Intersecting Disincentives
Congress created the broadband subsidy with other Covid handouts in the December 2020 omnibus bill...
The 2021 infrastructure bill provided $14.2 billion to extend the $30 a month broadband discounts, and these funds are expected to run out this month….
Some 23 million households receive broadband subsidies, which is more than the number on food stamps. Households qualify if they earn 200% or less than the poverty line or participate in other welfare programs such as Medicaid. This includes relatively affluent households with public-school students in localities like New York City that provide universal free school meals.
Context:
Intersecting disincentives are a central problem of our means-tested (pretty much all) social programs. Most of them have, in isolation, medium disincentives. “Affordable housing” programs, for example, often require one to pay 30% of income, meaning an additional 30% marginal tax rate. But most people sign up for more than one means-tested program. With just three such programs, the face an effective 90% tax rate. (The tax rates add directly, because social program phaseouts are each based on total income, not adjusting for the loss of other benefits. They can easily exceed 100%.) That is, of course, on top of actual state and federal taxes, income-based phaseouts of the earned income tax credit and child tax credit, sales taxes, and so on. And many programs have cliffs, where you lose everything if you earn another dollar.
Roughly speaking, and including in-kind transfers (health insurance, housing), the average American earning from $0 to $60,000 faces a 100% marginal tax rate. Equivalently, we have a $60,000 universal basic income, with a 100% tax of actual income on top of that.
That claim is of course contentious. I take it from Gramm, Ekelund and Early, and Casey Mulligan. But there are hundreds of studies which come to different answers. There are hundreds of different programs, but most people do not sign up for more than two or three, and most studies only assess the impact of two or three. The tax rate varies a lot depending who you are and which you sign up for. Gramm et al. also include the value of in-kind transfers, where most studies only include cash transfers.
How many such programs are there? A lot. A small list from CBO: Medicaid, Low-income subsidy (LIS) for Part D of Medicare, earned income tax credit, child tax credit, Supplemental Security Income (SSI), Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP, Food Stamps), Child nutrition programs, Housing assistance programs, Pell Grant Program.
To which I can add off the top, income-linked phaseouts of Obamacare subsidies, income-linked student loan repayment, income-limited education vouchers, unemployment insurance (duh), social security disability (work and lose it), and “affordable” housing: The government forces developers to build them, and then allocates apartments at “below market” rates to people below an income limit.
From HHS comes the following (still partial) list, based on who uses their definition of “poverty” for income limits. In addition to the above, and including both the enormous and the ridiculous: Children's Health Insurance Program, Consolidated Health Centers (CHCs), including Federally Qualified Health Centers (FQHCs), Maternal and child health services, Title X Family Planning Program, Older Americans Act Nutrition Program, Head Start, Health professions student loans and scholarships, Low-income Home Energy Assistance, National School Lunch Program, Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), Child and Adult Care Food Program, School Breakfast Program, Summer Food Service Program, Commodity Supplemental Food Program, Food Distribution Program on Indian Reservations (FDPIR), Senior Farmers' Market Nutrition Program (SFMNP), Special Milk Program for Children, TRIO Programs, Educational stipends for the Native Hawaiian Career and Technical Education Program (NHCTEP), Educational stipends for the Native American Career and Technical Education Program (NHCTEP), D.C. School Choice Incentives, Federal Student Aid-Income-Driven Plans, Weatherization Assistance Program, U.S. Citizenship and Immigration Services, Immigration Form Fee Waiver (Form I-912), Job Corps Workforce Innovation and Opportunity Act (WIOA), Senior Community Service Employment Program (SCSEP), Health Insurance Premium Tax Credits, Low-Income Taxpayer Clinics (LITC), Fee waiver for Offer in Compromise, Reduced user fee for Installment Agreements, Corporation for National and Community Service, Foster Grandparent Program, Senior Companion Program, LifeLine, Legal Services. Plus a few that do not use the HHS poverty definition, State/local-funded General Assistance (in most cases), Section 8 low-income housing assistance, Low-rent public housing.
And it continues, right down to the SF Bay Area low income bus pass, 50% off up to 200% of the poverty line, and half off express lanes and toll debt forgiveness also up to 200% of the poverty line (HHS missed those).
And, finally to get to the point, $30 a month off broadband up to 200% of the poverty line (also missing from the HHS list).
Of course not many people are going to turn down a job or a promotion over losing $30 a month. But it adds up. The increasing number of programs that eliminate all benefits at 200%, with no phase-out, create a larger cliff out of small programs.
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Each program might be small, but the disincentive comes from the combined effect of all programs taken together.
For now, most people only sign up for a few programs, and many programs only attract a few percent of eligible people. Heaven help them, and the budget, if they start signing up for more.
Signing up is a pain in the butt. I had to research the list of programs. The average beneficiary is going to have trouble even finding out about many programs. I think that’s a rough and ready rationing mechanism to control the disincentives of signing up for too many programs, but we can do a lot better than rough and ready, both in helping people who need it and in controlling disincentives.
Implied taxes add directly. If you pay a 50% income tax, and then a 10% sales tax, your total tax rate is only 55%, not 60%, because the 10% only applies on what you have left over after they take 50%. If you have one program that phases out 50% of your income, and another that phases out 10% of your income, your marginal tax rate is 60%.
Income phaseouts apply to market income, not program income. If you earn an extra legal dollar, you lose x% of your benefits. If you join another program (low income bus pass) the extra income does not count against your other benefits, so there is zero marginal tax rate. Getting a subsidized bigger apartment is just free. Getting a better paying job and paying for that apartment pays taxes and reduces other benefits.
