The Poor Tax

Redistribution stymieing recovery, holding people in poverty, research shows

AP Images
October 29, 2012

Welfare spending is higher than ever but the money is going to people living above the poverty line—and this redistribution is actually hurting America’s economic recovery, according to a new book.

Casey Mulligan, an economics professor at the University of Chicago and the author of  The Redistribution Recession: How Labor Market Distortions Contracted the Economy, argues "at least half, and probably more, of the drop in aggregate hours since 2007 would not have occurred, or at worse would have been short-lived, if the safety net had been constant."

President Barack Obama’s stimulus bill largely contributed to the growth in welfare spending over the past years. A recent National Affairs article, "Restoring a True Safety Net," argues that "the American Recovery and Reinvestment Act (ARRA), or the stimulus program, specifically targeted poverty programs for greatly expanded funding."

Total welfare spending topped $1 trillion in fiscal year 2011 according to the Congressional Research Service (CRS), making welfare spending the largest part of our federal budget—a fact illustrated in a chart released by Senate Budget Committee member Sen. Jeff Sessions (R., Ala.).

Benefits increased in response to the recession that began in December and ended in mid-2009.

"We’re not just having poor people getting benefits," David Armor, a professor at George Mason University and co-author of the National Affairs article, told the Washington Free Beacon. "The programs are more generous now."

Armor’s study shows that "more than half of the benefits allocated through programs we think of as ‘anti-poverty’ efforts actually go to people above the poverty line as defined by the U.S. Census Bureau."

Mulligan’s book documents and analyzes "the surprisingly large changes in means-tested resource allocation since 2007." His analysis shows that "the safety net expanded, and then stabilized at a more generous level, at about the same times that employment rates dropped, and then stabilized at a lower level."

Armor’s study in National Affairs seems to support Mulligan’s analysis. Armor and co-author Sonia Sousa write that between 2008 and 2010 welfare spending increased by almost $200 billion, "a 40 percent increase after accounting for inflation."

Mulligan’s book focuses on the marginal tax rate, which is, he explained, the ratio between the benefits one receives at a particular income and the income one receives apart from the benefits, including fringe benefits.

Eugene Steuerle, a tax and economics expert at the Urban Institute, defined the marginal tax rate with this question: "If I earn another dollar, how much do I end up taking home?"

The marginal tax rate is actually higher at lower income levels because benefits decrease as incomes increase, thus reducing incentives to pursue more income.

"None of this necessarily implies that the safety net is a bad thing, because few of us want to live in a society where starvation is the penalty for not working," Mulligan writes.

However, Mulligan told the Free Beacon, the United States has attempted redistribution in "a pretty terrible way."

By increasing benefits, Mulligan said, the federal government has taken away incentives for working.

The increase in welfare benefits actually "depresses the labor market considerably," Mulligan said.

Steuerle made arguments similar to Mulligan’s in testimony he presented to two House subcommittees. He argued that high marginal tax rates do indeed disincentivize work.

Steuerle’s testimony simply looked at the relationships of current benefits to income, not at changes in the marginal tax rate.

This is "an issue that I think deserves a lot of attention," he told the Free Beacon.

Clarifying the marginal tax rate and its effect "helps prevent hidden government," he wrote in his testimony.

Steuerle said that a "liberal-conservative compromise" caused the high marginal tax rates.

Liberals "want to concentrate benefits for the lowest income groups," he said, while conservatives want to reduce the costs of these programs. The resulting compromise creates means-tested welfare programs for the very poor, with decreasing benefits as income increases.

Welfare reform under President Bill Clinton in the 1990s attempted to get around the marginal tax trap, Steuerle said, by requiring "work as a condition of getting welfare benefits."

Steuerle indicated that many people found the welfare reforms to be "modestly successful."

He also noted that the tax code creates disincentives for marriage. Not marrying, Steuerle said, actually became a tax shelter for the poor because of the marriage penalty built into the tax code.

Armor said the federal government has changed the "whole nature" of welfare.

The federal government "rebalanced" incentives to work and aid "in terms of helping people more," Mulligan said.

"These programs were justified by the government and have been supported pretty broadly … as a safety net, that is, for people who are truly poor," Armor said. But these programs are doing far more now than that original mandate.

"For most of the so-called poverty programs … about half … of the people getting benefits are actually over the poverty line," Armor said. And "some of them are considerably over the poverty line."

Welfare takes up an increasing proportion of the federal budget, numbers provided by the CRS to the Senate Budget Committee show. Federal spending on the 10 most expensive welfare programs rose from 2.5 percent in 1962 to 11.9 percent in 1992 to 17.3 percent in 2011.

When asked what policies would help reduce the marginal tax rate and therefore increase employment, Mulligan said, "Just go back." He says lawmakers should "roll back all the stuff that was rolled out in the past 5 years."

Rolling back benefits, he said, would mean "being unemployed would be more uncomfortable," but this "discomfort would motivate more people to work."

A Republican Study Committee bill reflects part of Mulligan’s policy proposal, although his research shows that the bill is working against itself, in a way.

The Welfare Reform Act of 2011 seeks to return "the federal welfare budget to pre-recession levels after unemployment falls to 6.5 percent."

However, Mulligan’s research suggests that the higher spending is actually keeping unemployment high and thus preventing unemployment spending from dropping.

The House GOP bill seeks to "make welfare more effective, affordable, and accountable," said Brian Straessle, Republican Study Committee spokesman.

"The best thing welfare does is when it helps people get off welfare," Straessle said.