Over the past 30 or 35 years, income and government spending per household have both about doubled, but working- and middle-class Americans have seen much less improvement in their earnings, wealth, education, and skills than they did in earlier decades. The international economy and the concentration of power within the top 1 percent are major factors, but it’s hard to believe that we can’t do a lot better with the $60,000 in federal and state spending and tax subsidies we spend annually per household, or the $2 million in health, retirement, education, and other direct supports scheduled for each child born today. My recent study finds that the US budget is moving increasingly away from promoting opportunity for all.
At the same time, Hillary Clinton, Donald Trump, and almost everyone running for office ascribe to the notion of America as a land of opportunity while telling supporters they are being denied the opportunities owed them. But it takes more than rhetoric to climb out of our current political pit.
- First, the few programs that attempt to promote opportunity, such as work incentives and education, are scheduled to take a smaller share of available federal government resources. There is one major exception: large tax subsidies for housing and for employee benefits like retirement accounts continue to expand. However, by largely excluding low- to middle-income households, those programs show how today’s programs largely fail to promote opportunity for all. That is, they are not inclusive opportunity programs. Figure 1 summarizes these results.
- Second, if we wish to promote opportunity for all, we must carefully discern the outcomes pursued and judiciously measure how well programs achieve those outcomes. “Opportunity for all,” if left amorphous, lacks any prescriptive power, leads to claims that anything the government does or stops doing can promote opportunity, and, as long as the intended outcomes are unspecified, prevents assessing program performance. I suggest that opportunity for all is not simply an equity objective: it pursues outcomes centered on growth over time in earnings, employment, human and social capital, and wealth while it emphasizes inclusion, especially of low- and middle-income households. And I suggest that we can and should measure most programs by their performance on that opportunity standard, even if the primary standard by which they are judged—such as retirement, food security, or even defense—seems initially removed from that opportunity focus.
- Third, there’s tremendous budgetary potential for promoting opportunity whether the government increases or decreases relative to the economy. Realizing this potential doesn’t require moving backward on other fronts but shifting tracks, as from north to northeast, to also move forward on the opportunity front. The trick is to channel a larger share of the additional revenues provided by economic growth toward an opportunity agenda. Ten years from now annual federal spending and tax subsidies are scheduled to increase some $2 trillion (or roughly $15,000 per household), but essentially none of that growth goes to opportunity-for-all programs. Children receive almost nothing a decade hence, while interest on the debt rises significantly because we are unwilling to collect enough taxes to pay our bills as we go along.
When you look at these numbers, it seems clear that reorienting budget priorities could help provide opportunity in ways likely to promote equality in earnings and wealth. What is also clear, however, is that small ball is not going to get the job done when so much in the budget is moving in the direction of deform, not reform.
Total Outlays and Tax Expenditures for Major Budget Categories under Current Law
Billions of 2016 dollars
Source: Author’s tabulations of Congressional Budget Office data.
Notes: Public goods include such items as defense, infrastructure, and research and development that benefit the population broadly. Direct supports are programs and transfers that directly benefit households and communities, such as health care and education. Within direct supports, income maintenance programs such as Social Security, Medicare, and SNAP (formerly food stamps) protect a certain level of income and consumption, while opportunity programs aim to increase private earnings, wealth, and human capital over time. Largely inclusive opportunity programs benefit low- and middle-income groups, while noninclusive opportunity programs largely exclude them or provide them with fewer supports than upper-income groups.
President Barack Obama and Speaker Paul Ryan have proposed similar expansions of the earned income tax credit (EITC) for low-income workers without children. Their goal is laudable: to provide some modest additional income support for low-income workers currently excluded from the EITC. But as designed, their proposals would penalize many low-income workers who choose to marry or are married. Taking that step would not only provide a disincentive to marriage, it would be unfair to many married couples and erode support for the credit itself and for wage subsidies more broadly.
Fortunately, they can fix this flawed design by splitting credits for low-wage workers and benefits for children. Before I explain how, here is a bit of background.
The EITC, enacted first in 1975 under President Gerald Ford, has been expanded under every succeeding president and has broad bipartisan support. As cash welfare programs like Aid to Families with Dependent Children (AFDC) and its replacement, Temporary Assistance to Needy Families (TANF), have shrunk as a share of both the economy and the budget, the EITC has become a bedrock of the nation’s social welfare structure and the largest government cash support for those neither retired nor disabled.
