Meaningful Welfare Reform- The Negative Income Tax Credit Concept

There is no doubt that our public welfare system is badly broken and in need of serious overhaul. It is far too expensive, far too lax in preventing and detecting fraud, and far too generous.

It is also enormous. So much so, that many believe it can't be fixed, and should be scrapped altogether.

Before discussing changes, let's clearly define the problems within the welfare system:

Those not familiar with the welfare system tend to classify welfare recipients in two groups: Those who "need it", and those who "don't".  If there is to be meaningful welfare reform, three groups must be recognized:

a) Helpless persons- persons with significant physical or mental impairments which prevent or severely limit self-sufficiency;
           
b) Persons in financial need- persons who earn an income, but that income is not sufficient to meet basic needs;
           
c) Generational recipients- persons with little or no physical or mental impairment, who choose to subsist on government assistance rather than earn an income. The term "generational" refers to the fact that entire families do, indeed, subsist this way.
           
Note my use of the term "helpless", rather than the currently-used "disabled". Decades of blatant abuse of the welfare system has shown numerous examples of persons who are able to be certified "disabled", despite being capable of performing work. This widespread practice deprives genuinely disabled persons of needed taxpayer funds and access to government programs. The term "helpless" distinguishes those who are legitimately unable to fend for themselves due to severe handicap.

It is also essential to understand the phenomenon of "the welfare trap". Many government programs intended to assist workers with insufficient incomes are established with static income limits. If a person's income rises slightly to exceed the limit, the assistance is lost. This creates a "welfare trap", where persons are induced to remain in a state of underemployment, because a small increase in wages will cause the loss of some or all assistance benefits, resulting in a net loss of income. This group of persons would generally prefer to improve their income through work, if such opportunity is available. Eliminating the "welfare trap" must be a significant component of any meaningful welfare reform.

And then there is the subject of welfare abuse. Welfare abuse is a generational problem. As is already generally known, a segment of the population has become aware that it is possible to avoid working to earn an income, by means of manipulating the welfare system to provide an income. This "free money" mentality also creates hazards for private businesses, particularly thefts of services from utilities and telecommunications providers, unpaid debts to creditors which are exceptionally difficult to collect, and frivolous lawsuits arising from feigned injuries (for instance, the "false slip and fall" fraud). A part of this culture of welfare fraud is the ability of many persons to become certified "disabled", despite being able to perform work to some extent. Children raised in such an environment will frequently utilize such welfare abuse to establish an income in adulthood.

So, what is the solution to the massive, fraud-prone welfare system which traps people within its bowels?

Milton Friedman proposed the Negative Income Tax Credit, as a solution to this problem.

A negative income tax credit is an alternative system of public assistance, defined as "a progressive income tax system where people earning less than a certain income receive supplemental pay from the government instead of paying taxes to the government." Such a system is an alternative to the payment of numerous public assistance grants.

Under a NIT scheme, the welfare trap would be effectively eliminated, as every increase in a person's income would correlate to a fractional reduction in the benefit- i.e. an increase in wage will always mean an increase in net income.

Example:

Let's say an NIT credit were set at $15,000, and amortized at a rate of 50%.

A person who earned no income would recieve the full credit, $15,000.

A person who earned $1,000 would have their credit reduced by $500 (50%), for a total credit of $14,500 and a total income of $15,500.

A person who earned $10,000 would have their credit reduced by $5,000 (50%), for a total credit of $10,000 and a total income of $20,000.

A person who earned $30,000 would neither recieve credit nor pay tax. Income above $30,000 would be taxed (preferably at a flat rate).

This is just an example to illustrate the concept, and the actual numbers used would likely be different.

The major benefit to taxpayers would be a dramatic reduction in the size and cost of public welfare administration agencies. The bulk of the work performed by these agencies is to track the available grant programs and match recipients with such programs, which would be unnecessary with the uniformity of a credit system. This equates to a significant net savings of taxpayer monies over the current grant-based welfare system.

What about generational abuse? A solution for the generational abuse of welfare is to utilize a "work for welfare" system. Under such a scheme, persons who are not classifiable as "helpless" and who do not work could continue to recieve federal assistance- namely food stamps and HEAP- as a supplement to NIT credit, conditional to performing work within their capabilities. This provides an opportunity to obtain a public benefit from the payment of such monies. The labor could include a variety of tasks, such as cleaning of public buildings and parks, public garbage collection, preparation of government mailings ("envelope stuffing"), and so forth. Such work could be performed on a part-time basis. Since the work would be compensated labor- work performed in exchange for payment- any person would be free to refuse to perform the work, at the expense of loss of benefits, just as a person in public or private employment may refuse to perform work, at the expense of loss of their salary.

There would, of course, be daunting challenges to instituting this type of reform. The most significant challenge, as I see it, would be identifying the amount of federal monies recieved for joint programs, the required state contribution to federal joint programs, and the options for refusing or redirecting federal payments. A state can essentially distribute state-level welfare programs as it pleases. Making changes to the federal programs, however, would almost require a small miracle.

It must be noted that we do have a NIT credit of sorts in use already- the Earned Income Tax Credit (EITC). Unfortunately, it is very limited, and at current it is just another welfare benefit. In order for a NIT system to genuinely replace the welfare grant system, we'd have to convince enough well-intentioned but misguided liberal voters that it really is a better option.