Support for Strengthening Our Social Safety Net, Not Eliminating It

Katja Kleine, RESULTS U.S. Anti-Poverty Policy Fellow
July 03, 2012

Last week, I attended the House Ways and Means Committee hearing on , “How Welfare and Tax Benefits Can Discourage Work.” The focus of the hearing was on the efficacy of programs like the Earned Income Tax Credit and its impact on employment.

Now this hearing title was a loaded one, and not without some truth behind it.  As Clifford F. Thies explained in his testimony, a means-based social safety net can penalize families for increasing their income.

Means-based simply means that programs are only available for families below a certain income or who present a specific need, so a minor increase in income can make a family ineligible for a plethora of programs and support, negating the benefits of the increased income. This is very different than European programs, which are typically available for every citizen regardless of need or income. I believe this clearly suggests that our social safety net is too weak. Americans lose their benefits too soon and too quickly.

This predicament was best illustrated by the testimony of Rep. Gwen Moore (D-WI-4) who shared her personal experiences as a young mom, highlighting the difficulty many young working mothers face. She explained that government benefits kept her afloat when her first daughter was born. She admitted that at one time, she begged her boss to deny her a raise because it would make her ineligible for Medicaid (her work did not offer health insurance), which she desperately needed for her newborn daughter who suffered from asthma. The problem was no a lack of will to work; the problem was that a small increase in income meant huge losses in benefits she could not afford on her own.

Jared Bernstein, a Senior Fellow at the Center on Budget and Policy Priorities, fueled this argument in his testimony.  He explained that theoretically steep cliffs (when benefits drop abruptly) and high phase-out rates can disincentivize work, but the solution is to end such cliffs and make phase out rates longer and more gradual.  However, despite theoretical disincentives, there is still overwhelming evidence that tax credits incentivize work. Children who grow up with parents who receive the EITC and CTC compared to similar counterparts have better lifetime earnings, more work hours per year, and higher test scores. These benefits strongly outweigh any behavioral work difference the parents may experience. Additionally, the EITC and CTC have proven to be extremely strong incentives for single mothers to continue to work. Many times the disincentive is not between work and no work, but between work and slightly higher paying work.

Ike Brannon of the American Action Forum made another significant point at the hearing.  He argued that, “Regardless of a person’s income, high marginal tax rates deter work, effort, and reported income.” Marginal tax rates are the rate you pay on your last dollar earned. What he was saying is that a high tax rate on that income can impact work. This was supported by Eugene Steuerle, who showed that low income individuals very commonly experience a marginal tax rate greater than 50 percent with additional work, many above 80 percent if they lose housing or other assistance.

In other words, the loss of benefits they experience compared to their income amounts to a tax rate of between 50 and 80 percent. Nobody should be subject to such penalties for pursuing a higher paying position.

Additionally Brannon agrees that when low income Americans choose not to work it is not because they are lazy or malicious, it is because they are behaving responsibly and rationally; they are simply responding to incentives. This strongly supports that there are aspects of our safety net that need to be improved.

There is disagreement over the intended size and scope of the social safety net. But there is no disagreement that when aspects of the system serve to undermine the intention of a program in the first place, e.g. benefit cliffs and steep phase-outs, hard working and needy families get caught in the middle. This is why expansions and improvements to programs including longer phase-out periods and limited cliffs would help families engage more effectively in the work force.

In addition to the discussion of tax credits, throughout the hearing speakers reminded lawmakers of the importance of health care and child care assistance. These services are just as important to low-income families as more income in their pockets.

While the Ways and Means Committee hearing may have been designed to fuel the effort to cut the EITC and CTC, it had quite the opposite effect. The testimony demonstrated that these programs work, despite their flaws, and there are simple yet effective changes that can make them better. Eliminating the EITC and CTC and other like them only create a larger deterrent for people seeking work.