About 97 percent of EITC benefits, however, go to households with children, particularly single parent families. The very small sliver going to single individuals through the so-called “childless worker” credit is limited by a maximum of less than $600 and is completely phased out at less than $15,000 of income, or less than what would be earned at a full-time minimum wage job. By contrast, the EITC can provide close to $6,300 in 2016 for a single parent with three children and is available to families with up to $48,000 of income ($53,000 in the case of married couples).
Obama and Ryan would double the childless worker credit and increase the income levels at which it phases out. A similar though higher level of credit was provided by the Paycheck Plus Project in New York City, which offers some individuals up to $2,000 and even allows a modest credit for those making up to $30,000.
There’s a glitch in these proposals, however, and it’s a big one. For instance, one report suggests that Paycheck Plus provides “more generous support to all low-income workers.” But in reality it doesn’t. Many low-wage workers who marry into families not only lose their own childless worker credit, but also reduce the normal credit available to their partner with children.
Here’s one example of how they lose out. A childless male making $11,000 qualifies for a credit of $1,011 under the Obama-Ryan model in 2016. If he marries a spouse with two children making about $20,000 and getting a credit of $5,172, they would get only one credit of $4,018, a loss of $2,165 from the combined credits of $6,273 they had before marriage.
As a result, the credit Obama and Ryan both support would penalize many married couples, while encouraging low-income couples to delay marriage and household formation. Because these penalties would be quite transparent to millions of married couples filing their tax returns, they would likely erode support for the EITC in general.
There is an ongoing debate about how much a marriage penalty actually affects decisions to wed, but there is little doubt that avoiding marriage is THE tax shelter for low- and moderate-income individuals.
The problem can be fixed by separating credits for low-wage work and benefits for children. My Tax Policy Center colleague Elaine Maag and I have proposed this separation as a way to expand work supports for both groups largely left out now: the childless worker and low-wage workers who marry. As for the single head of household, her current credit would be replaced by two credits: one for households with children and an additional low wage worker credit based solely on earnings regardless of children. They’d phase in and out at roughly the same income levels and add up to roughly what she received under the old EITC.
Meanwhile, both the single person without children and the low-wage worker who marries into a family could get the new low-wage worker credit whether or not the family has children. Married couples with two low-wage workers would usually be better off, as now the addition of a worker to the household usually typically adds to rather than subtracts from total household credits received. Though we phase out the low-wage worker credit for those married to high wage workers, these are families for whom any EITC marriage penalty would be a smaller share of total income and who, at their income levels, largely benefit from marriage bonuses from other parts of the income tax rate structure.
The structure of any EITC is hard to summarize in a short column. The main takeaway is that the President and the Speaker could fix their proposals to do what they say they want—cover those low-wage workers now largely left out. And they could do it without penalizing those who vow commitment to their partners and their children.
This post originally appeared on TaxVox and UrbanWire.
Presidential campaign slogans often appeal to progress. Donald Trump’s has attempted to trademark “Make America Great Again,” claiming authorship of the same theme Ronald Reagan used in 1980. Barack Obama got great mileage in 2008 around his “Yes, We Can” theme. Compare on an optimism scale Franklin Roosevelt’s “Happy Days Are Here Again” with Herbert Hoover’s “We Are Turning the Corner,” and you can see one more reason Hoover lost that 1932 election.
Though I believe we should be optimistic about our future, these slogans, along with presidential campaigns more generally, pretend to offer one easy solution to thousands of very complicated problems. At their most basic, the slogans and campaign promises appeal to the notion that if we elect the right president, then progress, greatness and happiness will follow right behind. And, if our candidate is elected, we can feel really good about our achievement: we’ve won the Super Bowl of politics.
By simply choosing between candidate A and B, suddenly we can solve not just how to administer thousands of programs that together spend close to $4 trillion a year, but how to improve economic growth; address social ills; stop international terrorism; deal with worldwide economic, social, and military forces that lead to mass migration—or at least stop them from spilling over our borders; pay people to retire for one-third of their adult lives; make sure that households don’t have to pay more than $5,000 for the $24,000 worth of health care they now receive on average; keep taxes low and debt sustainable; and, of course, regulate the environment, occupational safety, and the financial industry, among others.
