think about “positive generational effects of safety net programs on later education and earnings outcomes of children from families that received such benefits”, I’m wondering what the comparison is. Other families with similar economic situations and demographics (native English language use, situation relative to discrimination against people of color, etc) who didn’t get the benefits? The problem with that is that it may not be random; parents who are simply less dedicated and skillful at dealing with the bureaucracy may fail to secure benefits to which they and their children are entitled, and simultaneously be less able to help their kids navigate the education system and become more-successful adults.

    I definitely think evidence and common sense supports the idea we’re talking about here, but it’s quite difficult to sift the data to definitively support it.

    In any case, the two most important points are probably the basic ethics of making sure families get food, shelter, and medicine — none of our citizens should be simply abandoned to the elements — and the effects on Aggregate Demand that we get by transferring money from those who have what they need (and thus don’t spend much of their marginal dollar) to those who don’t.

  2. Misaki says:

    It sounds like a good argument.

    But Congress members are likely to assume either that “more education will fix it”, or that people without jobs are somehow inherently unqualified for work (maybe their hands don’t move fast enough) and so… there’s like, no reason to be upset about the current situation or something. Or the fact that people are still watching TV is proof that they don’t really care about unemployment.


    And people don’t even think it’s due to ill intent by either party, more like simple incompetence. (Polls like Aug 2011 …) The % of “angry” about what’s going on in Washington DC went from 17% to 28%, but much more people were just “dissatisfied” at 56%. And while 74% said that most members of Congress don’t deserve re-election, it has yet to be seen whether this will be seen during elections and it doesn’t give data for previous years. 85% thought the two parties should compromise…

    People generally thought Republicans had compromised too little on the debt ceiling (15% too much, 52% too little), while there was only a slight leaning toward too little compromise by O and co (26% vs 34%).

  3. Alex Blaze says:

    Good arguments. This isn’t a dig at you, but it’s sad to me that with over 8% unemployment, the inefficiency that Congress is really worried about is if people are forgoing stable employment to keep a few dollars in free food.

    Let’s see, I could take on a real job, move out from my parents’ place, eat better, get a car, feel independent and productive while having a chance to move up in the world… but then I’d lose my source of free spaghetti! Clearly I’m going to pass up on the job.

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