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78–761 2013

HOW WELFARE AND TAX BENEFITS 

CAN DISCOURAGE WORK 

JOINT HEARING 

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES 

AND 

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JUNE 27, 2012

Serial No. 112–HR14/SRM08 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

TOM REED, New York 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

JENNIFER SAFAVIAN, Staff Director 

JANICE MAYS, Minority Chief Cousel 

SUBCOMMITTEE ON HUMAN RESOURCES 

GEOFF DAVIS, Kentucky, Chairman 

ERIK PAULSEN, Minnesota 

RICK BERG, North Dakota 

TOM REED, New York 

TOM PRICE, Georgia 

DIANE BLACK, Tennessee 

CHARLES W. BOUSTANY, JR., Louisiana 

LLOYD DOGGETT, Texas 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

JOSEPH CROWLEY, New York 

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

PATRICK J. TIBERI, Ohio, Chairman 

PETER J. ROSKAM, Illinois 

ERIK PAULSEN, Minnesota 

RICK BERG, North Dakota 

CHARLES W. BOUSTANY, JR., Louisiana 

KENNY MARCHANT, Texas 

JIM GERLACH, Pennsylvania 

RICHARD E. NEAL, Massachusetts 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

SHELLEY BERKLEY, Nevada 


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C O N T E N T S 

Page 

Advisory of June 27, 2012, announcing the hearing ............................................. 2 

WITNESSES 

Panel 1: 

The Right Hon. Iain Duncan Smith, Secretary of State for Work and Pensions, United Kingdom, testimony ...................................................................... 4 

Panel 2: 

Representative Gwen Moore (D–WI), testimony ................................................... 28 

Panel 3: 

Dr. Clifford Thies, Ph.D., Professor of Economics and Finance, Shenandoah 

University, testimony .......................................................................................... 38 

Dr. Eugene Steuerle, Ph.D., Senior Fellow, The Urban Institute, testimony .... 49 

Dr. Jared Bernstein, Ph.D., Senior Fellow, Center on Budget and Policy 

Priorities, testimony ............................................................................................. 64 

Dr. Ike Brannon, Ph.D., Director of Economic Policy and Congressional Relations, American Action Forum, testimony ......................................................... 78 

SUBMISSIONS FOR THE RECORD 

Anne Stevenson ....................................................................................................... 95 

Center for Fiscal Equity .......................................................................................... 112 

Cherie Boeneman ..................................................................................................... 115 

CLASP ...................................................................................................................... 118

Recapturing the Vision ............................................................................................ 128 


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(1) 

HOW WELFARE AND TAX BENEFITS 

CAN DISCOURAGE WORK 

WEDNESDAY, JUNE 27, 2012 

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON HUMAN RESOURCES,

SUBCOMMITTEE ON SELECT REVENUE MEASURES, 

Washington, DC. 

The subcommittees met, pursuant to call, at 12:15 p.m., in Room 

1100, Longworth House Office Building, the Honorable Geoff Davis 

[Chairman of the Subcommittee on Human Resources] presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

Davis and Tiberi Announce Hearing on How 

Welfare and Tax Benefits Can Discourage Work 

*UPDATE: NEW TIME* 

Wednesday, June 27, 2012 

*UPDATE: NEW TIME* 

Congressman Geoff Davis (R–KY), Chairman of the Subcommittee on Human Resources of the Committee on Ways and Means, and Congressman Pat Tiberi (R– 

OH), Chairman of the Subcommittee on Select Revenue Measures of the Committee 

on Ways and Means, today announced that the Subcommittees will hold a joint 

hearing on how certain welfare and tax programs can discourage work as a result 

of the high effective marginal tax rates they impose on certain populations. The 

hearing will take place on Wednesday, June 27, 2012, in 1100 Longworth 

House Office Building immediately following the full committee markup 

that begins at 10:00 AM. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. Witnesses will include experts who have 

studied how increased earnings may not yield additional income for families due to 

the complex interaction between earnings and federal tax and transfer programs. 

However, any individual or organization not scheduled for an oral appearance may 

submit a written statement for consideration by the Committee and for inclusion in 

the printed record of the hearing. 

BACKGROUND: 

Low-income families often receive benefits from multiple welfare and tax programs, such as assistance with food, housing, and day care costs, help with medical 

costs, or cash payments to supplement earnings from work. While these programs 

often support and encourage employment, program ‘‘phase-out rules’’—especially 

when combined across multiple programs—mean certain households may not be significantly better off if they earn more from work. 

Economists have studied the interaction between earnings and benefits under various programs by focusing on what are called ‘‘implicit marginal tax rates,’’ which 

refers to the portion of an additional dollar of earnings effectively lost due to rising 

taxes and benefit reductions. Due to implicit marginal tax rates that can approach 

or even exceed 100 percent when individuals receive benefits from multiple programs, it is possible that some individuals will be little better off financially—and 

in some cases even worse off—if their earnings increase. 

This problem has been exacerbated by the addition of new programs and the expansion of existing programs over time. For example, the expansion of the Earned 

Income Tax Credit over time has allowed more households to claim this credit and 

has increased the benefit received by many households. However, these expansions 

also mean that more families face a higher implicit marginal tax rate as their earnings increase and the credit phases out. In addition, the Patient Protection and Affordable Care Act created a new subsidy to purchase health insurance that phases 

out as household income increases. As the phase-out of these healthcare subsidies 

interacts with other welfare and tax programs for families, the return from working 

will be even lower than before and individuals who increase their earnings may 

keep even less of their hard-earned money in the future. 

In announcing the hearing, Chairman Davis said, ‘‘Americans should believe 

with confidence that hard work pays off. However, because of today’s many 

welfare and tax programs for low-income families, it is not clear that work 

pays—and in fact additional work may not actually result in additional income. Federal programs must send a clear message that work is always 

better than welfare. This hearing will allow us to explore problems with 

the current system and determine how we can ensure these programs can 


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be improved to encourage families to increase their work and self-reliance.’’ 

Chairman Tiberi said, ‘‘In recent years, Congress has increasingly used the 

Tax Code to provide means-tested benefits to low- and moderate-income 

Americans. These programs, however, are often flawed, imposing high marginal tax rates on those in the phase-out ranges as well as steep marriage 

penalties—thus discouraging both work and marriage. As part of comprehensive tax reform, this hearing will help the Ways and Means Committee reform these tax programs to make sure they reward work and 

honor marriage.’’ 

FOCUS OF THE HEARING: 

This hearing will focus on the interaction of various welfare and tax credit programs and how concurrent receipt of benefits from those programs can create perverse incentives that discourage work and higher earnings. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearing for which you 

would like to submit, and click on the link entitled, ‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance 

with the formatting requirements listed below, by the close of business on 

Wednesday, July 11, 2012. Finally, please note that due to the change in House 

mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House 

Office Buildings. For questions, or if you encounter technical problems, please call 

(202) 225–1721 or (202) 225–3625. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit materials 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. Note: All Committee advisories and news releases are available on the World Wide Web at http:

f 

//www.waysandmeans.house.gov/. 


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Chairman DAVIS. Good morning, everybody. Welcome to today’s 

joint review of how welfare and tax benefits can discourage work. 

Before we begin our regular session today with opening statements, 

I would like to recognize a very special guest who is in Washington, 

D.C., the Right Honourable Iain Duncan Smith, Member of Parliament, the Secretary of State for Work and Pensions for the 

United Kingdom. We are truly appreciative that he has been able 

to adjust his schedule to join us today for a few minutes. The 

United Kingdom is currently undertaking significant reforms to its 

welfare and tax benefit programs to streamline their administration and reduce marginal tax rates so that work always pays. 

This is an issue that I have cared about for many years. We have 

been watching many of the developments in Great Britain closely, 

as these reforms have been undertaken in what appears to be a 

very bipartisan manner, and he has graciously agreed to share 

with us information about these recent reforms in the U.K., which 

will be useful as we consider the effectiveness of our own programs. 

Mr. Secretary, we did a little digging through our archives, and 

even with the help of the experts at the Congressional Research 

Service we are not able to find another example of a sitting Foreign 

Secretary appearing before the Ways and Means Committee on 

nontrade matters, so this is actually a historic occasion. We are 

honored to have you join us today. And please proceed with your 

statement. 

STATEMENT OF THE RIGHT HONOURABLE IAIN DUNCAN 

SMITH, SECRETARY OF STATE FOR WORK AND PENSIONS, 

UNITED KINGDOM 

Mr. SMITH. Mr. Chairman, thank you very much indeed. I must 

say it is a pleasure to be here. It is also rather satisfying in this 

surrounding. I am used to doing my answering across the dispatch 

box in the House of Commons, being screamed and shouted at by 

most of the others at the other side within almost arm’s reach. So 

I am anticipating that not to happen here necessarily, but if it does 

I hope I will be able to handle it. 

Can I just say that what we are trying to do in the U.K. is much 

the same as anywhere else, is trying to figure out what has been 

going on with a system that was set out to actually try and help 

people to become independent but actually traps them now in a 

form of dependency. 

We saw spending on welfare increasingly rise by 39 or 40 percent 

under the last government at a time prior to the recession. So, during a period of growth, the economy was growing but we were also 

seeing welfare grow, which does seem to be rather peculiar. And 

what we saw here was a growing level of people who apparently 

just didn’t work, a very large number who regardless of whether 

the economy was growing or not were out of the environment of 

work. That, to my mind, causes wider problems we must recognize. 

It is not enough just to take people off benefits. Anybody can do 

that. The question you have is where do those costs then go, because they don’t disappear. By that I mean, for example, even if 

you don’t pay people benefits, you end up with a kind of creative 

underclass, and that underclass then becomes very expensive in 


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other ways, in policing. We saw our policing bill rise by over 50 

percent during the course of the last government. 

Your health, this is where most of your serious health concerns 

exist amongst the same underclass. They are the biggest drawer on 

health care and they are also the biggest, the most likely group to 

be almost recording every kind of sickness you can possibly imagine. So health care bills are highest. And last of all, education is 

deeply disrupted by people from that underclass who themselves 

have no expectation or anticipation of proceeding. So their knock 

on, notwithstanding the cost in taxation, therefore is huge to all of 

us. And so handling and changing this is not just about reducing 

the welfare bill, which of course is critical, it is also about reducing 

those other costs that come as a result of having a group like this. 

And so what we have chosen to do is to look at, first of all, one, 

the entrapment principle. That is to say the welfare system that 

you set up: does it free people or does it trap them? And what we 

believe is the system that we have inherited is so complex with so 

many different benefits, all being withdrawn from people as they 

go into work at different rates, some are 100 percent, some are 60 

percent, some are 70 percent, as they go up the hours towards full 

time work, and some are gross, some are net, it is almost impossible for the benefit recipients to understand or calculate exactly 

how much they would have in their pocket after the withdrawal. 