I am led to the view that the government needs to integrate all means-tested programs in one place. At least, then, we can know the actual marginal tax rate that each person faces and redesign programs to control the combined disincentive. We might also then control the disincentives. How about, “Here is the menu of programs available to you. Choose which ones you want, but the calculator will keep track of the all in marginal tax rate and make sure it’s below 50%.” Or perhaps it can offer a new personalized subsidy/tax credit to smooth the disincentives. Given all the programs you’re in, you get something like the EITC with a phase-out that makes sure your all-in marginal tax rate is below 50%. I once suggested a similar “alternative maximum tax” on the high end: since those disincentives also depend on all taxes together, nobody has to pay more than (say) 70% all-in tax rate. The same principle applies. Or work requirements can be tailored to the all-in marginal tax rate.
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Which brings me finally to the quotation. We are starting to integrate programs, but in a way that seems to multiply rather than control the all-in disincentive.
Households qualify if they earn 200% or less than the poverty line or participate in other welfare programs such as Medicaid…or free school meals.
Starting at least with food stamps in the Obama Administration, there has been a concerted effort to sign people up. The political and bureaucratic forces that like these programs naturally want more people in them, and view two percent sign up rates as a human tragedy.
My “one stop shopping” vision, run by them (naturally) would be an incentives and budget disaster: Walk in (or visit the website) and the AI helper will instantly sign you up for every single program you’re eligible for, right down to the low-income bus pass. The marginal tax rate would be astronomical, and the same AI helper will easily tell you “if I report $100 more income what do I get?” Don’t do it.
You see in the quote a major step in that direction. Rather than have each program’s bureaucracy independently verify income, people automatically cross-qualify once they are accepted into one large program, such as Medicaid or free school meals. Obviously, the incentive to fudge one application rises dramatically. The people checking your income for free school lunches (who really cares if a few extra people get free school lunches?) now control huge sums, and huge disincentives.
Income is not an innate immutable characteristic. Incentives matter. The main problem with our social programs is not cost, but intersecting disincentives.
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I have no problem with any of these give-away programs, disincentives or not - BUT ONLY WITH THE CAVEATE THAT RECIPIENTS LOSE THEIR RIGHT TO VOTE!
The thesis in the 2022 book written by Gramm et al. is simply stated: Poverty in the U.S. is not as dire as the media and the social justice warriors make it out to be. Income transfers by federal and state governments, Gramm et al. contend, level up the income distribution substantially. Additionally, the 2017 income tax code revision lowered the proportion of taxable earned income collected by the IRS on households in the lower income tax brackets. Earned income of $30,000 isn't going to allow the taxpayer to live the life-style of a Hollywood movie star, but if that is the life-style the taxpayer aspires to (and many do) then the motivation is towards remunerative work rather than to reliance on the federal or state dole.
John uses the term "marginal tax rate" in his essay. One might be inclined to observe that he misuses the term, and even grossly misuses the term. Consider the 'affordable housing' subsidy. This subsidy equals the market rent that the program beneficiary would have paid absent the government program and 30% of taxable income that beneficiary is required to pay to the housing authority. At an annual taxable income of $30,120 the 'rent' is $9,036 per year ($753 per month). If the market rent is $1,100 per month for a comparable rental apartment, then the subsidy is $347 per month ($4,164 per year). Assume, with John, that the 'affordable housing' subsidy is marked by a 'cliff' -- earning $30,121 per year disqualifies the occupant from receiving the 'affordable housing' subsidy. What is the 'marginal tax rate' then in John's calculus? It would have to be $4,164 divided by $1, or 416,400%. What level change in earned income would make the 'affordable housing' subsidy recipient indifferent to disqualification for the subsidy? Clearly it must be an increase of $4,164 divided by one minus the combined federal and state marginal income tax rates. Assume that the combined federal and state income tax rates for this individual (or, household) amount to 10%. Then the annual taxable earned income increase to make the tax payer indifferent to the loss of the 'affordable housing' subsidy is $4,627, or an increase in taxable earned income of 15.36%. For a young adult, an improvement of 15.36% in annual taxable earned income is practicable. For an older adult, or a single mother with children under the age of 16 years, an improvement in annual taxable earned income by 15.36% is probably out of reach except under exceptional circumstances. In other words, the subsidies and inter-household income transfers by the federal and state governments are received by individuals and households that need those subsidies and income supplements the most and have the least likelihood of being able to improve their incomes.
Gramm et al. argue that because of the welfare programs and income transfers life in the least wealthy demographic segments is less dire than it would otherwise be without such subsidies and transfers. Ergo, the motivation to increase taxation of the income of wealthy households is lower than it would otherwise be. In short, Gramm et al. argue that increasing the tax burden on high income (high net worth) households is not supportable in light of the current extent of the welfare benefits the lower income (low net worth) households receive, or would receive if those households took advantage of the welfare benefits they are entitled to by law. That is my take on Gramm et al. (2022).
The proliferation of social benefit programs is conditioned on the proliferation of federal and state government departments set up to administer and deliver such benefits. Absent those federal and state government departments, social welfare must depend on philanthropy and religious institutions. The net effect on John's "marginal tax rate" is unchanged. Social welfare benefits are constrained by the availability of funding, whether from federal and state government coffers or from private and religious sources. There will always be some form of 'cliff' relative to income or household wealth regardless of the design of the social welfare benefit program(s). Welcome to the real world.