The problem with the current structure of our safety net programs

All predominantly capitalist societies, in one form or another, have some type of safety net in place. The rationale for them are diverse, but nonetheless compelling. Most obvious is the safety net’s role in preventing citizens from experiencing the suffering of abject poverty, to the extent that their very survival is at stake. Besides this, safety nets play crucial roles in stabilizing the business cycle, reducing structural unemployment (arguably, by allowing people time to find jobs that best match their skill-sets), and boosting productivity by boosting citizen well-being.

America’s complicated web of social assistance programs also serve these crucial purposes, albeit oftentimes inefficiently and rather ineffectively. Multiple programs tend to overlap, and many are desperately under-funded and poorly designed. Yet arguably the most damaging aspect of America’s social safety model isn’t the public element; rather, its the usage of the private sector for purposes of social justice.

Take, for example, the current structure of our post-World War 2 healthcare system. Utilizing tax exemptions, the government essentially subsidizes employer-sponsored health coverage for employees, incentivizing employers and employees alike to obtain generous employer coverage. In other words, the government uses the private sector to achieve the goal of public health. The ACA worsens this via the “employer mandate”, forcing employers with 50 or more “full-time employees” to provide coverage to their employees or pay a penalty. Rather than ensuring skimpy but adequate government insurance for all citizens as a safety net baseline, the government uses the private sector to do its bidding so as to avoid the label of “government takeover of healthcare” and to give the appearance of limited government.

Arguably, the same might be said for the imposition of the minimum wage. Rather than guarantee its citizens a bare minimum financial safety net, it forces businesses to look after employee’s personal well-being themselves (which, obviously, one can make an argument that businesses looking out for their employees and not “taking advantage” of them is a good thing that is to be desired; but the point that the government seems to offload its responsibilities to its citizens by placing it on the shoulders of businesses shouldn’t be automatically ignored).

This (arguably, uniquely American) structure likely has many ill-effects. First, rightly or wrongly, it places the responsibility of minimum standards on institutions whose foremost goal is the achievement of profit (which is not a criticism; it is, rather, the natural aim of businesses) which, although oftentimes in alignment with the goal of worker well-being, is not always so, especially in industries with large quantities of lower-skilled labor. Second, this model inherently has rather large amounts of red tape imposed upon businesses that make it much more difficult to function efficiently and without liability. This can often create scenarios of costs vastly outweighing the benefits, hurting citizens more than it helps. Third, it is an incomplete safety net model, as many people are temporarily (or for longer periods of time) disenfranchised from the labor market, and therefore have little to no interaction with the businesses  the government attempts to use to achieve social goals.

None of this is to say there is zero need for internal regulation of businesses or that businesses can’t play a role in the social safety net. But we should consider the idea that there are many circumstances in which the government ought to play a role in provisioning social assistance that is entirely independent and separated from private business – both for the benefit of business, and the benefit of society as a whole. Right now, in my opinion, we have too much government manipulation of the private sector for social aims – and not so much to show for it.

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Achieving a “2020” Vision

I wouldn’t be surprised if people on the internet have already used this play on words, but seriously – why isn’t this a major campaign slogan yet? Even if the vision is inarticulate and 2020 has nothing to do with the objectives, it’s still a catchy phrase.

But I take it one step further by integrating it into a neat little tax plan. Specifically: 20% flat rate. $20,000 standard deduction. By 2020.  It’s that easy.

Here’s how my dream plan would work:

  • Repeal the current income tax code.  Replace with a 20% flat rate applied to all taxable income (including capital income).  This provision contains a lot of benefits, with some amendable drawbacks.  A flat 20% rate would be fair and efficient.  Everyone could calculate it (exactly 1/5 of their taxable income), and its simplicity would destroy the artificial need for tax-preparation services.  This saves the economy billions in both dollars & hours.  It is reasonably fair – proportionally, everyone pays the same, but the rich still pay more in absolute amounts.  It would not change the tax owed by those with capital income too much (already, the top rate on capital gains is around 20%).  Additionally, its simplicity is pro-poor, who often lack the resources for tax consultation services.  Granted, it would represent, in some ways, a “tax hike” for many lower and middle-income people (who previously had lower rates applied to their incomes).  But this can be at least partially (if not fully) offset by a much higher personal exemption and preservation/improvement of a few antipoverty tax-credits (see below).
  • Introduce a $20,000 personal exemption for all households, indexed to inflation.  Starting in 2020, this generous exemption amount would be fully phased in.  It essentially means that not a penny of every dollar up to $20,000 per year will have the income tax applied to it.  In this way, people at or near poverty would not see their tax burdens increased (for many, potentially decreased compared to the current system).  Indeed, it’s at least five times larger than the current personal exemption ($4,000) and provides complete relief to people whose income is nearly twice the poverty line ($11,770/year in 2015).  The exemption amount would be adjusted for non-real increases in income (e.g. inflation) on an annual basis, chained to the index of the candidate’s choice.  Such a high exemption amount should help pave the way for elimination (or near-elimination) of any deductions (especially itemized deductions, such as the mortgage interest deduction, which primarily benefits wealthy taxpayers).  Among the biggest benefits in the vision’s exemption provision is that it allows for some continued progressivity in the tax code.  For example, a person with $20,000 in annual income would pay 0% in income taxes ($20,000 total income – $20,000 exemption = $0 in taxable income * 20% = $0 in taxes = 0% of total income); in contrast, someone with an income of $100,000 would pay about 16% in income taxes ($100,000 total income – $20,000 exemption = $80,000 in taxable income * 20% = $16,000 in taxes = 16% of total income).  So, the effective tax rate is progressive (increases by income), but it is proportionally the same for everyone above $20,000.

And there you have it.  Those two elements – the 20% rate with the $20,000 personal exemption – form the 2020 in the plan.  Benefits, already described somewhat above, include:

  • Simple calculation
  • Elements of fairness (combo of progressivity and equal proportionality)
  • Would likely boost growth & efficiency of tax collections
  • Could very well boost economic growth
    • simple calculation = less time & resources devoted to calculation = higher productivity, savings
    • lower rates boost economic demand and/or supply

Drawbacks include an uncertain impact on the federal budget and the tax burden of the poor/middle class.  For the former, there is reason to think that this plan could well boost tax revenues (thereby helping to close the annual deficit).  The simple calculation of the tax could boost compliance, and the higher growth it could produce would mean higher incomes = more revenues.  Additionally, the elimination of many deductions and credits would save a ton of money; currently, federal tax expenditures total around $1 trillion per year.  As for the burden on the poor/middle class, this plan could entail the loss of several tax credits or deductions that currently benefit them.  To mitigate the impact, some of these credits/deductions could be maintained, but at the threat of making the plan less fiscally sustainable.  Additionally, the impact on those whose incomes are not high but fairly above the poverty line (e.g. those above $20,000, but not too far above) is concerning; it’s unclear whether the proposed tax plan would represent a sizable increase in their tax burden relative to the current system (despite the $20,000 exemption).  People will also scream that this is a tax cut for the rich (who face marginal tax rates of up to almost 40% in the highest income quintiles).  However, it’s important to remember that even the effective income tax rate of the richest in America usually comes in around 20%.  With the 20% rate applied to all of the income of the super-rich (except the first $20,000), their effective rate will basically be 20%.  And with the elimination of some of their favorite deductions and loopholes, it could even represent a tax hike for them.

For too long, our political system has been paralyzed by short-term thinking and an unhealthy attachment to everyday opinion polls.  Now more than ever is the time for policymakers to start projecting clear, attainable visions for the future, with workable frameworks.  When it comes to the tax code, this plan isn’t anywhere near perfect; not by a long shot.  But it’s a place for them to start.

 

 

 

The Endurance and Transformation of American Poverty

For the first time in several years, the September 2014 Census Bureau report on the state of poverty and income within the United States contained encouraging news: incomes were up (slightly), and the poverty rate was down (from 15.0% in 2012 to 14.5% in 2013). It appears that, 5 years since the resumption of economic growth following the Great Recession, growth is finally translating into improvements in basic social indicators. With the output gap (between real observed GDP and potential GDP) now down to around 4% (from a peak of just over 7% of GDP), and with U3 unemployment beginning to approach its estimated natural rate of around 4.5-5.5% (it reached 5.9% in September 2014), the relative bargaining power of workers is slowly but surely improving, allowing for upward pressure on wages and income to materialize.  Despite these improvements, however, poverty as defined by the government’s federal poverty rate remains at multi-generational highs, and is likely to remain elevated for several years to come.