And in some cases they are losing, in the case of some lone parents, 

up to 95–96 pence in every pound. So that basically means they get 

about 4 or 5 pence out of every pound they work for every extra 

hour, not much of an incentive and often very difficult for them to 

understand that they are better off or worse off. And they assume 

hugely that they are worse off, it is not worth the effort, and so 

they don’t make the effort. 

So the system itself doesn’t incentivize people to do the right 

thing, it actually does the opposite. And we will see most of the 

money under the last government was transferred not to people in 

work, although it was not intended, but mostly to people out of 

work, particularly large families living in larger houses, often not 

two couple families. So a lot of the shift of money made it worse 

because if you receive more money, you are less likely to go to 

work. So we created a thing called the universal credit, which 

starts next year. That merges all the back-to-work benefits into one 

benefit, and it takes them away at one single rate every hour. So 

every hour you work, you will come off, in our case it is 65 percent. 

Now, that is a line that can be adjusted according to the government. They make that decision. It is about investing money or 

withdrawing money; it is as simple as that, rather like taxation. So 

that simplifies your understanding of benefits. 

The universal credit is critical in two regards. One, the marginal 

reduction rates are dealt with by that single, flat taper. The other 

bit, which is the participation tax rate, is the moment you enter 

work, to my mind that is the critical bit. So people who have been 

out of work generationally, you need to get them across that 

threshold, number one. After that, keeping them in work, and I 

will come back to that, is critical as well, but get them across. Keep 

that cliff edge very low indeed so going across is very easy. So that 

decision economically makes sense. The universal credit is basically 


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about that, simplification and making work. Always pays to be in 

work, not on benefits. So you are better off in work always than 

on benefits. 

Secondly, we have a work program, which is de-risking government, but actually making sure that it does what we need it to do. 

So we hand to the private and the voluntary sector those who are 

being difficult to get into work. I don’t care what they do, it is not 

my problem. I simply pay them only after they have got somebody 

into work. So it is a payment by result system. And there we actually pay them 6 months after somebody has been in work and come 

off the benefit register. They don’t receive their money for 6 months 

so they need to keep them in work, which is really critical. It is 

easy to get somebody into work; it is very difficult to hold them in 

work. You need to hold them in work because only then do they 

get what I call the ‘‘work habit.’’ Once they got the work habit they 

will then satisfy that thereafter. They will make sure they understand work. So 6 months, 9 months, a year, even up to 18 months 

in the case of the most disabled. So in other words, the rewards 

lie further down the chain for them, which means they need to 

work with people even after they have got them into work. And the 

lack of risk is because basically they only get paid after they do the 

job, not before. And we calculate that by how much money we save 

on benefits and therefore how much money we can pay them. It is 

a straight crossover in money. 

The third area of our reforms, which is important, is looking at 

sickness benefits and disability. We had a massive problem that a 

huge number of people were trapped really on two benefits, particularly one, a sickness benefit, called incapacity benefit. If you 

are on it, you are ineligible for work. We had some people on these 

not seen by anybody for up to 10 years. And of course if you are 

on a benefit like that you are not working. It doesn’t take the 

brains of an incredibly intelligent individual to understand that if 

you had a problem you certainly have a big problem 10 years later, 

so you get worse not better. So what we have now done is we are 

reviewing all of those and moving them onto a new benefit or moving them back to work. And the assessment is around about 10,000 

or 11,000 cases a week. We are doing the stock right now, and we 

are finding something on the order of over a third of those who are 

assessing that were are not fit for work are now going straight 

back to work and they will go to a work program. Just a bit more 

than that are going to the middle bit of this new benefit, which is 

you will be able to get to work but you have some transitory problems. You might be in cancer treatment or something like that. But 

the expectation is you will be available for work. 

And the third group of roughly about the same, about a third, 

is a group that actually there is no expectation of work because you 

really are genuinely too sick. 

And then of course we will keep assessing people once they are 

on that other benefit every year to make sure that if they are getting better now so we can move them back to work, whereas before 

we never had a constant check on them. And the other one is a disability benefit, which is about your mobility and your care. We are 

reforming that because it got too wide, mostly through judicial review, of course where the judges have sat on the appeals and widVerDate Mar 15 2010 01:48 Apr 03, 2013 Jkt 078761 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\78761.XXX GPO1 PsN: 78761

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ened the case law. So we are now tightening that back up now to 

make sure the benefit goes to those who really need the money. 

And that is not work related. So in other words you can receive 

that in or out of work. So now we can work with people to make 

sure that they get back to work and the most disabled are able to 

work, which is after all what they really want. They don’t want to 

be trapped out of work. 

That is it in principle. There are a lot of other things, but those 

are the main things that we are doing. 

[The prepared statement of Mr. Smith follows:] 


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a proportion of the workforce. The UK too easily believed a modern western 

economy couldn't compete in manufacturing. 

However look at Germany. Their record shows that after their labour market 

reforms in the first decade of the millennium, their productivity rose again. 

Over the same period, Germany's manufacturing has grown such that it has 

managed to maintain a much higher 22% share of its economic outpul. 

Equally, although the USA experienced a decline in terms of manufacturing as 

a proportion of the national output, in the last decade the sector grew by some 

23% from around $1,500 billion to $1,800 billion. 

The second important reason was that the last Government lost control of 

welfare spending. They sought to micromanage the system and the result was 

a benefit system of such fiendish complexity that too many chose a life on 

benefits over work. This was compounded by a lack of conditionality so far too 

many were able to sit on benefits unchallenged, and was made worse by the 

pursuit of a poverty target which cost more and more just to stand still. The 

safety net had become a cage. 

The welfare challenge 

Take some of the figures we were confronted with when we came into office: 

5 million people - some 12% of the working age population - on out of work 

benefits, 1 million of them stuck there for a decade or more. 1 in every 5 UK 

households had no one working, and almost 2 million children were growing 

up in workless families. This was the cultural challenge we faced -

entrenched and intergenerational worklessness and welfare dependency. 

This problem was not just a product of the recession, as some might have us 

believe. In the UK, we had over 4 million people - 11 % of the working age 

population - on out of work benefits throughout the years of growth. 

Under the previous Government employment rose by some 2.5 million, yet 

more than half of that was accounted for by foreign nationals. To be clear, this 

is not a point about immigration, rather the facts serve to remind us that we 

had a huge challenge with our workforce at home. 

Put simply, it was a question of supply and demand. Large numbers were on 

out of work benefits, yet many were unwilling or unable to take advantage of 

the job opportunities being created. This is an issue that I understand may 

have some relevance in the USA too, where according to the OEeD, the 

inactivity rate actually increased by 2 percentage pOints from 22.6% to 24.6% 

in the decade between 1998 and 2008. 

So what we need to achieve in the coming years is not political and 

technocratic welfare reform, but internal and external cultural change. 

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To explain what I mean let me start by taking you back to the early 1940s, 

when William Beveridge was laying out his vision for the modern welfare 

state. 

A great economist and social reformer, appointed as Under-Secretary in the 

Ministry of Labour during the war years, Beveridge was driven by a desire to 

slay the 'five giants' that he identified in society at the time: want, disease, 

ignorance, squalor and idleness. 

But he was also clear about the risks that were attached to this laudable 

cause. He warned that: 

"The danger of providing benefits, which are both adequate in amount 

and indefinite in duration, is that men as creatures who adapt 

themselves to circumstances, may settle down to them." 

And he was clear that the system should not be allowed to "stifle incentive, 

opportunity, or responsibility". 

In other words, Beveridge was focussed on the kind of culture that the welfare 

system could underpin. Would it be one that fostered a society where people 

took responsibility for themselves and their families, and treated welfare as a 

temporary safety net in times of need, or one that conditioned people to grow 

dependent on state support, and in turn treat it as a long-term crutch? His fear 

was that if the balance was wrong it would lead to the creation of a semipermanent underclass. 

Beveridge's warning went unheeded and our welfare system received little 

more than a patch-up job, under an incredibly reactive process. A new 

challenge would emerge in the system and Government would respond by 

tweaking things, adding new rules, new supplements, even new benefits. But 

it was all built on a creaking edifice, and the result was a system of monstrous 

complexity. More than 30 different benefits, complicated by additions within 

each benefit. 

This was then compounded by the fact that when an individual started work 

part time, they found it impossible to calculate if they would be better off or 

not. Some of their benefits were withdrawn at 40% as they moved into work, 

some at 65%, some at 100%; some net, some gross; some only available at 

16 hours, some at 24, some at 30. 

Feed all of that into a complicated computer system - because no normal 

person can calculate what it all means for their income - and something 

extremely damaging happens. People on low wages lose up to 96 pence in 

every pound they earn as they increase their hours in work. In other words for 

every extra pound they earn, 4 pence goes in their pocket and the rest goes 

back to the Government in tax and benefit withdrawals. 

So suddenly you have a system that is incomprehensible to those that use it, 

except for one thing that seems clear - it's not worth the risk of working. 

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Debt and consumption 

As a result under the last Government, the amount spent on welfare was 

remarkable, increasing by 40% in real terms even in a decade of 

unprecedented growth and rising employment. In 2009/10 alone, around £90 

billion was paid out in benefit payments to working age people and their 

families - about the same as the entire education budget. Yet even as money 

was poured in, scant attention was paid to the results the other end. 

Take the example of child poverty, where in the years from 2003/04 to 2010, 

there was an almost £30 billion increase in welfare spending and £171 billion 

paid out in tax credits - that's to say benefits for those in work but on a low 

income. Yet over the same period, there was no actual reduction in child 

poverty. Labour spent all this just to keep the poverty rate flat. 

So too in healthcare, in crime, in education, where Government paid out to 

manage and maintain social problems, rather than tackling them at their root. 

This is a culture marked by an obsession with inputs - with pouring money 

into social programmes - so that governments are seen to be doing 

something. Of course big spending is attractive because it brings big media 

headlines. But my concern is that no one asks what will come out at the other 

end, in terms of what impact the spending will have on people's lives. 

So we are now faced with a fundamental challenge. Levels of social 

breakdown high and rising; millions of people stuck out of work on benefits; 

millions not saving nearly enough for their retirement; and politicians - of all 

hues - addicted to spending levels as a measurement of success, rather than 

life change as a measurement of success. 

These are areas ripe for reform, but how do you reform when there is no 

money? The answer - you change the way you reform. Not just cheeseslicing, but recalibrating whole systems so that you change behaviours, and 

change the culture that allowed spending to get out of control in the first place. 

This is absolutely critical. When welfare spending balloons, as it has done, the 

temptation for successive governments has been to squeeze it back down 

again. But rather like a balloon, when you squeeze it at one end it will tend to 

grow at the other. 

So whilst savings must be made, they must also be sustainable. Otherwise, 

once the public finances are back in order, and the economy grows again, so 

the bidding war starts once more. Lobby groups put pressure on government 

to spend more. Governrnent in turn dip its hands into taxpayer pockets to buy 

media headlines, and the vicious cycle continues. 

