Thursday, May 5, 2016

Reforming Welfare?

America's welfare system is broken. Around 14 or 15% of Americans are currently in poverty, and that's not too different from when LBJ started his "war on poverty in the 1960s. It's sorta safe to say that LBJ's war plans against poverty were no better than his plans against the Viet Cong. Many more Americans, around half, are living with incomes under $30,000 a year.

What would happen if we just clumped the entire transfer payment system (Welfare, Social Security, Medicare, Medicaid, etc.) into just one program? Specifically a negative income tax (NIT). A NIT is what it sounds like, its a payment for those making under a certain amount of income based on a percentage of their income that is beneath that certain amount. It's sorta like the current earned income tax credit (which already is pretty effective), but it also creates a lower limit which creates a guaranteed basic income for those that don't have any income at all.

So here's a basic formula where the basic income would be $15,000 and payments would be provided until one makes $30,000 at a 50% NIT.

30,000 - Income = X
Income + (X * .5)

Under this formula:
A person making $0 will receive $15k.
A person making $5k will receive $12.5k ($17.5k in total). 
A person making $15k will receive $7.5k ($22.5k in total). 
A person making $29k will receive $500 ($29.5k in total).

What this does is it eliminates welfare cliffs that litter the current welfare system and create disincentives to work. In a NIT, the more money you earn, the more overall money one has in one's pocket. 

Another reason to like the NIT is that it promotes individual decisions in how welfare recipients spend their money. If they decide to invest it or start a business they can do so. If they decide to spend it frivolously, they can do that too. We should treat adults like adults and let them make their own decisions about how to spend the money. Why should the government act as a nanny over the lives of millions of people? It shouldn't. 
Economist Milton Friedman on the NIT

Now is the above $15k guaranteed income with a 50% NIT plausible? Well, I think it is a little optimistic, but the gross spending on federal, state, and local levels on welfare, health, social security, and pensions is currently ~$2.9 trillion. If you divide that by ~190 million, a generous approx. size of America's <$ 30k income earners and unemployed, you'll get ~ $15k per person which is the worse case scenario where no one has an income. So it's theoretically possible without actually raising taxes, but this doesn't take into account a ton of factors from child tax credits, health issues, and differences in state poverty levels so it is a rough assessment. 

One could come up with a slightly more complex way to distribute the funds of an NIT with regards to the complexities of the real world and could probably do so in a way that saves a bunch of money, with "bunch" being equivalent to billions. I'm not that person though. 

There are problems with the NIT in regards to fraud and a lessened incentive to work, but the current system already has these problems and likely in a more severe degree thanks to those welfare cliffs and the sheer number of programs currently in existence. 

I think it is obvious that an NIT is a superior way to fight poverty in combination with other reforms such as tax reform to lessen the burden on America's middle class and to promote private sector growth. If one thinks reform is needed to America's welfare system, then the NIT should be something to look at for a comprehensive bipartisan welfare reform. Too bad no political party of particular note supports the the idea. 

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