WASHINGTON, March 20 (UPI) -- The impact of taxes, coupled with the loss of government benefits as income increases, creates a disincentive for welfare recipients to seek employment, according to a new study from a Dallas think tank.
"What the study shows is the very high marginal taxes that everyone, especially the poor, are paying," Laurence J. Kotlikoff, chairman of the department of economics at Boston University and co-author of the study, told United Press International.
"The poor are paying the highest marginal taxes (the amount of tax paid on every additional dollar of income) because when they go to work they loose the government benefits they would get if they didn't work at all," said Kotlikoff. "For the poor that is a bigger share of what they would earn (over their lifetime)."
The paper, "Does it Pay to Work?" was recently published by the conservative National Center for Policy Analysis, a free-market oriented think tank. The National Bureau of Economic Research in Boston also released a version of the paper last August.
The study is based on an economic model of a two-income couple and calculations about the economic consequences of their employment over a lifetime. The authors found that Americans across the income spectrum face a net lifetime marginal tax rate of greater than 50 percent. This means that for every dollar earned, Americans will lose more than 50 cents to taxes and lost government welfare benefits.
The poorest Americans -- who are eligible for welfare -- face the highest rates because of the loss of government benefits they would receive if they received welfare.
For example, the researchers calculated that a couple with two children could expect $489,100 in lifetime benefits from the government if they never work. However, if both spouses are working full-time and each is earning about $16,000 a year, they lose Medicaid and other welfare benefits because their income pushes them past thresholds to qualify.
The analysts calculated that these losses amount to two-thirds of the couple's possible income over their entire life, and concluded that this creates a disincentive to work.
They add that at the low end of the income scale, the disincentives to work are even greater when comparing part-time with full-time work. A minimum wage-earning couple that moves from part-time work to full-time work was found to lose 97 cents out of every extra dollar earned.
Daniel J. Mitchell, a senior fellow at the conservative Heritage Foundation, said that the analysis is sound.
"The combination of the welfare system and the fact that people get a tax hit makes it very unappealing to work," he told UPI.
"High tax rates and welfare benefits discourage productive behavior and that is bad for the economy."
Henry J. Aaron, a senior fellow in economic studies at the liberal-centrist Brookings Institution, agreed that welfare and taxes do combine to produce a disincentive to work among the poor.
"This has been well understood for 35 years at a minimum," said Aaron. "There is a mathematical equation that is inescapable."
There are three often-cited solutions to this dilemma, all of which create significant problems.
One is to cut federal programs for the poor. But critics say this approach is unacceptable because it fails to address the needs of the poor.
Another is to slow the rate of benefit reduction as incomes rise. This would be extremely costly and expand the reach of government assistance higher up the income scale.
Mitchell and other supply-side economists favor the third approach despite the fact that it has some problems. They believe the dilemma should be addressed through a reduction of welfare benefits along with an accompanying reduction in tax rates.
"You want work to be a lot more attractive than welfare," said Mitchell. "That means you have to reduce the tax burden and reduce government benefits."
Aaron traced the debate over this problem back 300 years to the English Poor Laws. These statutes placed those who believed that society should help the poor at odds with those who believe community efforts to help the poor bred sloth.
"There are real issues on both sides and I don't mean to scorn either position because there is truth in both," said Aaron.
"Social policy over the last 300 years has been about trying to find an appropriate balance between these two half-truths."
He said policy-makers must be careful to avoid the trap of believing that these data reinforce arguments for cutting taxes and benefits. The proper focus, he says, should be on how the design of social programs minimizes the disincentive to work, because the combination of government welfare and taxes will always create some form of economic distortion.
Aaron pointed to the 1996 welfare reforms and the Earned Income Tax Credit as examples of recent policies that have minimized the disincentive to work. Leonard Burman, an economist and senior fellow at the liberal-leaning Urban Institute, also said the 1996 reforms, known as Temporary Assistance to Needy Families, have reduced the disincentive to work.
"There are time limitations on TANF (five years of receiving benefits) and there are also work requirements," he said. "You can't get it if you are able-bodied and choose not to work."
One White House official told UPI that despite the lukewarm reception the president's economic plan has received in Congress this year, the administration remains committed to permanently extending the marginal tax reductions enacted in his 2001 tax cut package.
The administration's fiscal 2004 budget proposed this at an estimated cost of $287 billion. Proponents say the cuts promote economic expansion by improving incentives to work and save.
Also, some impact could be felt from congressional reauthorization of the TANF act. The White House and key Republicans in Congress remain committed to toughening the work requirements under the program.
At the same time, budget crunches at the state level are expected by many to result in funding cuts for some welfare programs. This would make working more difficult for many poor Americans who are unable to afford daycare on their low incomes.
Burman, who is also a research professor at the Public Policy Institute at Georgetown University, said his views of policy proposals to cut taxes and welfare benefits are "unprintable."
"We are a rich country," he said. "If we can't help the least well-off people feed and clothe their families adequately we are pretty pathetic."
Kotlikoff agreed that cutting taxes or welfare benefits raises difficult problems.
"The current administration cut taxes dramatically and wants to cut them again without reducing spending," said Kotlikoff. "We are in a situation where we have future generations facing enough liability with Social Security and Medicare."
Nevertheless, he does not support cutting welfare benefits.
"We are not treating the poor all that generously, given the government benefits being given to middle class and elderly people," said Kotlikoff.