Welfare reform 

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Structural change, leading to cultural change, is the key to this dilemma. In 

other words you have to tackle the demand itself, changing the effects of 

welfare by changing the incentives in the system. 

My belief is that everyone in the welfare system should be on a journey - it 

should be taking thern somewhere, helping them move from dependence to 

independence. 

So if you are looking for work, the system should make work worthwhile and it 

should both support and encourage you. If you are a lone parent the system 

should support you with your caring responsibilities while your child is young, 

but it should also keep you in touch with the world of work and ensure at the 

earliest opportunity that you move back to the world of work. What we will not 

do is put anyone on benefits and then forget about them, as was so frequently 

the case for those on sickness benefits in the UK. 

But if a journey for people is our purpose, we have to recognise that our 

current welfare system is not fit to provide it. That's why we are reforming it in 

a way that brings welfare spending back under control, whilst changing lives 

at the same time. 

Universal Credit and the Work Programme 

But as we reform, we also have to recognise a simple fact. Not everyone is 

starting from the same place. There is no point assuming, for example, that 

everyone understands the intrinsic benefits of work, the feelings of self-worth, 

or the opportunity to build self-esteem. If you are dealing with someone from a 

family where no one has ever held work, or no one in their circle of peers has 

ever held work, there is no point in simply lecturing them about the moral 

purpose of work. 

What you must tackle is the biggest de motivating factor that many people face 

- the fact that the complexity of the system and the way it is set up creates 

the clear perception that work simply does not pay. 

Thus, after generations in key communities, worklessness has become 

ingrained into everyday life. The cultural pressure to conform to this lifestyle is 

enormous, underscored by the easy perception that taking a job is a mug's 

game. It is this factor which can stop someone's journey back to work in its 

tracks. 

Changing this is what the Universal Credit and the Work Programme are all 

about. 

Universal Credit is a new system we are introducing from next year, which will 

replace all work-related benefits and tax credits with a single, simple, 

payment. It will be withdrawn at a single, constant rate, so that people know 

exactly how much better off they will be for each extra hour they work. This 

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rate will be significantly lower than the current average, meaning that work will 

pay for everyone, and at each and every hour. 

This requires investment up front and we are spending some £2 billion to get 

it right. But if we do so, and start reaping the effects of cultural change, it will 

save government huge amounts down the line, as workless households 

become working households. 

But Universal Credit alone is not enough. When you are dealing with people 

who are a long way from the workplace, who do not have many skills, and do 

not have the work habit, you need to provide a system that supports them and 

helps them to get work-ready. 

That's what we are doing with the Work Programme, and we have asked 

some of the best organisations in the private and voluntary sectors to deliver it 

for us. 

They are tasked with getting people back to work, and then helping to keep 

them there. They are given complete freedom to deliver support, without 

Government dictating what they must do, through what we call the 'black box' 

That means trusting that these organisations are best placed to know what 

works 

Universal Credit and the Work Programme are two sides of the same coin. 

Either without the other would not have the same impact, but together they 

will become formidable tools for taking people on this journey. 

Through the two, we are creating a contract with clear obligations. Each 

unemployed person will understand that we support them to find work and 

ensure they are better off in work than they are on benefits. In return, they are 

required to be permanently work ready, attend interviews and try to get work 

and take work when it is offered. Failure to comply and we take their benefit 

away - for 3 months the first time, 6 months the second time and 3 years the 

third time. 

The wider reform agenda 

More than that, we are capping the total amount an individual can earn whilst 

on benefits so that even if different benefits add up to more than the cap, they 

don't get it. Yet this isn't about punishing people, rather it is about removing a 

major stumbling block as people try to move back to work 

Under the system we inherited, some people with large families on Housing 

Benefit were living in areas with incredibly high rents. It was actually possible 

for families to claim over £100,000 a year for help with housing costs in 

certain cases, and on top of that they received other benefits. Well from next 

year this will no longer be the case. No matter how the different benefits add 

up, claimants will not receive more than average earnings. 

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We are also reforming the culture that allowed people to avoid work by 

languishing on a sickness benefit for years - almost 1 million for a decade or 

more. 

Large numbers are being checked - of some 130,000 initial outcomes, 37% 

were found fit for work and some 34% were placed in what we call the 'workrelated activity group', ready to move back to work when their condition 

improves. So more than 70% who once would have languished unseen on a 

sickness benefit, will now be engaged on a journey to independence through 

work. 

We are plotting out a journey in our pensions system as well, except here we 

are looking to set people on a journey to a decent and sustainable retirement 

whilst also reducing the pressure on the public purse. 

We are pushing ahead with plans to automatically enrol all of those without 

pension coverage into pension schemes to make saving the norm, and we are 

making progress with plans to radically simplify the State Pension system -

creating a 'single tier' pension which is set above the level of the means-test, 

so that people know that it makes sense to save. 

Together with raising the retirement age alongside rising life expectancy 

which alone will save around £90 billion, these measures are set to deliver 

enormous savings to the exchequer in due course. 

Cultural change 

This is not just welfare reform, rather cultural change. The end of the 

something for nothing entrapment and the renewal of a welfare system that 

should be seen as a means of temporary support, the beginning of a journey 

back from dependence to independence. 

We are already seeing positive signs that this cultural change is beginning to 

happen. Though the overall economic outlook is still poor, the jobs figures for 

the last 3 consecutive months in the UK showed some encouraging signs of 

stability, particularly stronger than expected growth in jobs from the private 

sector. 

Latest statistics show that even with a big fall in public sector employment, 

private sector employment was up 205,000 on this quarter. There are now 

419,000 more people in work than in there were when this Government came 

into power in 2010. 

What's more, the total number on out-of-work benefits is down by 80,000 in 

the same period because of the changes we have introduced to get more 

people looking for work and into the jobs market. We are reassessing 

claimants on old incapacity benefits at a rate of 10,000 people a week, and 

with a further reduction in the age limit for single parents with young children 

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claiming what we call 'income support', almost 100,000 lone parents have 

moved off inactive benefits since 2010. 

In this year, we have reduced the economic inactivity level to its lowest since 

1992, and we will get welfare inactivity down even further, as our other 

reforms start to bite. 

Just take the changes we are making to cap Housing Benefit. Research 

published this month shows that of those Housing Benefit claimants affected, 

a third said they would be looking for a job in future. 

This is what I mean by dynamic reform - creating a welfare culture that 

incentivises work and promotes independence over dependency. In other 

words, reform that is not just about the benefits system, but about social 

renewal, part of a wider vision for stable families, with educated children, 

growing up in areas of low crime. 

Government spending 

Yet there is one final piece to the puzzle. I have covered what I call external 

cultural change, change in society at large. But we must also achieve an 

internal cultural shift, changing the culture of government spending. 

It is here that I think we still have much work left to do. We have to reject the 

old focus on inputs - the old mantra which says that 'more spending equals 

good, less spending equals cuts ... which equals bad' - and open up a whole 

new dimension, one focussed solely on the impact that spending has on 

people's lives. That means changing not just how much we spend, but how 

we spend it. 

So let me return to the example of the Government's Work Programme, 

where we have been pioneering the use of payment by results. While 

supporting someone into work obviously has a cost attached, you find that 

cost is quickly outweighed by the reductions you can make to the welfare bill 

when you get someone back into work and paying tax. The key point is that 

we use these future savings to pay for the Work Programme now. 

We do that by putting the onus on the 18 Prime Providers who compete to 

deliver the Work Programme in different parts of the country. They raise the 

money to deliver the programme alongside their subcontractors; we then pay 

them when they deliver the results. That means first, getting people back into 

work. But from day one we've been clear that getting people into work on its 

own isn't enough. If people do not have 'the work habit' - in other words they 

are not used to the workplace, or convinced that working is right for themthe risk is that they will soon fall out of employment again. So the providers 

get the biggest payouts when they keep someone in work for 6 months, one 

year, 18 months, or up to two years in some cases. 

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Because we are paying for results we will only pay for what works, therefore 

hugely reducing the risk on the taxpayer, and we make sure that every pound 

is only being paid out because it has a positive impact on people's lives. 

A payment by results system works best when the timescales for success are 

short and the metrics relatively straightforward. But in addition to Payment by 

Results there are other areas as well. In particular, we are really trying to 

open up the social investment market. 

I see this as a huge opportunity to get much more private money working in 

pursuit of the social good. Historically it has been assumed that people could 

either be 'good citizens' and put their money into charitable works, whilst not 

expecting anything in return, or they could be 'profit maximisers', who invest 

their money in commercial ventures and have to forget about the social 

consequences. Social investment is a way of uniting the two - it is about 

saying to investors: 'You can use your money to have a positive impact on 

society, AND you can make a return.' 

But to get this investment you need to have programmes that are tested and 

accredited. That then allows you to create a social bond that people can 

invest money in. 

That is why we have we have agreed to establish an independent foundation 

that will accredit programmes of work and provide a rigorous assessment of 

their likely social returns. It's why we're testing a variety of cutting edge 

programmes through our Innovation Fund, which will help build the evidence 

base around social investment models, and it's why we have launched Big 

Society Capital, capitalised with £600 million, and tasked it with the sole 

mission of growing the social investment market. 

This market may still be in its infancy, but I believe it has huge potential. First, 

it has the potential to greatly increase the amount of funding available for 

social programmes by bringing in private investment money. 

Second, it brings a whole new level of discipline and rigour. Too often in the 

past good, proven programmes have been introduced by Government but 

haven't worked. 

This isn't necessarily due to a problem with the programme itself, rather it is 

because as the programme has trickled through the system bits have been 

added or subtracted, modified and changed, so that in many cases the 

programme has been neutered. 

Why? Because when Government care more about inputs than outcomes it 

doesn't have much interest in whether the programme actually works. Once it 

is underway the nature of the programme itself becomes largely irrelevant. 

But if the money follows the outcome - as it does with payment by results, or 

with social investment - we can bring a whole new level of fidelity to the way 

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f 

Chairman DAVIS. Thank you very much. I appreciate you sharing some of the challenges you are dealing with and we certainly 

are going to be dealing with in the very near future with addressing processes, and quite a bit of it is unknown. 

I mean, for me it is ironic having you here. I went to the British 

parachute school at RAF Brize Norton 30 years ago as a U.S. army 

paratrooper on an exchange. And one of the more interesting aspects was having to jump out of an old barrage balloon to find out 

if the parachute worked. It was the longest opening time I ever 

had. We are glad to watch you take the first jump so that we can 

learn from some of these reforms. 


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But as we face these challenges, unemployment rates in both our 

countries are elevated, fewer people are working or looking for 

work, there is increasing family breakdown that leads to some of 

the social problems and financial costs that you alluded to that you 

are dealing with in your own jurisdiction. And given these factors 

it is critical that we develop approaches to integrate our processes 

to more effectively serve people, an issue I have cared about having 

grown up in a single parent home and I was on a form of assistance as a child as well, not meeting my father until I had been in 

the Army for 7 years. I am very interested in how you bring people 

over or avoid this cliff of falling off when they want to go back to 

work and they find disincentives. 