But where do we fit in? Do we solve the country’s problems by increasing our benefits from some government programs? By lowering our taxes? That’s what the campaigns tell us. We’re going to get more from or pay less to government AND make the world a better place along the way. Gosh, we’re good.
Identify, if you will, one candidate for president or Congress who doesn’t tell at least 90 percent of us that we are about to get something more from government if we elect her or him. Oh, a few might get less—you know, those lazy people on welfare or those rich tax avoiders who aren’t going to vote the same way as us anyway. Their losses will finance our gains, and $100 billion of higher taxes or lower benefits for a few will somehow cover $1 trillion worth of lower taxes (or higher benefits) for us.
The one-vote-solves-all mantra adds to our sense of dependence and incapacity to make the world better. What does it matter if we work harder or tutor or in other ways provide services and goods that others need? Why should we spend less on alcohol or fancy cars and donate the proceeds to some worthy cause when our contribution is just a drop into the bucket? Why should we fight terrorism by donating to the education of women in poorer countries when we can always send out more troops or bring them home, or raise others’ taxes or lower ours so the economy grows? Why should we gather in our community to address the social ills that threaten a significant portion of its children?
Why can’t others see the solution? We vote the right way, but they don’t; that’s why our problems aren’t solved. Sometimes we win, but then our successful candidate turns coat and fails to solve old problems while allowing new ones to arise. Or our favored son or daughter really tries when elected, but those others deny our democratically achieved victory from attaining its complete fulfillment.
It’s them again; it’s always them.
There is an alternative view. I firmly believe that what we are and what we achieve as a people derives from the sum total of what all of us do. Government can often help us combine our efforts, and, yes, government can block progress as well. Either way, it’s a damn poor excuse for our own failure to act well when we can and our tendency to blame others to excuse our own inaction.
So, yes, let’s engage fully in the elections. Let’s also be optimistic about the future when we live in a nation never so rich throughout all of history, and stand on the shoulders of those who went before us, who added to our store of knowledge, and sacrificed to make our own world a better place. At the end of the day, let’s also admit that progress derives from everyone’s efforts and reject wholeheartedly the dependency that derives from the notion that our role in advancing society comes mainly from flipping a toggle switch.
Mark Zuckerberg and his wife, Priscilla Chan, recently pledged to donate 99 percent of their Facebook shares to charitable purposes over their lifetimes. They are doing it through the Chan Zuckerberg Initiative, which uses a limited liability corporate structure.
Why not give to an IRS-approved charity, or a foundation created by Zuckerberg and Chan, instead? Two reasons leap to my mind, both shaped by nonprofit law. The first, which I fail to see in most commentary to date, is that generous lifetime giving by the wealthy can’t get much of a charitable deduction no matter how structured. Second, the Zuckerberg-Chan pledge falls into a class of efforts sometimes labeled “fourth sector” initiatives, which give much greater flexibility for how the money is used, including combining charitable and business purposes and lobbying for a favored cause—essentially what private individuals can but pure charities cannot do.
Economic Income, Realized Income, and the Charitable Deduction
In studies examining the behavior of those with significant wealth, other researchers and I show how little income they tend to realize, often 3 percent or less of the value of that wealth. That doesn’t mean the investors have earned such low rates of return. In fact, many like Mark Zuckerberg became millionaires or billionaires because they got very high returns. Most of their money, however, tends to be in stock or a closely-held business and, especially for those with only a few million dollars in total wealth, residences and vacation homes. As long as the wealthy don’t sell those assets, they won’t “realize” for tax or other accounting purposes the true economic returns or gains they achieve. And those gains can be substantially more than 3 percent: from 1926 to 2014, including during the Great Depression and Great Recession, stocks produced an average annual return of about 10 percent before inflation.
Related research examining the charitable activities of such wealthy individuals shows that most delay a huge portion of their giving until death. That is, they give from the wealth of their estates, not the income of their lifetimes. Why? Because tax law provides very little incentive to give huge donations to charity during a lifetime. Let’s suppose that Mark Zuckerberg and Priscilla Chan normally realize as income 2 percent of their estimated $45 billion wealth, or $900 million, this year. The charitable deduction is limited to 50 percent of yearly income, which in Zuckerberg and Chan’s case is $450 million; it’s only 30 percent ($270 million) if they want to give to foundation. Thus, if Zuckerberg and Chan give away more than 1 percent of their wealth each year, they run out of allowable charitable deductions. If in an average year they earn 10 percent on their wealth and give away only 1 percent, they are still accumulating much faster than they are giving it away, unless they consume billions annually.