Output Gap

Resources are not being used to their full potential in the US economy

Poverty rate

Poverty rate remains at multi-generational highs

US Unemployment rate nearing estimated "natural rate"

US Unemployment rate nearing estimated “natural rate”

 

This is depressing, but it fails to tell anywhere near the whole story.  First, we must come to terms with the fact that the actual existence of poverty is all relative, dependent on the constructed definition of the observer.  Since there will almost always be disparities in income (assuming the absence of a genuine proletarian revolution), then there will always be a class of peopled who are “in poverty”, even if their real incomes and living standards would historically have qualified them as middle class or higher.  As such, we can never really eliminate “poverty”, in the sense that that definition is relative and always transforming as absolute conditions shift.    Secondly, the poverty statistics we currently use are woefully simplistic.  Our main poverty metric is calculated based upon the food budget of a typical family using thresholds from 1955 – when the share of income dedicated to food was very different than it is today.  Furthermore, the current poverty thresholds and definitions also do not take into account many forms of governmental assistance (food stamps, Medicaid, etc.) in its calculation that would significantly reduce the number of people listed in poverty.  Perhaps most importantly, though, improvements in product quality and the introduction of new goods & services have zero impact on poverty statistics.  This is important – for though the overall discretionary purchasing power of people is being squeezed (as necessities like healthcare, education, etc. rise in cost), many consumer goods & services are not only far more affordable than they used to be but there is now a greater variety of goods with new qualities and capabilities.  Even as overall discretionary purchasing power is stagnating, quality and variety continue to rise, to the benefit of all consumers.  The stats don’t reflect any of this, hinting that the actual poverty rate might be overstated and that American well-being has continued to improve over time.

Of course, this is in no way diminishing the hardships that those labeled at or near poverty experience within this country.  Indeed, we still are not considering all the variables that impact American poverty.  While consumer goods & services become cheaper and better qualities & characteristics are developed, this comes at the cost of the termination of employment in many sectors, such as low-end manufacturing and various low-skill professions.  Theoretically, these workers could be retrained to perform more higher value-added tasks; in reality, the United States lags in post-secondary completion rates and overall educational quality (mostly at the primary level), making such transitions more difficult.  Additionally, the United States is not particularly generous in offering temporary assistance to those who are unemployed due to market forces (consider the example of the Trade Adjustment Assistance program).  Ironically, this skills shortage in the American labor force and the structural unemployment that results makes it more difficult for consumers to purchase these higher-quality lower-priced goods and services, leading to large imbalances and counteracting many of the benefits of these improved and emerging consumer options.

So, to sum up:

1) Poverty will always exist as long as there are disparities in income (desirable, to a point) and it is (like everything) a human construct.  This does not mean it stays the same; rather, it evolves as overall conditions evolve

2) American poverty metrics are far from giving any rational sense of the true state of poverty in America

3) There are indications that poverty is both less and more widespread than is thought, with positive and negative influences counteracting one another

Certainly, lowering the prevalence of absolute “poverty” would be desirable for society, and not just for the obvious benefit of those so labeled as “the impoverished”.  Greater inclusiveness and higher earnings power boosts the overall macro-economy (consumption, productivity, etc.) and helps to promote social cohesiveness.  But first, we have to acknowledge that not only are the current measurements of poverty severely flawed and in desperate need of an update, but we must accept that we will never completely eliminate relative “poverty”.  As long as it is a relative concept that is allowed to vary as conditions change, it will always be said to exist, even if it vastly different from what it was in earlier periods.  The fight against poverty is therefore a continuous process whose end goal is the indefinite improvement in the living standards.  To say we can ever “win” the War on Poverty is, I think, misleading; because to say we can ever win implies that there is a set limit to how much living standards can ever rise.  Once we accept these points, we can proceed to rethink our goals and proceed to make genuine progress in improving American well-being.