I was wondering if you could elaborate for us on how your reforms are meant to address each of several issues; unemployment 

and work, family breakdown, and the need for budgetary discipline 

from a governmental perspective in terms of handling this, and I 

also understand that wage data is playing a key role in these reforms and I was wondering if you could comment briefly on how 

the wage and other data are being used to design and operate this 

new system. 

Mr. SMITH. Again, the reason was family breakdown. Family 

breakdown was the main reason why people found themselves in 

what we describe as poverty. I have this big debate about how it 

is not relative income so much that looks at that income, it is not 

relative income about poverty that is the key. It is what leads you 

to the position of being unable to earn money for yourself as a 

household. And those are the things like family breakdown, failed 

education, debt, drug and alcohol abuse and then your dependency 

on the state. 

So those areas need to be wound into any kind of assessment, because your lifestyle usually has a bearing on what is likely to happen to you. And here is the point about family breakdown. We 

therefore need to do a lot more in advance about the dysfunctional 

family life which exists in many of these areas. So early intervention has got to be the key to this to put particularly young dysfunctional mums and their families right so the kids are right early on. 

And secondly, really to look at families on the edge of breakdown, 

so we are now investing money into help and support from most 

the voluntary sector, etc. to help stabilize families before they 

break down rather than spend the huge sums we do picking up the 

pieces afterwards. It is estimated over 20 plus billion pounds a year 

we spend on the after effects of breakdown, whereas it is known 

if you put a bit of money into this you can restabilize families who 

are often on the edge but don’t then break down and the children 

will benefit. 

So that is a huge shift to where you put your money to focus on 

solving breakdown rather than dealing with the after effects of it. 

On the issue about how the system works in terms of employment, the reality that we have here is that right now we know 

what the static levels are for benefits. So what we are simply saying is that as people go in from benefits into work, the levels they 

achieve in work for each hour should mean that their income is 

higher throughout that work process and demonstrably higher than 

it is when they are on benefits. So the universal credit is interVerDate Mar 15 2010 01:48 Apr 03, 2013 Jkt 078761 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\78761.XXX GPO1 PsN: 78761

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esting because by and large it shifts some of the money down to 

the bottom end, that is to say, the early hours, because we think 

that going into work is the biggest issue. And then moving up the 

hours is the secondary issue of importance, you know, your marginal deduction rates. So the participation tax rate, that bit going 

in, you need to get that cliff edge right down so that they are always on an upward curve in income. And that starts literally at 

hour number one. 

Now, that will hugely benefit, for example, lone parents who we 

want to go to work because we think it is good for them and their 

children after a certain point, quite rightly, that their children realize work is a part of life and a part of your future and they see 

somebody from that household working. So a lone parent household 

it has to be them, if it is a two couple household somebody else. 

So the early hours are really important because they may match 

that with some of their caring, but that needs to pay. And to keep 

them in work is important. 

So that is really how the economics of this works, which is as 

they get paid, the withdrawals are lower, particularly in the early 

sector. And you do that by what I call disregards. So as they enter 

work, each category of persons, a lone parent, will have an amount 

of their income disregarded before the taper, so they can earn so 

much. A very disabled person will have a bigger disregard than the 

taper. Someone who is able bodied and young will have a very 

small disregard for the taper. And the lone parent will have a disregard slightly bigger than that and then the taper. The taper is 

the same for everybody, but the disregard evaluates what your particular level of need is for you to actually make that income work 

for you. And that is where most of the money is therefore concentrated on the investment but then takes them up the chain. 

And this will allow us later on to look at in work conditionality. 

Chairman DAVIS. Thank you very much, Mr. Secretary. I would 

like to recognize my friend and the ranking member of the Human 

Resources Subcommittee, Mr. Doggett of Texas. 

Mr. DOGGETT. Thank you for your insightful testimony. As I 

understand it, this universal credit is a new approach that you are 

just beginning to pilot or implement? 

Mr. SMITH. That is true, that is correct. It goes live in October 

next year. We are building a new software system and everything 

else. And we are doing some early advance work on it starting at 

around about April next year in some key areas. Not trialing it, but 

running it out early in some key areas to see what the glitches are. 

Mr. DOGGETT. Is the goal that once you resolve any of those 

glitches to have uniformity across the country, so you wouldn’t 

have a different policy in Wales from Greater London or in Greater 

London from Northern Ireland? 

Mr. SMITH. Not in terms of the basic structure of this, no, but 

how it is delivered later on it could be a very localized delivery. 

Right now, we will be doing it as a national delivery until it is bedded in and then we are open for discussion about whether that 

could actually be localized. 

The key to this benefit, by the way, is that we also have to 

change the way we report on taxation. So alongside this is a big 

change to create what is called a real-time information system on 


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our tax base. Because as someone goes to work under the present 

system, the tax authorities predict that they earn a certain amount 

of money. We know in part-time work that hours change, so it is 

not the same as the prediction. So you are expected as an individual to report your hours changes back to the authority so they 

can readjust your support through the tax credit as it exists at the 

moment. 

The problem is you are coming from a group that really doesn’t 

like authority very much, doesn’t really understand it and gets confused. You forget to do this. Some might deliberately not do it, others forget. So they go on to pay you too much money over the year. 

The end of the year they turn around and say, oh, we have overpaid you, now we need to reclaim that money and take it back. But 

of course you are dealing with a group that spends every penny 

that you give them immediately. What the real-time information 

system will do with universal credit means every month we reconcile. So if your hours change, we don’t even need you to tell us 

because the business reports that in their immediate report and 

then it just adjusts automatically. So now we say, hold on, his 

hours were down last month, we will adjust the payments this 

month. 

Mr. DOGGETT. Are your projections that overall this will cost 

more to your national treasury to have this universal credit or less? 

Mr. SMITH. We are investing money to get it in, but once it is 

in, you will more than save that money back because of two key 

features. The first is the point I was making, huge levels of fraud 

and huge levels of error that are costing billions in the system; 

they will be eradicated. 

Mr. DOGGETT. How much more are you investing over the short 

term? 

Mr. SMITH. Over the 3- or 4-year period we are averaging about 

$2 billion a year of investment. And then, as I say, once that is 

bedded in, after that that is where you start. Or you will be making your returns immediately, because we think we will more than 

offset that even as we are bringing it in through the savings we 

make through the error and fraud alone that exists in the present 

system. 

Mr. DOGGETT. One of the obstacles that we found in this country to people moving freely from one job to another or moving from 

a job to setting up a small business is the lack of access to health 

insurance. Is it your feeling that access to health insurance in the 

U.K. is helpful to promoting employment? 

Mr. SMITH. Well, our system of course is fundamentally different from what you have over here. 

Mr. DOGGETT. Yes, it is. 

Mr. SMITH. We have the National Health Service and therefore 

everybody gets access free at the point of delivery. 

Mr. DOGGETT. You don’t have any barrier to employment from 

people being locked into an insurance policy at one job and fear of 

losing it if they move to another setting up a small business. 

Mr. SMITH. People do have private insurance, but I don’t think 

it plays anything like the part it would play here because of that 

level of basic health care that they get. I am not, by the way, enterVerDate Mar 15 2010 01:48 Apr 03, 2013 Jkt 078761 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\78761.XXX GPO1 PsN: 78761

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ing the argument about whether you should have anything similar 

here. 

Mr. DOGGETT. What we have and what has been adopted here 

is very dissimilar, but it does reduce that job lock. And of course 

when we were considering it, one of your European parliamentarians was on Fox News telling us what a horrible system there was 

over there. He was repudiated by Prime Minister Cameron who referred to your health service as a great national institution. Is it 

still a great national institution in the U.K.? 

Mr. SMITH. Yes. That is being reformed at the moment. There 

is a big, big change taking place. We have just put some reforms 

through to make it much more responsive to what people actually 

need and to make sure the money that you spend is focused, although overall we spend less money on health care than you do 

over here. 

Mr. DOGGETT. Well, I agree with the concept of reform but not 

with repeal so that we have access to health insurance for our 

workers here. And thank you for your testimony. 

Chairman DAVIS. I thank the gentleman. And the chair now recognizes Mr. Boustany from Louisiana, the chairman of the Oversight Subcommittee. 

Mr. BOUSTANY. Thank you, Chairman Davis. Welcome. It is 

great to see you here today, and we appreciate the tremendous 

work you all are doing to reform this complex system in the U.K. 

to really align the incentives, to make sure that work actually pays 

and that those who are receiving the benefits will understand that 

moving, crossing that threshold to get to work is where they need 

to go, and of course how do you keep them in employment. 

I want to focus on a slightly different part of what you were 

doing with reforms. I think it is called the work program. And it 

is a system of delivering employment services to these individuals. 

And as you restructured the benefits, the structure of the welfare 

benefits and tax benefits, you are also looking at your delivery system for these benefits. And my understanding is you have ways to 

leverage nonprofit organizations, certain private organizations, not 

only to help these individuals get into the workforce but stay in the 

workforce. Could you elaborate on this program? 

Mr. SMITH. We describe the work program, which I think is unusual for two reasons. The first is that it is a payment by result 

system. So the risk is not taken by the taxpayer, the risk is taken 

by the private and the voluntary sector who actually run the program. So we don’t pay them until they have got somebody in work 

and kept them there for a minimum of 6 months. And then after 

that they get further payments the longer they are in work. 

The second point about this is that we also call it a black box 

system. By that I mean simply it is not my job to tell them what 

they should do, it is their job to figure that out and do it. This is 

where the voluntary sector comes in. The prime contractor, there 

are 18 of them in different areas, and they will have underneath 

them different subcontractors, some private, some voluntary. There 

is a lot of voluntary sector. And they tend to be the organizer, they 

will use to deal with systemic problems that an individual has. For 

example, somebody who, and we know this by knowing what prisoners are. They have no ability to read or write, a reading age of 


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10, even age of 11. If you get somebody in front of you like that, 

no good trying to put them straight into work because they simply 

won’t stay in work because they will fall out at some point because 

they are incapable of doing half of the jobs. They can’t read the 

signs. So what they will have to do is back load them very quickly 

to some organization, probably a voluntary sector organization that 

does remedial education work, enough to get them to the point 

where they can actually hold a job down, and then they take them 

through to work. So they have to invest a bit before they start to 

get them into work and get them paid. And that is how the process 

works. For the easy ones that just need to be attached and sorted, 

well, they will go through quickly. But it is these more difficult, 

and by the way, they get rewarded at a high level for those more 

difficult ones, and that is how it works. So the risk is taken by the 

private company who is the prime. They don’t flow the risk on 

down to the voluntary sector, so the voluntary sector gets paid at 

a slightly lower level, but nonetheless it all works for them in 

terms of their total reward. 