Running out of charitable deductions doesn’t mean that the wealthy gain nothing from giving away money directly to charities earlier in life. Once assets are transferred to a charity, the donors don’t have to pay taxes on the income earned from those assets. But donors such as Zuckerberg and Chan would achieve only modest tax savings from early gifts to charity as long as their taxable income from the alternative remains a small percentage of their wealth. What also might be in play here, and I don’t fully know, is that the charitable side of the Chan Zuckerberg initiative will yield enough losses, transfers, and sales to needy individuals at below-market cost to offset any taxable income otherwise earned on the business side, so it can effectively avoid income tax just as well as an outright charity.
For Benefit Corporations and the Fourth Sector
So limits on the advantages of a charitable deduction provide a significant impetus for wealthy individuals to pledge money for charitable purposes without necessarily giving it to a charity. Donors may also think the flexibility they gain is substantial relative to any potentially modest tax costs. Giving to charity later is always an option, thus avoiding estate tax; meanwhile, other options haven’t been foreclosed.
Among the additional options at play is combining nonprofit and business activity. Among the many efforts of this type that get complicated in a pure charity setting are raising private equity; sharing real estate investment returns with low-income residents; running a business centered around training its workers and building up their equity rather than making profits for investors; investing in new drug research and pledging that the public, not investors, will garner any potential monopoly returns from some successful patent; or investing in green energy by granting some risk protection to private capital partners; and garnering research and development tax credits.
Some states have tried to create special rules applicable to certain “for-benefit corporations” that allow shareholders and charities to share returns. But, for the most part, the walls surrounding charitable money can’t be torn down. Federal and state tax and other nonprofit laws protect money that now essentially belongs to the public (with the charity as fiduciary), not to the donors.
If donors aren’t worried about getting a charitable deduction up front anyway, as is likely the case for Zuckerberg and Chan, the easiest route is to create a potentially profit-making limited-liability business. Meanwhile, donors can engage in all sorts of ventures without having their lawyers shouting “Stop” to each new creative idea because it might violate some charitable law. At the same time, Zuckerberg and Chan need a new entity since they can’t pursue their charitable pursuits directly through Facebook without soon running into problems meeting that corporation’s obligations to other shareholders.
If Zuckerberg and Chan decide that they want to lobby government, they also can avoid any limitation imposed on foundations or other charities.
These types of private initiatives, sometimes labeled as a Fourth Sector, push society in new, exciting, and yet-to-be-determined directions. As I’ve discovered when I raise money for charity, people will often consider giving away much more when asked to think about giving out of their wealth, not just their realized income. Fundraisers, take note: I don’t think we’ve even begun to tap this way of encouraging giving. Also, people often see new possibilities for enhancing charitable purposes when not confining themselves within the walls surrounding a typical charity, with entrepreneurs and venture capitalists often especially excited by the new adventure. Zuckerberg and Chan are merely two of the richer faces giving new attention to these broader movements.
When I was a kid, I asked Santa to bring me a bike or a baseball glove. As an adult, I mainly wished for good health and good cheer for myself and my loved ones. This year, I have a particular request that I hope the man in the red suit can grant: I want to be a drug company.
I want the government to give me a monopoly over what I produce. I want to be able to set almost any price for my products.
I want the government to pay for whatever tens of millions of government-subsidized customers buy from me. I also want the government to pay those who sell my product or spend their time advising and prescribing my product for others.
I want to be paid for years and decades for producing the same thing to meet some chronic need, even if it would be better to produce things that heal or cure. I want to be paid for things that sometimes turn out to be worthless, and to avoid the possibility of my customers haggling over prices or suing me because they don’t pay for those things directly.
I want Congress to give me the power to appropriate money to myself and give up some of the power reserved in the Constitution for itself.
But I’m not done.
I want the government to let me avoid paying tax on the income I earn from the money it pays me. I want to be able to live in the United States and claim citizenship for tax purposes abroad in some low–tax rate country. I want to defer taxes on my income, then have the government forgive that tax debt. And I want congressional representatives who for years—even decades—have been more interested in fighting among themselves than in doing anything about this type of arrangement.
