The Welfare Cliff

The American Enterprise has a great short article with graphic showing the huge penalties a working single mother can experience as her income increases. According to the article/graphic, this single mother is better off making $29000 in gross income than $57,000(!) See entire article here.

Note this article is for a woman making use of all available government programs, including housing and childcare.

According to the article, the total value of all the programs for this hypothetical single mom is $45,000! This is more expensive than the Free Money for All proposal. Sorry, we cannot give out that much to everyone and stay solvent. For some people there would need to be benefit cuts — for those people to most effectively work the system. There is not way all the needy are getting the level of benefits shown on the graph. You want to know why there are so many hoops to jump through, look at the numbers.

How Much Money are We Talking About?

If you want to get rich, you need to work for it, inherit it, marry it, beg for it or steal it. Big money is not lying around for free. Bummer. In fact, if we divide up all the receipts from 2008 federal budget and gave it out equally to adult citizens, each would get about $12,000/year. For a married couple this comes out to $24,000/year. Not exactly riches but not chump change either.

Interestingly enough, $12,000/year/adult is about the amount needed to eliminate poverty! That is, based on federal poverty guidelines $12,000/year is more than enough to take a single person above the poverty line and is almost enough for a married couple with three children to be above the poverty line without working. Give out this much free money and we can eliminate all welfare programs save those for the seriously ill and mentally incompetent. At this much lower level, it should be save to leave these responsibilities entirely up to the states. We could close down the entire federal social program apparatus.

But it looks like we would need to shut down the entire federal government at this level! We might want to keep the Defense Department, the Patent Office and some national parks. So maybe we need to look at a lesser number. Besides, the American People might want people to have to work to be out of poverty. If we use free money to bridge the gap between the minimum wage and a living wage, the amount drops to between $575/month and $875/month, which translates to $6900/year and $10,500/year. The lower figure leaves us 42% of the federal receipts to run the federal budget. This might be enough if we didn’t already have obligations to retirees…

Of course, our proposal to use free money to replace the federal welfare state means replacing both federal welfare programs and the progressive tax system. If we merge payroll taxes and the federal income tax into a deduction-free 30% super flat income tax, then we need a rebate of around $2600/adult to ensure no one gets a tax increase. We can probably turn that rebate into a prebate without impacting revenues significantly, especially if that prebate substitutes for other social programs including Social Security. That is if today’s social benefit is greater than $2600/year, then you get today’s benefit without the prebate. If today’s benefit is less, you get the $2600/year prebate. This provides a bridge between welfare and work, which is one of our major goals.

To afford a bigger amount of free money rebate/prebate, we might need either a higher marginal income tax rate, or a two-tiered tax. It is hard to say without more detailed study, since the rich make use of many loopholes which are beyond my knowledge. The flat income tax I propose includes treating capital gains as ordinary income, which would eliminate many of the most squirrely loopholes, and the tedious tax regulations meant to thwart them. However, many people object that treating capital gains as ordinary income would make the double-tax on corporate founders hideously high. The simple solution? Reduce the corporate rate to 20%.

So, what are we proposing here? The answer is time-dependent. Let us start by replacing our fiendishly complex tax system with the 30% flat tax with a prebate of around $300/month. This may cost or save the government money. It is hard to say without doing the experiment. The enormous simplification of the tax code should inspire more people to start businesses, and the universal stipend should provide enough of a bridge between welfare and work that many in the welfare class will consider employment. If the resulting improvements in the economy reduce the welfare budget and/or increase the tax receipts sufficiently, we might increase the citizen’s dividend. If not, we might need to consider some further adjustments to the tax rates. I’ll return to this subject in a future post.