Mr. BOUSTANY. This was a big departure from past practice. 

Mr. SMITH. Huge. It is a complete departure. In fact, I think it 

is the biggest anywhere in the world that I can be aware of where 

we are doing a payment by results program. It is now national, and 

we are not quite into the first year. And it is a 2-year program, and 

we have targets for them. And if one of the primes fails and doesn’t 

achieve the results then simply we will get rid of them and somebody else will come in. So we keep the risk away from the taxpayer, very much on the provider, and in turn it is in their interest 

not just to get them to work, and I think I also mentioned this, 

holding them in work. And that is the bit that is being missed by 

endless government agencies, which is you churn massively after 

about 7 or 8 weeks, because if they are not right for work then they 

will not stay in work. And therefore what happens is they churn 

out. It is very expensive then because you are chasing them after 

that. Then they are less likely to go back to work later again because they got scarred. So when you get them once, you got to 

make it tell once. And so that means that the provider has to check 

on the individual who is at work constantly to see if they have any 

problems and deal with them and then hold them and talk to the 

employer if necessary to hold them in that job. 

Mr. BOUSTANY. Well, I thank you very much. That is excellent 

work. And hopefully we will continue to learn from the experience 

that you have there in the U.K. 

I yield back, Mr. Chairman. 

Chairman DAVIS. Thank you. The chair now recognizes Mr. 

Neal from Massachusetts. 

Mr. NEAL. Thank you, Mr. Chairman. Mr. Secretary, just to follow up a bit on what Mr. Doggett had to say. One of the reasons 

that data suggests that the Welfare Reform Act of 1996 here 

worked was in some measure because we added a number of mitigating issues to the overall package, including job training, 

childcare, and not to miss the point people were able to keep their 

health insurance. That had a profound impact on that flexibility 

that Mr. Doggett noted. 


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Now, I am not going to trespass into domestic politics in the 

U.K., but I think that just having observed from 3,000 miles away 

the Prime Minister during his election cycle, he actually suggested 

a much more radical transformation of the health care system in 

the U.K. than he was actually able to deliver on. And I understand 

that because that is just the reality of what happens. But I think 

as a follow up to what Mr. Doggett pointed out, I think the Prime 

Minister probably discovered that the health care system in the 

U.K. was pretty popular. 

Is that a fair statement? 

Mr. SMITH. Yes. You’ve got to understand, seeing it from the 

standpoint of the U.K., which it is quite different from where you 

are here. There is no question the health service because of its 

basic principle, which is that no matter what your means you will 

always be able to get treatment at the point you need it without 

any request or requirement for money. So that is and was a big 

change. It is now ingrained in people’s psyche. And it is a very 

emotional point to lots of people. So they are very wary if you play 

with that because they don’t want to see that shifted so they would 

have to start having to fork out for treatment. So that is the big 

balance. 

But on your point . . . you know, we are a coalition. I am in a 

coalition that is not wholly conservative, so we sometimes have to 

cut our cloth according to what we can do in parliamentary terms. 

But the reforms that we have gotten through will make a big difference to recentering where that decision making should lie much 

more with those who are responsible for the treatment, and also 

knowing how much that treatment costs and bearing down and understanding how that money is spent better. 

Mr. NEAL. Good point. And let me flip that argument. One of 

the problems that we ran into in 1996 was the suggestion I think 

that was fairly accurate that for many people who were receiving 

public benefits, they stayed with health care through the Medicaid 

system. The problem in some measure was that two people conceivably living next door to each other, one, who went to work every 

day and did not have health care benefits, came to resent the person who was receiving a public benefit and keeping the health care 

benefit. So those mitigating circumstances that I referenced earlier 

about a level of maintenance for health care in your instance seems 

to give you a little bit more room or flexibility in terms of experimenting. 

Mr. SMITH. It possibly does. The only comment I would make 

on that is we all as politicians make this argument that I don’t 

know where I am going but I know I wouldn’t start from here is 

always our biggest point. So dealing with our position as to where 

we are, we obviously don’t have that issue about health treatment 

in the two houses living next door to us. But we do have issues 

around welfare. And that resentment in welfare is a big issue right 

now in the U.K. where someone going to work on low and marginal 

income looks at the house next door with the curtains closed and 

realizes they are earning pretty much what they are already earning but they are not working because they have got a larger family 

or because they are living in a larger house. So that resentment 

does exist. It tends to exist for us in the welfare system. And a lot 


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of people in work are now deeply resentful of those who are not in 

work. And so this is where our cultural shift is rather than on 

health care. 

Mr. NEAL. And lastly this morning in Belfast Martin 

McGuinnis, who is an old friend of mine, and the Queen shook 

hands. And it is a lot of people like me to participate over 35 years 

in all these it will never happen moments to witness these huge 

changes. But as you noted in an earlier conversation that we had, 

there are still very stubborn elements, smaller in number year 

after year, who still are rejectionists. But as one who is very knowledgeable about the Shankill and the Falls Road in Belfast, the link 

between poverty and high rates of unemployment and violence. It 

was the best, I shouldn’t say the best, but one of the best recruiting 

tools for the hardest men and women in those neighborhoods to organizations who sought destiny as never finding a common moment. 

Mr. SMITH. Yes. My comment would be this really. First of all, 

I was a soldier. I was in the Scots Guards many years ago. I served 

in Northern Ireland so I have firsthand memories of some of the 

violence. I lost friends who have been killed in subsequent service 

in Northern Ireland. No one is happier than I am to see the possibility of peace in Northern Ireland. It has been a dreadful running 

sore in the United Kingdom for far too long. 

But you are right about the cocktail. There is a very peculiar 

cocktail in parts of Northern Ireland where you overlay deep deprivation also alongside peculiar religious division and a lot of residual violence. And some of those are still in place today when I visit 

some of those communities, and breaking those down is a very big 

job, but we are making strides towards that. But, yes, hugely obviously deprivation has a part to play in it. 

Mr. NEAL. Thank you. 

Chairman DAVIS. I thank the gentleman. Mr. Secretary, again 

we thank you for taking time out of your busy schedule to come 

and share some of your experiences in the United Kingdom. We are 

going to continue to monitor your progress closely and we look forward to learning from what you are doing and to continuing this 

dialogue. Thank you again. 

Mr. SMITH. Thank you, Mr. Chairman, for the opportunity. 

Chairman DAVIS. As the Secretary departs, I would like to 

thank all of my colleagues for their unanimous consent in altering 

our normal agenda with opening statements until afterwards to accommodate the Secretary’s time. I would like to proceed with opening statements. And now I will begin. 

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


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the middle class. Today we will consider whether the multitude of 

current welfare programs 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, Mr. 

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 and 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 childcare, 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 

Democrat’s 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 low or 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 their earnings increase. 

Here is how another Harvard economist, Jeff Liebman, 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 anymore 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 percent because of the income gain, which is the rule. She 

lost the $280 a month in a 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 could go back to earning $25,000.’’ He estimated that the 

government imposed a 130 percent implicit marginal tax rate on 

her. 

We look forward to all of the witnesses’ testimonies today, including possible solutions, so Americans have more, not less incentive 

to work and support their families. This is an issue I have personally wrestled with for many years, first as a volunteer before comVerDate Mar 15 2010 01:48 Apr 03, 2013 Jkt 078761 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\78761.XXX GPO1 PsN: 78761

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ing to Congress and trying to find a way to build a bridge that 

would smooth this transition to work without creating a cliff, particularly for single parent families that are trying to make a go of 

it and improve the quality of their lives. 

With that, I would like to now turn it over to the ranking member of the Human Resources Subcommittee, Representative Lloyd 

Doggett. Would you care to make an opening statement? 

Mr. DOGGETT. Yes, Mr. Chairman. Thank you very much for 

your courtesy. Certainly if we can perfect our tax system so that 

it does more to reward work we should do it. And if we can ferret 

out any abuse of existing preferences or tax credits that are not 

being properly used in accordance with the law, we should do that 

and should take corrective steps. But I must say respectfully that 

it is my belief that the focus of this hearing and the focus of the 

overall work this year and last year of the Ways and Means Committee in this area is misdirected. 

Let’s look at the facts. The richest one-fifth of Americans are reported to own 84 percent of the wealth of this country, while the 

bottom 40 percent are estimated to own about 3 or 4 percent of the 

wealth of this country. The Congressional Budget Office reports 

that over the last 3 decades after tax income for the top 1 percent 

soared by 277 percent, while two-thirds of the income gains from 

2002 to 2007 flowed to the top 1 percent of households. 

The focus of this hearing is not on the 1,500 millionaires who 

paid zero income tax in a recent year, it is not on those corporations who not only paid zero, such as in some years General Electric, Boeing, Wells Fargo, but in some cases actually received 

money back in credits from the government. It is not on the area 

where revenues are not flowing to our government, it is not on 

those at the top, it is all focused on whether those who have an 

ownership interest in 3 percent or less of our Nation’s wealth, 

whether they are getting too much. 

The overall concept of this hearing seems to follow closely the report last year of the House Republican Study Committee concerning the disincentivizes of our current system. This is the same 

group and same set of reports that condemned as welfare and 

seemed to call for reductions in Pell grants, Title I grants to disadvantaged schools, Head Start, the school lunch program and the 

school breakfast program. I believe that is a mischaracterization of 

those important initiatives that help those who are struggling to 

become part of the middle class and to share in the American 

dream to help them advance, and that it is wrong to continue to 

deny those opportunities. 

When a mother with a couple of children who lives in Austin or 

San Marcos or San Antonio leaves the welfare program for a full 

time minimum wage job, the earned income tax credit and the 

child tax credit are available to help her and other working families. That increases the value of her work in a significant way and 

is an incentive to advance. 

At the same period of time through the recent recession there 

were reports by the Pew Research Center that Hispanics particularly represented the hardest hit by the recession, a 66 percent 

drop in wealth from 2005 to 2009, a widening of the gap in our 


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country that has not been seen in the last quarter of a century during the time that data was collected. 

These are serious problems that need to be addressed to encourage and help people move into the middle class and to see that our 

Nation has the revenues that it needs in order to sustain those programs. We need more focus on those real problems rather than on 

the small issue that is raised by today’s hearing. And I yield back. 

Chairman DAVIS. I thank the gentleman. I now turn to the 

Chairman of the Ways and Means Subcommittee on Select Revenue Measures, Mr. Pat Tiberi. 

Chairman TIBERI. Thank you, Chairman Davis. Thank you for 

your leadership on this issue, and it is a real pleasure to have an 

opportunity to have a joint hearing with our subcommittees today. 