Why not? A recent news flurry surrounds Pfizer’s announcement that it will now become a foreign company so it can avoid US corporate tax and grab money set aside abroad for US tax liabilities. But that’s only the tail on a long list of favors granted it and other drug companies.
I write a lot. Imagine if I put my work under copyright, then lobbied to have a law passed that creates millions of subsidized customers who can have my work for free because I’m billing the government. Of course, I should be allowed to set almost any price for what the government pays on behalf of those customers. And the government could promise to book and magazine sellers that their profits would rise automatically with sales of my writings. Meanwhile, I’ve been around long enough that I’ve got a good share of my income deferred from tax until I draw down my 401(k) accounts, so I should be allowed to rent a shack somewhere abroad, claim a foreign residence, and avoid ever paying tax on that income, even while I live in the States.
Now, don’t blame me if I respond naturally to all those incentives. Or lobby Congress to maintain them. And don’t blame me if I end up producing things less worthwhile than what I could produce. Hey, it’s a free country.
How about you? Maybe together we can invent a company for workers and could be granted power to charge anything we want for providing that work to a large set of government-subsidized customers. We shouldn’t have to pay tax, given all we are doing for the economy. We could get some deep-thinking consulting firms to prove that this would probably solve any future unemployment problem.
What do you say, Santa? For goodness sake, you know I’ve been good, and I’m not pouting. With this wish, I’m just asking for what your competitor, Congress, gave the drug company next door.
On October 22 Paul Ryan announced he “will gladly serve” as Speaker of the House if he can unify the Republicans around his vision for the party and the Speaker’s role within it. He faces an uphill battle: Mo Brooks of the House Freedom Caucus has already voiced his concern at Ryan’s reluctance “to do the speaker job as it’s been done in the past.”
But what if the job, not the person filling it, has become the problem? What if the expectations now placed on any Speaker of the House are so unreasonable that no one can meet them? What if the procedures of both the House and the Senate simply cannot meet modern legislative needs? Then we had best not place our hopes on the right person meeting wrong expectations.
Instead, to succeed, the next Speaker of the House must radically redefine that role and how the House conducts business. Ryan himself has stated that “we need to update our House rules…and ensure that we don’t experience constant leadership challenges and crisis.”
At least since the time of Newt Gingrich, an extraordinary amount of the House’s power has been concentrated in the Speaker’s office (although I sense that John Boehner struggled to simultaneously maintain that power and disperse it). Consider some consequences of this convergence:
- Acrimony. The antipathy that accompanies all concentrations of power has spread not just between political parties, but within them as well. One of Republican Congressman Mark Meadows’ chief complaints about John Boehner was that the Speaker had attempted “to consolidate power and centralize decisionmaking.”
- Attention to party rather than nation. In recent years, the House has attempted to confine enactments to items that receive broad consensus among members of the majority party. But the US Congress cannot operate like the British House of Commons, where party leaders become prime ministers. Our Constitution separates the country’s executive and legislative functions, slowing down reforms both good and bad. Although we can’t imitate most British parliamentary procedures, I do think the British tradition of the Speaker resigning his or her party position to serve all House members is worth looking into.
- Inefficient policymaking. Congressional committees are much weaker than they were 20 years ago. At one time the Ways and Means Committee was the most powerful in the House, and its chair was often as powerful as the Speaker. Working closely with the Senate Finance Committee, Ways and Means often took on the unpopular task of identifying how to increase taxes or cut the entitlement spending under its jurisdiction so the nation’s balance sheets maintained some semblance of order. However, once much of the committee’s power was relegated to a Speaker whose job revolved around keeping members of his party happy, necessary economic choices and the compromises that need to be ironed out in a small group— often including members of the other party—couldn’t be developed or sustained. In turn, the complicated, technical, details of policymaking—whether over a tax cut or a health care expansion—often got messed up when put under the purview of people with limited expertise on the particular laws being reformed.
In sum, a Speaker can’t serve either nation or party well when so much power is concentrated in one office, the acrimony surrounding such concentration rises so high, too many party obligations weaken the Speaker’s ability to focus on legislative obligations, and the assumption that the primary role of the Speaker is to promote partisan politics weakens the ability of the House to make tough choices and creatively draft detailed legislation.
