Thursday, July 12, 2007

Reverse Income Tax


Last week I mentioned the “Reverse Income Tax” and I got a couple questions about it so I decided to make this week’s post about reforming poverty programs.

I recently ran across a woman who has a lot to say about these programs. Star Parker was born in a poor neighborhood in LA and like the African-American stereotype she got pregnant, got on welfare, admits to four abortions, and racked up a criminal record in her youth. However, she made a series of decisions and an acceptance of faith that changed her life. Today, she is a columnist and head of Coalition on Urban Renewal and Education. She is also a die hard Conservative who hates the welfare system.

I found this quote from her first book that puts our poverty programs in great perspective. “We have two economic systems working for America: capitalism for the rich and socialism for the poor. The problem with a government that lets both systems operate is that the middle class gets stuck working for the rich to support the poor.”

For me, it is not the existence of a poverty program that is the biggest problem, it’s the design. Before reform in 1995, Welfare (AFDC) was designed to give aid to unemployed parents of dependent children. The flaw was that for every dollar you earned at work you lost a dollar of welfare. Someone qualifying for welfare is unlikely to make much, so oftentimes they didn’t actually start earning any extra income until their work hours hit 30 or 35 hours per week. Why would anybody work 30 to 35 hours for nothing? That’s the problem. They didn’t.

Today, many of the poverty programs have the same design problems. If you work you lose a lot of benefits. If you put money into savings you lose benefits. Recently, a study by the National Center for Policy Analysis showed that for every dollar someone on benefits puts into savings, they lose $2.60 in benefits. If they get married or live with the other parent of their child they lose benefits. Those on benefits work less, save less, and they choose not to marry or stay with the father of their children because the system rewards irresponsibility. We have placed these people in a position where they must choose between dignity and putting food on the table for their kids.

How do we expect people to stay out of poverty if they aren’t building a career? How can we expect them to weather their next job loss or medical emergency without a decent savings account? The financial and emotional stability brought by marriage helps many stay out of poverty and rear healthy children. Why would we punish them for doing so? Like I mentioned last week, some on the Left have the idea that “bad luck causes poverty” so engrained in their heads that they never consider that we are eroding the strength and character of those on benefits by a poor design. We have made children out of adults and have trapped them in poverty. The reforms in 1995 accomplished a lot, but we still have a long way to go.

So how does the “Reverse Income Tax” come into this and what is it? The “Reverse Income Tax” raises your income if you make below the poverty level based on a percentage (40%) of the difference between your income and the poverty level. My idea takes the math from this and tweaks it a little. What do I mean by a percentage of the difference? Say a mother makes $7.00/hr as a day care worker. That’s $3.00 less than $10.00/hr. She would receive $3.00 * 40% = $1.20/hr added to her paycheck, giving her $8.20/hr. If this mother made $9.00/hr she would be given $0.40/hr ($10-$9=$1 * 40%).

This isn’t a perfect plan, but why is this better? Under the old system you earned nothing for each additional hour you worked until you hit 30 to 35 hours a week, so few worked. Under this system you earn not just your typical pay of $7.00/hr, you would earn $8.20/hr. It preserves the incentive to work just like Friedman’s plan. I could go into more detail, but the spirit of his idea created a system that didn’t seriously erode their character. While my idea is similar to Friedman’s, I think it offers a stronger incentive by adding it to their paycheck instead of having to wait until the next year to file a tax return.

The points of my idea are:

For every hour that a parent with children at home works they would receive 40% of the difference between their pay and $10.00/hr as long as they worked at least 20 hours a week.
Being married or living with the other parent would not count against your ability to receive the benefit.
Neither contributions to 401K, IRA, nor holding up to $10,000 in savings would count against your ability to receive benefits.

This Character Based idea is Marriage Neutral, Savings Neutral, and helps to provide a better wage to low income parents. By neutral, I mean it doesn’t discriminate for or against. Obviously there would be more details to work out to prevent fraud and cover other problems, but this is the basic framework.

Nothing in this idea requires us to bash the poor. In fact, it’s about giving them back their self respect. We can never know what they can accomplish if we don’t let them leave behind low expectations. How many Star Parkers are still trapped in poverty?

If you like this idea and can come up with a better slogan for this that would be great. As always, let me know what you think, and pass this on to friends. I got some good feedback this week so keep it coming.

From You: In Oklahoma, the state government is apparently running TV ads to encourage more people to get on welfare so that the state can maximize their grant from the Federal government. Another great incentive set up by poorly designed legislation!

Technical discussions about the reverse income tax.
Star Parker (Search for Star Parker) (Search for Star Parker)
National Center for Policy Analysis stat,1,2701901.column?coll=la-mininav-business&ctrack=1&cset=true

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