Providing an adequate safety net for Americans who have fallen 

on hard times I believe is a nonpartisan issue in this Congress. It 

is something that all of us believe in. As is making sure government does not stand in the way of Americans who want to work 

to achieve their life and fulfill their American dream, I know firsthand for the need for a safety net. When I was in high school my 

father who immigrated to America with my mother with nothing 

lost his job of 25 years, lost his pension and our family lost our 

health care. At that time I was thrown into the free and reduced 

lunch program in high school. The good news is my dad found a 

job, he was rewarded and we went on being a family again. 

Today what is dangerous with our Tax Code is that it appears 

that people or the Tax Code is saying to people, to Americans who 

are down on their luck, who had a job loss, that they will be penalized if they turn their luck around and are fortunate to find an opportunity of work. 

Comprehensive tax reform is a chance to solve this problem. In 

tax reform we should ensure that low-income Americans are not 

punished through extraordinarily high implicit marginal rates. We 

should reduce complexity as well. There is no reason that my father should have to see a tax accountant for his tax returns. Our 

current code is a nuisance where taxpayers, for instance, claiming 

the earned income tax credit in many times and many places have 

to use a paid tax preparer, costing them money from their own 

pockets. 

I look forward, Mr. Chairman, to discussing how we can fix this 

issue to empower Americans to live the American dream. I yield 

back. 

Chairman DAVIS. Thank you very much. The chair now recognizes Mr. Neal, ranking member of the Select Revenue Subcommittee. 

Mr. NEAL. Thank you, Mr. Chairman. Thanks to you and Mr. 

Tiberi for holding the hearing. I want to quote Ronald Reagan: The 

earned income tax credit is the best anti-poverty program, the best 

pro-family, the best job creation measure to come out of Congress. 

The earned income tax credit is a bipartisan idea and it was signed 

into law by President Ford with a Democratic Congress and expanded by every President since Ford, both Democrat and Republican. 

Here is an opportunity where we might change the rhetoric in 

Congress when we frequently hear that 47 percent of the American 


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people don’t pay taxes. Of course they do. They pay the most onerous taxes, payroll taxes. There would be an easy way to soften 

some of the harsh rhetoric here by that simple acknowledgement. 

President Reagan was absolutely right, the earned income tax 

credit is extremely successful at increasing work and lowering welfare receipt, making our tax rules more fair for low and moderate 

income tax families and, most importantly, reducing poverty. In 

2010 the earned income tax credit lifted about 6.3 million Americans out of poverty, almost 3.3 million children. Without the earned 

income tax credit the number of children living in poverty would 

have been one-quarter higher. Is it perfect? Of course it is not. 

There is no provision in our Tax Code that is perfect. And I am 

open to working with my Republican friends and colleagues to 

strengthen the credit. 

I do get a bit antsy, however, with recent comments that I have 

heard from some who would suggest or imply that we should increase taxes on low and moderate income families. Majority Leader 

Cantor recently stated, quote, we also know that over 45 percent 

of the people in this country don’t pay income taxes at all and we 

have to question whether that is fair. 

Mr. NEAL. Again, an opportunity to reshape language. Majority 

leader Cantor and I clearly have different definitions of the word 

‘‘fair.’’ Some are calling for increasing taxes on the poor and moderate-income Americans at the same time they are calling for lowering taxes on the wealthy. That is hardly fair. 

Republicans tell us that we can’t increase taxes on the wealthy 

because of the negative impact on jobs. But ironically, they link increasing taxes on poor people, because they say it will encourage 

them to work. We have come a long way since those days when 

President Reagan proudly proclaimed at the signing of the Tax Reform Act of 1986, quote, ‘‘Millions of the working poor will be 

dropped from the tax rolls altogether and the wealthy will pay 

their fair share.’’ That is Ronald Reagan’s quote. 

But as I conclude, let me highlight that I am open to working 

on this legislation. I hope that the 1-year enhancements that we 

are attempting to offer EITC and the child tax credit would make 

their way to the end of the year and I hope that members of this 

subcommittee and the full committee can find a common path forward on these issues. 

Yield back. 

Chairman DAVIS. I thank the gentleman. 

I will now turn to our member panel on which Representative 

Gwen Moore will be testifying. Representative Moore and I have 

worked on legislation in the Financial Services Committee affecting 

affordable housing, dealing with child homelessness and domestic 

abuse. 

I would like to remind Representative Moore to limit her oral 

statement to 5 minutes, however. Without objection, all of your 

written statement testimony will be made part of the permanent 

record. Please proceed with your testimony. 


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STATEMENT OF THE HONORABLE GWEN MOORE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN 

Ms. MOORE. Thank you so much, Chairman Davis and Chairman Tiberi and Ranking Members Neal and Doggett. It is certainly 

a privilege to be here as an expert witness on being poor. 

I am indeed an expert. As many of you may know, I had my first 

child at age 18. She is now 42 years old and talks back very regularly. But let me say that times were not always so easy. The very 

first welfare benefit that I received, sir, was Medicaid, because I 

gave birth to my daughter on Medicaid. 

The subject of this, and I can tell you that if in fact welfare reform would live up to its promises and its rhetoric of making work 

pay, of helping to lift people out of poverty, to give people a hand 

up instead of a hand out, I can guarantee you that the 4 million 

people who are now receiving TANF would storm the Capitol and 

demand welfare reform. But of course that is more rhetoric than 

it is reality. 

I was able to listen to some of the testimony of our distinguished 

guests, the Honorable Duncan Smith, catch a bit of his testimony 

before I walked over here today. And I must say that as a 

Britainer, he must appreciate the fact that Britain is the country 

with probably the least social mobility among the OECD states, 

which means that you can predict people’s social mobility more by 

what their father’s station, whether they were a duke or an earl 

or what their income was, than you can with anything that welfare 

would have done. 

And I say that with all due respect, Mr. Chairman, and I mean 

it with all due respect, that the title of this hearing, ‘‘How Welfare 

and Tax Benefits Can Discourage Work,’’ is at best a misnomer, 

and at worst is just fallacious non-sequitur because it assumes— 

I heard the testimony—it assumes a lot about the lack of character 

on the part of welfare recipients, and it doesn’t talk at all about 

the structural intent of these welfare programs. 

I just want to—I want to quote, since I see my time is expiring 

against my will here, I would like to just quote from Charles Dickens—I think that is appropriate, given our first panel—SparkNotes 

quote on Dickens. The theme of David Copperfield focuses on orphans, women, and the mentally disabled to show that exploitation, 

not pity or compassion, is the rule of an industrial society. So that 

when we look at the tax benefits, the marginal tax rates that people experience, it is because our benefits are not high enough to 

make work pay. 

I would submit and I look forward to the question-and-answer 

period, I would submit that people don’t work just for their self-esteem or for their dignity. They need to make enough money to be 

able to pay the rent and put a Barbie doll under the Christmas 

tree at Christmas. 

In my case—and I am happy to share details of that with you— 

my daughter had her first asthma attack at age 4 days old. I could 

not afford to have a job that would have separated me from the 

Medicaid benefit that we had. And I once had a job and begged my 

supervisor not to give me a 50 cents an hour raise lest I lose Title 

20 day care. I worked 80 miles away from my children. And as a 


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person who survived childhood rape, I know how important it was 

to have reliable daycare. 

And so I would say that if we really want to encourage work, 

things like the Earned Income Tax Credit, things like providing 

child care, things like providing food supplements, encourage work, 

not to simply take the position that we are going to take the 

Keynesian approach and just say, Well, the thing to do is to snatch 

food stamps, snatch housing benefits, snatch Medicare so that we 

can literally deliver this poor group of people, primarily women, to 

the workforce so they will be forced to work because, in fact, they 

will not have any other choice. 

And with that I would be happy to answer questions Mr. Chairman. 

[The prepared statement of Ms. Moore follows:] 


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Congresswoman Gwen Moore 

Testimony 

Ways Clnd Committee June 27 

I am here today to try to help debunk some of the myths about low-income 

people that some of the Majority witnesses are so committed to perpetuating. 

These thinly-veiled attacks on the poor have been occurring regularly in the 

House over the past few months-for example, in the Budget Committee, where 

Chairman Ryan and his colleagues are trying to hold up TANF as a "successful 

model" for reforming other safety net programs. 

The premise of this hearing suggests that recipients of welfare and tax benefits 

have DQ incentive to work and that the benefits they receive from the 

government are actually "harmful" to them. Today's witnesses would have you 

believe that there are millions of people out there who are "prevented" from 

working because of the government programs that "keep them down." 

This hearing is predicated on a series of false assumptions about our social safety 

net. I want everyone to know that contrary to what you might hear today, many 

of our government programs-SNAP, for example-work very well, and 

contribute to massive reductions in poverty by increasing family income. We also 

have programs, such as child care subsidies, that are effective because they 

provide supports that get people into the workplace. It's true that some of our 

programs, like TANF, need a serious structural update, because they have been 

designed to fail the very populations that they intended to serve. But make no 

mistake: the people of this country still need a safety net. Eliminating the safety 

net will not eliminate poverty. 

I have personal experience living in poverty, and raising young children as a single 

mother while working, going to school, and sometimes relying on welfare to get 

by. I can tell you that I didn't sit down after a long day of work to calculate the 

"marginal tax rate" of government benefits to determine my choices. I think that 

the panelists here today-who make it sound like low-income women get home 

every night and pore over a spreadsheet to figure out how much they'll be taxed 

on the next dollar they earn, or their next dollar in benefits-need a bit of a 

reality check. They're showing very little understanding of the day-to-day factors 

that affect people's decisions about work, child care, education, and much more. 
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Congresswoman Gwen Moore 

Testimony 

and Means Committee Hearing June 

I don't have enough time to respond to each and everyone of the false claims you 

will hear today. But I will point to one extremely noteworthy recent example that 

invalidates many of the Majority witnesses' claims: the TANF Emergency Fund. If 

low-income welfare recipients simply didn't want to work, then why was the 

TANF Emergency Fund so successful? In just two years it created over 250,000 

jobs. Republican Governors and state and local policymakers across the country 

came out in strong support of this program, because it was undeniably successful. 

Many economists and researchers agree that the number one reason why some 

low-income people are not in the labor market is because we simply don't have 

enough jobs. When the TANF Emergency Fund was in effect, citizens came out in 

droves in search of jobs that were finally available to them. Their government 

had finally helped provide the work opportunities they need. And yet, here in 

Congress, conservatives refused to extend this program. And now they're arguing 

that poor people are looking for a free ride. Rather than continuing to help 

families find the jobs they need and supporting businesses struggling in tough 

economic times, Congress pulled the plug on a successful program. 

If the argument is that we want to have a productive society, cutting off benefits 

to those who need them is not the way to do so. Researchers at Harvard have 

found that giving families very modest tax credits leads to higher standardized 

test scores for their children. These students then have lower teenage birth rates, 

are more likely to attend college, and eventually have higher earnings than had 

they not received the tax credit. In the end, as productive members of society, 

they are able to offset the cost of the initial tax credit. 