Of course, the Speaker cannot reform his own role in isolation from other roles and rules within the House. As already noted, more legislative power can be returned to committees, and party politics can be relegated to party whips or other officers with no obligations to the House as a whole. Here I agree with many Freedom Caucus members, who claim they want to empower committees, but I disagree that this means that a small group within a majority party should be more likely to get its way. The job of the committee chair, just like the job of the Speaker, is to create legislation that will form enough consensus to pass the House, the Senate, and the presidential veto pen.
The House, led by the Speaker, must also start to tackle other obstacles to legislation. Here are three to start. First, political staffs should be reduced in size and nonpartisan staffs increased. The House budget and tax-writing committees can look to the Congressional Budget Office or Joint Committee on Taxation for objective analyses of legislative proposals; other committees lack independent reality-checkers. Second, the congressional budget process is long overdue for overhaul. As a former head of the Budget Committee, Paul Ryan should be all over this one. Third, the wasteful replication of hearings on the same subject matter across House committee jurisdictions should be curtailed.
There’s no guarantee that any particular reform will suddenly make the House more productive. But continuing under current expectations and processes almost assuredly insures that both the House and the Speaker will fail to meet their fundamental constitutional responsibilities to legislate for the nation.
Disgruntled minorities will always seek whatever power the existing structure grants them. The next Speaker can only meet his huge challenges by boldly changing the rules of the game he is called to officiate.
Setting disability policy is tough. Very tough. It’s tough empirically to measure and distinguish among degrees of disability or need. It’s tough legally and administratively to draw boundaries without excluding some sympathetic person or giving an inappropriate level of benefits to someone whose needs can’t fully be assessed. It’s tough economically to transfer resources to people with disabilities without setting up perverse incentives that separate them from the workplace and their fellow workers. It’s tough socially because the needs are so great.
Disability policy has gotten increased attention recently because the Social Security Disability Insurance (SSDI) trust fund is unable to pay our current benefits through 2016. But reform should involve more than money. By defining eligibility for benefits partly by the inability to work, SSDI and other federal disability policies effectively discourage recipients from trying to support themselves. If they work, they lose their benefits. This needs to be fixed. But how?
In a recent conference sponsored by the McCrery-Pomeroy SSDI Solutions Initiative (disclosure: I helped organize the initiative and still serve as advisor), no one advocated reducing benefits to bring SSDI back into balance. Nor did anyone suggest merely raising taxes.
Most speakers talked about the need to modernize US disability policy—in particular, to offer opportunities for people who want to work, can work at some level, or can keep working if they receive help when they first develop a health problem or impairment. Speakers recognized that work is therapeutic and that disability policy should account for the factors that can affect someone’s disability differentially across his or her lifetime, such as the episodic nature of many mental illnesses and the kinds of rehabilitation that can prove helpful to different people at different times.
Disability policy is exactly the same as other policy in one respect: it contains a fairly precise, even if implicit, calculus of what and whom will and won’t be funded. So, any reform to the policy must address the balance sheet.
The President and Congress seem ready to punt on dealing with SSDI, effectively covering shortfalls by transferring money from Social Security Old Age Insurance (OAI). Despite the pretense, such a move is not costless. Today’s taxpayers and beneficiaries won’t need to pay for the growing costs of SSDI, but future taxpayers and beneficiaries—of SSDI or other federal programs—will inherit even higher SSDI or OAI deficits, along with their compounding interest costs. Meanwhile, today’s catalyst for reform is neutralized.
As I listened to the McCrery-Pomeroy conference speakers propose adding work incentives and supports to SSDI (a suggestion I lean favorably toward, despite many design issues), it struck me that the proponents were implicitly suggesting that there is a better way to spend the next SSDI dollars than simply expanding the current program. If those proponents genuinely believe that work incentives and supports are the right way to direct additional dollars, then they also imply that we ought to look at how Congress already has scheduled additional dollars to be spent.
Some advocates may try to claim that we shouldn’t make such marginal budget comparisons. When I co-wrote a book on programs for children with disabilities, my fellow authors and I were criticized in one review for noting simply that the principle of progressivity requires figuring out who needs support the most. Such a critique ignores that we have to make choices, so we may as well do them as best we can. No one, proponent or opponent of current or any reformed law, can get around the simple fact that dollars spent one way cannot be spent another.
