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Davis Opening Statement: Joint Hearing on How Welfare and Tax Benefits Can Discourage Work

June 27, 2012

June 27, 2012
(Remarks as Prepared)

Today’s joint hearing is on disincentives to work built into current welfare and tax credit programs in the U.S.  

As we have already heard from Iain Duncan Smith, the Secretary of State for Work and Pensions in the United Kingdom, other countries are wrestling with these same issues. Secretary Duncan Smith’s presentation, as well as the testimony of our witnesses today, will help us as we consider making changes on this side of the Atlantic as well.

Two weeks ago, when President Obama spoke in Cleveland, Ohio on the state of the economy, he talked about his vision for how we need to provide “ladders of opportunities for folks who aren’t yet in the middle class.”  Today we will consider whether the multitude of current welfare and tax credit programs create effective ladders of opportunity, or are missing important rungs by effectively discouraging work and higher earnings for millions of families.

To explain this complicated topic, one of our witnesses, Dr. Clifford Thies, describes an income “dead zone” in which a family earning $40,000 per year is barely better off financially than a family not working at all, once all welfare benefits and tax credits are taken into account:

Other experts, like Harvard economist Greg Mankiw, call this phenomenon a “poverty trap.”  He says the bottom line is, “If you are poor, the government is inadvertently ensuring that you have little incentive to try to improve your condition.”

What it really boils down to is this: When government benefits for low-income families end as their work and earnings increase, that discourages more work and earnings.  The more benefits the government provides, the stronger the disincentive to work harder and earn more.

Ironically, many of the programs in question, like TANF and child care in our human resources jurisdiction, are designed to alleviate poverty while promoting work.  However, especially when combined with refundable tax credits that have grown rapidly in recent years, the collective weight of these programs can have an unintended side effect of discouraging harder work and higher earnings.  

This is not a new problem, but it is about to get a lot worse.  The massive new health insurance subsidies under the Democrats’ health care reform will expand this problem, and extend its reach well into the middle class, affecting families earning up to $90,000 for a family of four.  According to the National Center for Policy Analysis, the exchange subsidies under ObamaCare will yield “marginal tax rates over a broad range of lower middle-incomes that are always above 55 percent, usually above 60 percent, and sometimes above 70 percent.”

Those are some staggering numbers.  But as we will learn, for some people the implicit marginal tax rate can actually exceed 100 percent.  That means the family is actually worse off when their work and earnings increase.  Here’s how another Harvard economist, Jeff Liebman –  an advisor to President Obama – describes the story of one woman who went from earning $25,000 a year to $35,000, and could not make ends meet any more as a result:

“She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance.  Her rent associated with her section 8 voucher went up by 30% because of the income gain (which is the rule).  She lost the ($280 a month) subsidized childcare voucher she had for after-school care for her child.  She lost around $1,600 a year of the EITC. She paid payroll tax on the additional income.  Finally, the new job was in Boston, and she lived in a suburb.  So now she has $300 a month of additional gas and parking charges.  She asked me if she should go back to earning $25,000.  He estimated that the government imposed a 130% implicit marginal tax rate on her.”

We look forward to all of our witnesses’ testimony today, including on possible solutions so Americans have more – not less – incentive to work and support their families.