Our welfare system under AFDC was not perfect. But at least it allowed people to 

receive a basic level of income while pursuing education and training. TANF, 

which we hear described as a "model" program, is simply not effective at getting 

people into decent jobs. The system is fundamentally and fatally flawed. Many 

states use the work participation rate of welfare recipients as their primary 

performance measure. Under this indicator, states are more likely to indicate 

better performance if they assist families that already have some education, skills, 

and/or work experience and therefore have the best chance of securing 
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Ways 

Congresswoman Gwen Moore 

Testimony 

Means Committee Hearing June 17 

employment. As a result, the families who should be prime candidates for 

assistance are those that are often least likely to receive benefits. 

With the Deficit Reduction Act, conservatives made it even more difficult for 

welfare recipients to get the education and training necessary to obtain better 

jobs. Limits on what constitutes work activities and a 12-month limit on 

education make it extremely difficult for a welfare recipient to receive postsecondary education. 

Welfare recipients thus face multiple barriers. These barriers are the real factors 

that affect workforce participation-not the preposterous factors that are being 

discussed in this hearing today. Not only are there few jobs available to lowincome people, but the few jobs that are available aren't ones that are going to 

help them earn enough-or learn enough-to truly change their financial 

situation, let alone alter the course of their lives. 

Close to half of all TANF recipients lack even a high school diploma, making it 

extremely difficult for them to find employment. Various studies have estimated 

that about 45% of welfare recipients have cognitive impairments including 

learning disabilities, which can impede success in education and the workplace. 

Any barrier to education is a direct barrier to sustainable employment. Many jobs 

require specialized training and experience and most employers prefer workers 

who have completed a certified trade school program. The current limit of one 

year of full-time education is not enough to complete most programs of study, 

especially for students who need to complete remedial coursework in order to 

brush up on their skills and be college ready. 

Unlike TANF, SNAP benefits automatically ebb and flow on the basis of economic 

need. SNAP benefits have thus been successful at increasing families' income, 

while rising evenly along with the unemployment rate. This is an important 

point-because the goal of these programs is to alleviate poverty, and SNAP does 

just that. And yet, the House Majority wants to change SNAP, and look at TANF as 

a model program. Republicans (admittedly aided by Democrats in the late 19905) 

have decimated the TANF program, leading the caseload to decline by 68% from 

1995 to 2010. Yet, interestingly enough, families with children in poverty 
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Congresswoman Gwen Moore 

Testimony 

and Committee Hearing June 

increased by 17% over the same period. In what way is this program a model? It 

is simply not doing what it is designed to do. 

There are a vast number of ways in which TANF could and should be fixed. We 

need to first acknowledge that welfare benefits are necessary and that the 

program we have is inept. TANF has effectively been capped as a block grant 

which is completely unrealistic in these difficult economic times. There's a reason 

more and more people are in poverty and it isn't because of their unwillingness to 

work. TANF doesn't account for inflation and isn't designed to be effective during 

a recession. 

The Earned Income Tax Credit (EITe) was designed to reduce the tax burden and 

supplement the earnings of low and moderate income working adults, many of 

whom are raising children. Numerous studies have found that the EITC 

encourages work and helps reduce poverty; findings suggest it is more successful 

than TANF at increasing work rates. Despite what others may have you believe, 

most EITC recipients only use the credit temporarily when an event, such as a job 

disturbance, affects their income. Over an 18-year-period, 61% of EITC recipients 

received the credit for just one or two years at a time. 

I find it unconscionable that we have somehow found a way to distance ourselves 

from the real-life human consequences of our actions on Capitol Hill. Millions of 

people are barely surviving. We hear stories of people watering down infant 

formula because they don't have enough to make it through the month. We hear 

of people giving babies juice or water because they don't have any benefits left. 

We hear of families running out of food, and adults starving themselves so their 

children can eat. This is the reality of living in poverty. People have to make 

terrible choices. They are working two or three jobs, earning low wages and never 

getting ahead. They are worried about who they're leaving their kids with during 

the day because they can't afford adequate childcare. We have to ask ourselves: 

do we think it is acceptable to allow people to have to live this way in the United 

States? 

In 2010 the poverty rate reached its second-highest point since 1965. Not only 

that, but the deep poverty rate (as in, those living below half of the poverty level) 

reached 6.7% which is the highest rate ever since 1975 when we first began 
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Congresswoman Gwen Moore 

Testimony 

Ways and Means Committee Hearing June 27 

collecting this data. To put things in perspective, half the poverty line is about 

$11,000. Nearly 1-in-1O children is living in a household with this low income, 

barely able to get by. A study by researchers at the University of Michigan and 

Harvard found that the number of households with children living on less than $2 

per person per day has almost doubled since 1996, now reaching 4%. Even if food 

stamps are counted as cash assistance, there remains one in every 50 children 

living in such a household. 

After we pause to reflect on the way poor people in this country are living, I can't 

help but question the values and morals of those who would try to eliminate 

credit tax credits, like the EITC, for low-income people, while at the same time 

fighting tooth-and-nail for tax cuts for people at the top. The Ryan budget would 

have given each high-income family a $400,000 tax cut. And yet we're here 

listening to people complain about the expense of the EITC-which clearly 

incentivizes work, and is yet another example of a program that flies in the face of 

the premise of this hearing. 

I'd like to close by reminding us of a recent New York Times article by Jason 

DeParie, featuring interviews with some of the people who have fallen through 

the cracks in our social safety net. They told stories of the desperate steps they 

have taken to stay alive, and feed their children. One woman told the all-toocommon tale of returning to a violent boyfriend because she had nowhere else to 

turn. Others told stories of selling their food stamps at a reduced rate, or selling 

blood, or digging through trash cans. 

DeParle's article tells the story of Tamika Shelby. Tamika first sought cash 

assistance at age 29 after working fast-food jobs, and as a waitress in a strip club. 

The state gives her $176 per month for her and her three-year-old son, and she 

works part-time for effectively $2 an hour job at a food bank. Her supervisor said 

she was "just wonderful" and indicated she would often even show up on her 

days off from work. But because Arizona reduced its time limit from five years 

down to just two, Tamika no longer has welfare assistance or her job at the food 

pantry. While she and her son can qualify for $250 a month in food stamps, she 

reports there are often days when she doesn't eat. 

Congresswoman Gwen Moore 

Testimony 

Ways and Means Hearing 27 

The witnesses on this panel would have you believe that welfare recipients are 

"taking advantage of the system." Does a mother who has to choose between 

eating herself and having enough food for her children sound like someone who is 

taking advantage of the system? The reality is that TANF is a failed program, and 

now here they are criticizing the poor who should be cared for by this so-called 

safety net. It must be nice to be at the top. 
35 

Chairman DAVIS. Do any members have a question? 

Mr. DOGGETT. Thank you very much for your expert testimony 

Ms. Moore. 

Do you think that Americans that are out there looking for work 

are more focused on the issues of child care, job training, job availability than they are on calculating their potential marginal tax 

rate if they work a certain number of hours? 

Ms. MOORE. No, sir, I can tell you that they are not. But I want 

to stipulate, Mr. Doggett, that welfare recipients are not stupid. 

They have common sense, even though they may not have the ability to calculate implicit tax marginal rates. I can tell you that it 

is just common sense. Like what I learned as a parent of a 4-dayold child is that I had to have health care so that I think I would 

have been very successful as a waitress, you know, because I love 

people, I love engaging them, but I would not have been able to afford to, as a 4-day-old parent, go work in a restaurant that didn’t 

provide health care, and risk at that time losing Medicaid. I 

couldn’t afford to lose Medicaid. My daughter is 42 now and still 

has asthma. And I couldn’t afford to lose Medicaid. It is a benefit, 

and if the government wants to help people, they should. I would 

want to work if in fact I didn’t risk losing Medicaid. 

Same thing with daycare. Just like I begged my employer, it is 

not something that I calculated. My daycare provider told me if 

that I was—that earning $17,000 a year with three kids—I was 

still poor—that I had, in fact, hit that marginal tax rate; and that 

if I earned any more—I was still poor—so that when January came 

around and the automatic increases in Title 20 occurred, the inflationary increases, then I could take, I could take the 50 cents an 

hour raise. 

So I want to stipulate to the fact that there are implicit marginal 

tax rates that people hit. But the conclusion that poor people are 

then gaming the system or you should just take the benefit away 

is fallacious. What it means is that the cost of daycare in 2012 

terms, $1,000 a month, $1,500 a month, depending on the age of 

your child, is so great that work does not pay. Women cannot afford to work without governmental assistance. 

Mr. DOGGETT. Thank you. 

Chairman DAVIS. And one thing I would like to point out to the 

gentlewoman, the purpose of the hearing in fact is in fact to address these questions. You said yourself that you begged not to get 

a raise, and I called this hearing—— 

Ms. MOORE. Yes, sir. And I want to stipulate that—— 

Chairman DAVIS. Reclaiming my time. I would just like to make 

the point that what we are trying to address are broken processes 

that we have worked on, a bipartisan process over the course of 

this Congress, to address this very cliff. 

And I think what I am hearing from your commentary is actually 

agreeing with the premise of our hearing, to look at best practices, 

ways to better integrate information, and avoid people getting into 

the very situation that you yourself were in as a young mother. 

With that I would like to recognize Mr. Neal. 

Ms. MOORE. Mr. Chairman, can I respond to that because that 

was not your time. I think that was someone else’s time, and so 


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you reclaimed someone else’s time. There is still 2 minutes remaining on the clock. 

Chairman DAVIS. Actually that was my time, Ms. Moore. We 

will go ahead to Mr. Neal and then we can come back. 

Mr. NEAL. Thank you. I think you hit some very important 

points, job training—— 

Ms. MOORE. Yes. 

Mr. NEAL. Health care. 

Ms. MOORE. Yes. 

Mr. NEAL. Transportation. 

Ms. MOORE. Yes. 

Mr. NEAL. Daycare. 

Ms. MOORE. Yes. 

Mr. NEAL. The other agreement that we had in 1996 that was 

really far reaching and all encompassing—and maybe you could 

speak to it because you invited a question when you said you wanted to be as candid as possible—what about the role of child support? We do a pretty good job with trying to enforce child support 

here. Maybe you could give us a practical assessment of that? 

Ms. MOORE. Well, thank you for asking that, because I am a 

huge fan of child support. And as a matter of fact, for several years 

the only bipartisan amendment that has passed out of the Budget 

Committee has been me and Mr. Ryan’s amendment to try to do 

100 percent passthrough of child support to a custodial parents. I 

am a huge fan of child support, particularly since all of the other 

source of supports are wanting. TANF is not a very reliable source 

of income, it is no longer a mandatory expenditure. So I think child 

support is very important. 