Let me put this in terms of the politics. Politicians never want to identify losers because then we voters crucify them. They want to operate on the give-away side of the budget: spending increases and tax cuts. So how can we give politicians some protection to reform disability policy if you and I know that putting relatively more money into work supports changes the nature of SSDI and prevents some other use of the money?
Here’s one way: emphasize the long-term dynamic that reform in a growing economy makes possible. Counting everything from health care to education to disability policy, our social welfare budget now spends about $35,000 annually per household. As the economy grows over time, the number is going to increase—perhaps to $70,000 if the economy doubles in another few decades. We don’t need to cut back on disability programs absolutely in order to allocate a share of those new marginal dollars to different approaches. We simply need to focus the growth of those future budgets.
SSDI and OASI grow automatically over time because benefits are indexed for real growth in the economy over and above inflation. No legislator determines that today’s additional expenditures should be directed one way or another; it’s in a formula set decades ago. Why not consider reducing that automatic growth to finance more subsidies and supports for people who want to keep working? What about capping growth—at least for those getting maximum benefits? What about re-allocating some of the federal health budget, where so many of the dollars are captured by providers rather than consumers, to help pay for work supports?
Or what about cutting back on those features of SSDI that add to the anti-work incentives? For example, what about paring the ability to increase your benefits by about 30 percent if you retire at age 62 on disability insurance instead of old age insurance, at least for people at higher incomes? Or at least not increasing that disability insurance bump, as now happens automatically when the full retirement age increases?
We can shift toward a more modern disability insurance system, but only when we face up honestly to the trade-offs implicit or explicit in every system. We will never move disability policy away from its antiwork emphasis if we’re not willing simultaneously to address the way we put additional resources into the current prevailing system. And, as best I see it, that is just what a scared Congress and president are about to do.
In testimony yesterday before a joint hearing of two House subcommittees, I urged Congress to modernize the nation’s social welfare programs to focus on early childhood, quality teachers, more effective work subsidies, and improved neighborhoods. One way lawmakers can shift their gaze is by considering the effects of combined marginal tax rates that often rise steeply as people increase their income and lose their eligibility for benefits.
While some talk about how we live in an age of austerity, we are in fact in a period of extraordinary opportunity. On a per-household basis, our income is higher than before the Great Recession and 60 percent higher than when Ronald Reagan was elected President in 1980.
A forward-looking social welfare budget should not be defined by the needs of a society from decades past. Two examples of how our priorities have shifted: Republicans and Democrats didn’t always agree on the merits of Aid to Families with Dependent Children (AFDC) or the Earned Income Tax Credit, yet they agreed on the need to shift from welfare to wage subsidies. Ditto for moving from public housing toward housing vouchers.
I sense that both the American public and its elected representatives are united in wanting to create a 21st century social welfare budget. That budget, I believe, should and will place greater focus on opportunity, mobility, work, and investment in human, real, and financial capital.
However, for the most part, our focus has been elsewhere. As I show in my recent book Dead Men Ruling, we live at a time when our elected officials are trapped by the promises of their predecessors. New agendas mean reneging on past promises. Even modest economic growth provides new opportunities, but the nation operates on a budget constrained by choices made by dead and retired elected officials who continue to rule.
For instance, the Congressional Budget Office and others project government will increase spending and tax subsidies by more than $1 trillion annually by 2025, yet they already absorb more than all future additional revenues—the traditional source of flexibility in budget making.
I am concerned about the potential negative effects of these programs on work, wealth accumulation, and marriage of combined marginal tax rate imposed mainly on lower-income households. To see how multiple programs combine to reduce the reward to work and marriage, look at this graph.
For households with children, combined marginal tax rates from direct taxes and the phasing out of benefits from universally available programs like EITC, SNAP, and government-subsidized health insurance average about 60 percent as they move from about $15,000 to $55,000 of income. This is what happens when a head of household moves toward full-time work, takes a second job, or marries another worker.
Beneficiaries of additional housing and welfare support face marginal rates that average closer to 75 percent. Add out of pocket costs for transportation, consumption taxes, and child care, and the gains from work fall even more. Sometimes there are no gains at all.
While there is widespread disagreement on the size of these disincentive effects on work and marriage, there is little doubt that they exist. One solution: Focus future resources on increasing opportunity for young households. Make combined tax rates more explicit and make work a stronger requirement for receiving some benefits.
This post originally appeared on TaxVox.