One of the big sticking points in the debt limit discussions between President Biden and the House Republicans was whether there should be a small increase in work requirements for people receiving entitlement benefits.
In the end, the negotiators basically punted on what is probably the most important public policy issue the nation faces: Who should get free food, housing, medical care and other benefits, and whatif anyshould the conditions be?
The current system is having a devastating effect on self-sufficiency, family formation and marriage. A better alternative is within our grasp.
Lets start with the harm our system is doing.
Penalties for working. Boston University economist Laurence Kotlikoff and his colleagues have produced the most accurate estimates available of the combined tax and entitlement penalties for working.
When all is said and done, here is the question: When you earn a dollar, how much of that dollar do you lose, considering all the ways the government can tax it or reduce entitlement benefits based on it? That percentage is your net marginal tax rate.
The authors write:
Our findings are striking. One in four low-wage workers face marginal net tax rates above 70 percent, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45 percent.
The richest 1 percent of taxpayers face a median marginal tax rate of roughly 50 percent. That means that many poor income earners face tax rates that are almost as highand often much higherthan the very rich.
People are responding to these incentives by working less. Phil Gramm and Mike Solon report that:
Since 1967, average inflation-adjusted transfer payments to low-income householdsthe bottom 20%have grown from $9,677 to $45,389. During that same period, the percentage of prime working-age adults in the bottom 20% of income earners who actually worked collapsed from 68% to 36%.
A study by Jonathan Bain and Jonathan Ingram at the Foundation for Government Accountability finds that among the four million able-bodied adults without dependents on food stamps, three in four dont work at all. Fewer than 3% work full-time.
The marriage tax. Academic studies find that marriage stabilizes relationships, improves childrens outcomes and helps adults develop labor market skills. In general, marriage is correlated with economic well-being.
In Two-Parent Privilege: How Americans Stopped Getting Married and Started Falling Behind, University of Maryland economist Melissa S. Kearney makes the case that one of the most important causes of inequality in our society is marriage. Higher-income couples marry and lower-income couples dont.
Prof. Kotlikoff and his colleagues believe they have found an important reason why. In a first-of-its-kind study, the Kotlikoff team finds that when higher tax rates are combined with a reduction in welfare/entitlement benefits, the economic loss from marriage for young adults with low- or middle-income jobs equals between one-and-a-half and two years of income, on average.
Take two people between the ages of 26 and 40:
- If both individuals earn $10 an hour, getting married will lower their lifetime income by more than $70,000, on average, because they will lose some of the entitlement benefits they were previously receiving due to the married couples higher reported earnings.
- If they earn $15 an hour, the lifetime losses will climb to more than $107,000.
- At $20 an hour, their loss will be more than $142,00.
Some couples face marriage burdens that are much higher. In the worst case, researchers discovered, getting married has a lifetime cost that is equal to 20 years of income! This occurs when marriage makes a familys income too high to qualify for Medicaid, but too low to qualify for an Obamacare subsidy in states that have not expanded Medicaid.
These findings help explain why couples earning $100,000 a year (and far less reliant on entitlements) are twice as likely to be married as people earning $26,000 or less.
In search of alternatives. After reviewing the negative impact of high net marginal tax rates on potential workers and their families, Hoover Institution economist John Cochrane writes:
One answer is [to] remove the income phaseouts. Give food stamps, Medicaid, housing subsidies, earned income tax credits, and so forth, to everyone, and don't reduce them with income.
Cochrane concludes, however, that this solution would be impractical, since giving these benefits to the entire population would be enormously expensive.
But not so fast.
The largest entitlement benefit is Medicaid, and (as noted) the loss of Medicaid has very large incentive effects on the enrollees. But what if Medicaid, or something like Medicaid, were available to everyoneregardless of income? What would that look like?
It turns out that this is the most common health care arrangement in the world today. Almost every country south of our border makes health care available for free, regardless of income. But free care has some unattractive features. There may be rationing by waiting, for example. Patients may have to bring their own bed linen when they are admitted to a hospital. The patients family may even have to supplement the hospitals food.
In these systems, patients almost always choose private care and even buy private insurance, if they can afford it. Outside the developed world, very rarely is public (that is, free) health care viewed as desirable as private care.
Our own health care system isnt as different from what I am describing as you might suppose. American hospitals are not allowed to turn away patients in need of emergency care and, as a practical matter, patients are rarely turned away for any reason.
Once they receive care, uninsured patients with few resources are rarely forced to pay. A Johns Hopkins study of 414 Texas hospitals during the Covid pandemic (when patients from all sorts of backgrounds sought care) found that only 28 hospitals ever sued a patient for an unpaid bill. Even in those cases, the hospitals recovery was scanty and half the time the patients didnt even show up at the hearing.
It seems that in America, getting care you dont pay for carries a penalty that is usually little more than a bad credit rating.
Solutions. If instead of Medicaid, we simply designated certain hospitals and clinics as safety net institutions and made care available regardless of income, we could probably provide more care to more needy patients than we do now and avoid the costs of an enormous amount of bureaucratic paperwork in the process.
- That is effectively how Parkland Hospital in Dallas works. Nonemergency patients know they may have to wait several hours for their care. But the care is usually free. Its of very high quality. And the privately insured rarely go there.
- For over a decade, Homemade Cafe in Berkeley, California, has been providing a free breakfast to anyone who says they cant payno questions asked. To fund the effort, the establishment invites those who can pay to make a small contribution and there is a GoFundMe site as well. Importantly, the opportunity for a free breakfast does not attract the entire population of northern California.
- In every major city, the public schools are providing free lunches to studentsno questions askedand some provide breakfast and dinner as well. Is there some reason hungry adults cannot be given the same opportunity in the same cafeterias after the students leave, as an alternative to food stamps?
- For the homeless, why not set up make-shift tents and cotsavailable to anyone who needs relief from the coldagain regardless of income.
Conclusion. We can have a safety net that meets the needs of people who experience misfortune without creating a permanent class of nonworking dependents who behave in socially undesirable ways.