I want to respond to something that Chairman Davis said with 

my tacit agreement about hitting these marginal tax rates. I come 

to a different conclusion about it. You know, instead of saying, 

Let’s take away the work supports, I am saying that perhaps you 

ought to expand it. Because right now for an infant, for example, 

if you want a woman who is on welfare to go work to get decent 

daycare—and I mean very modest daycare for an infant—this 

would cost $1,000 a month in the Midwest. I am not talking about 

New York City or Washington, D.C. How can a woman earn $1,000 

a month and still pay the rent, buy food? She can’t. And so if she 

hits that cliff in terms of eligibility for daycare at $7.52 an hour, 

your premise is, or Honorable Duncan Smith’s premise is that she 

is some sort of lazy person who is lacking in character and so 

therefore she would quit work. And I am saying that she is someone like me who very much wants to continue work but needs— 

honestly needs more support in order to be able to continue to 

work. And so that is a clarification I would make with regard to 

our agreement on that. 

Chairman DAVIS. Mr. Larson is recognized for 5 minutes. 

Mr. LARSON. Thank you, Mr. Chairman, and thank you, Mr. 

Tiberi, as well. I appreciate the spirit of which this hearing is being 

conducted and especially appreciated the value added that my colleague from Wisconsin brings. 

And you underscore a point. I wasn’t going to speak, but to look 

at the magnitude of this situation, it goes beyond anecdotes. And 

I am speaking, I think, with a great deal of knowledge just in my 


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own staff here at the Capitol. When we talk about daycare, I think 

Ed Ziegler, the sterling professor of psychology, the father of the 

Head Start program for the Nation under the Nixon program, said 

it best: Daycare is nothing short of a cosmic crapshoot for people 

who are seeking to have their children be developed in a manner 

that, if they could stay at home themselves, which of course they 

would all prefer, but for the fact that they have to be out and employed. 

So it underscores I think what you are saying, Representative 

Moore, the need for us to continue to augment; and as the chairman has said, when we get to these cliffs what is it at that cliff 

that we have to decide? Ziegler used to say, Why is it that we don’t 

utilize public schools that are already on bus routes that are safe, 

where we can put people there and provide the kind of affordable 

daycare that is safe, that is fundamentally sound and would be 

helpful? 

Take a look around, and especially if you are a young and expectant mother and you are in the workforce currently, you are pursuing a professional career. Take a look around at what kind of 

daycare there is for you, and then consider where you may have 

the means, the situation of so many fellow Americans that don’t. 

I hope that underscores some of what you have to say, Representative. 

Ms. MOORE. Well thank you for that commentary, Representative Larson, because it is. I can tell you what the alternatives are 

to having $1,000 a month to pay for decent daycare. You can have 

a loving mother or mother-in-law who will take care of your kids 

the 2 days of the week that she is not on dialysis. You can have 

a next-door neighbor take care of your kids, and maybe this will 

be a good family and that Chester the molester will not be a resident of that household. It is a crapshoot, as you said. 

You can do as I did for so many years before I found this daycare 

that finally told me that I was going to hit the cliff, and I sent my 

kids down to the corner to a babysitter who sat my kids in front 

of a television with a stick, and if they moved she would hit them 

and beat them, so much and so often that my daughter who is now 

42 refused to take her brothers down there again. 

Or you can just hang a key around your kid’s neck and your 8- 

year-old and 6-year-old kid and tell them to stay in the house, don’t 

open the door, fix a peanut butter and jelly sandwich, and hope 

that you are lucky enough that nothing will happen to them while 

you are gone. 

Those are the options that I know plenty of people who have resorted to those options. That is what happens. It is not that you 

are sitting there calculating the implicit marginal tax rate. You are 

just trying to figure out if you have to work and it is not—and if 

you don’t work it is not because you have poor character, it is because you cannot figure that out. You are not lucky enough to be 

able to figure that out. 

Mr. LARSON. I yield back. 

Chairman DAVIS. I thank the gentleman. And as one of those 

kids with the key around his neck from when he was 7 years old, 

I care very deeply about this issue. And in no way has there been 

any attempt to prejudice any individuals who are caught in these 


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situations. Again, though, it is absolutely critical as a nation, like 

Great Britain is doing, that we address all of the process issues to 

integrate agencies effectively and be willing to ask the hard questions. And with that, I thank the gentlewoman for her testimony 

and would ask for the next panel to come up. 

Thank you very much. 

Ms. MOORE. And just thank you, Mr. Chairman, and thank all 

of you for listening to my testimony. 

Chairman DAVIS. Moving on to our third panel joining us today, 

several distinguished gentlemen who are going to share their 

thoughts on the issues of reforms and addressing the issues of taxation and benefits. Dr. Clifford Thies, Ph.D., professor of economics 

and finance at Shenandoah University; Dr. Eugene Steuerle, Ph.D. 

and senior fellow, the Urban Institute; Dr. Jared Bernstein, Ph.D. 

and senior fellow, Center on Budget and Policy Priorities; and Dr. 

Ike Brannon, Ph.D., director of economic policy and congressional 

relations, American Action Forum. 

I would like to remind all of our witnesses the testimony is limited to 5 minutes. However, without objection, all of your written 

testimony will be made part of your permanent record. 

Mr. Thies, please proceed with your opening statement. 

STATEMENT OF CLIFFORD THIES, PH.D., PROFESSOR OF 

ECONOMICS AND FINANCE, SHENANDOAH UNIVERSITY 

Mr. THIES. Good morning. I appreciate very much the emotion 

with which certain people have addressed the loss of health insurance upon passing over certain thresholds. In the Article I wrote 

on the Dead Zone 3 years ago, I myself got a little emotional at 

those points. It seemed so unfair as well as socially inefficient to 

have these cliffs over which people would fall, and there is an opportunity with health reform to address this. 

We have grown a series of supports to provide an economic safety 

net. One of these supports, the EITC, has a positive incentive for 

working. It stands out in that regard. The impact it had in terms 

of increasing labor force participation was noticeable upon its enactment and upon its expansions. It does testify to the importance 

of these programs. Also, although they are anecdotal, there are lots 

and lots of anecdotes. Almost everybody knows anecdotes of people 

who were making the calculations about whether working more is 

worthwhile. And these people maybe sometimes are called gamers 

of the system; in truth, they are heroic. 

Often my own mother, she would complain about not having 

health insurance and working. She said, Prisoners get health care 

when they need it. I said, Mom, if you need, you can go rob a bank. 

Now, in Europe they have health insurance and it is paid for primarily by payroll taxes and sales taxes, and it has a much bigger 

apparent cost than our system does. Our system has a larger real 

cost in terms of the disincentive effect in terms of keeping people 

in a certain status in society. Instead of moving from addressing 

security, to moving to self-actualization in their work, instead of 

being engaged as a fully human person in terms of working with 

diligence and with judgment and with a degree of creativity in 

their work, they are trapped in a different strata, and not participating fully with the rest of us in a free society. We should want 


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a seamless transition from the place where we have the economic 

safety net to the place where we—most of us at least in our lifetime, certainly our children will be in their lifetime, in terms of acting as a free person, self-actualizing, associating with other people 

on the basis of free association. 

Now, I was interested in the other calculations of the numbers; 

the actual implicit tax rate is somewhat problematic because of the 

cliffs that are involved. The EITC phases in and phases out, that 

is pretty easy to calculate the implicit tax rate. 

Well, how do you handle something where you have a cliff where 

you lose eligibility entirely, or the adults lose health insurance and 

then the children are still covered for a while and then they lose 

eligibility? So there is some art to making those calculations. 

I wondered whether I should update the calculations I had in my 

2009 article for this presentation but I, like everybody else, am 

waiting for the Supreme Court to speak on the issue of health-care 

reform. And then also we have the problem of the payroll tax going 

up, of the Federal income tax rate for the first bracket going up, 

and of the child tax credit going down. So I thought let me just 

have the same calculations I had several years ago. 

The point is pretty clear, when you consider income after taxes, 

and plus benefits that you receive, that there isn’t much incentive 

for a lot of our fellow Americans to work. Taking into account the 

net effect, the tax rate may be 50 percent for some, may be as 

much as 100 percent for others. We should have a big, robust, positive tangible effect for everybody in our system. This speaks to tax 

simplification and tax reform, so that all pay their fair share, the 

focus today being that the poor not pay more than that fair share 

on the marginal dollar of productivity. 

And the payroll tax is a very big tax and it is paid twice, by the 

worker and by their employer. It is a very large tax. Why do we 

have that tax when we are trying to help people? 

If you look at an alternative measure of income for the purpose 

of calculating poverty, based not on the official income that we currently base our poverty rate on, but based on income after taxes, 

plus benefits, at least for the State of Minnesota, the Urban Institute shows that you have about the same poverty rate. We push 

about as many people into poverty as we pull out, we pull the same 

people in and out yo-yoing them in the process. 

Chairman DAVIS. Mr. Thies, could you sum up quickly so we 

could move on? 

Mr. THIES. We want to have an integrated approach with a robust incentive to work at every phase of the income distribution. 

Chairman DAVIS. Thank you very much. 

[The prepared statement of Mr. Thies follows:] 


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The Implicit Tax Rate on Low Income Americans 

Clifford F. Thies 

Eldon R. Lindsey Chair of Free Enterprise and Professor of Economics and Finance 

Shenandoah University 

June 27, 2012 

A few years ago, when I was a resident scholar at a D.C.-based think tank, I had the 

occasion to brief visiting delegations of parliamentarians from Europe on social 

insurance and social services here in the United States. I did this mostly by 

contrasting OUf programs to theirs. 

OUf social insurance and social service programs, I said, appeared to be less 

expensive. But, their programs were not as perverse as ours in terms of 

undermining the incentive to work. The main reason their programs were not as 

p~rverse as our programs was that, in Europe, SOcidi insurance and social services 

are not means·tested. 

That is, in Europe, retirement benefits, health insurance and social services that are 

provided to some are usually provided to all, regardless of work, income, asset and 

other "tests" as are used in the United States. In contrast, here, you are generally 

denied benefits as you work more, have more income, have assets, and so forth. 
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As a result ofthe loss of benefits, people in the United States who are at the margin 

between being dependent on the government and being independent, may have 

little economic incentive to work. To be sure, there may be an inner motivation to 

work. And, there may be the idea that, in the long run, working can lead to a better 

future. But, there is no immediate, tangible feed-back reinforcing the inherent 

goodness of work; and, over time, as the habit of work wanes, we can suspect so too 

would appreciation for its inherent goodness. 

Since I gave those briefings, there have been some changes to the social insurance 

and social service programs of the United States that impact the incentive to work. 

Until recently, these changes represented a mixed bag, some improving the 

incentive to work, and some not. On the plus side, the complete end of the Social 

Security disallowance for earned income improved the incentive to work for people 

over their Social Security retirement age. On the other hand, the taxation of Social 

Security benefits for persons having other income weakens the incentive to work. 

More recently, changes in health insurance may significantly change the effective tax 

rate facing low income Americans. Also, our long period of depressed economic 

conditions may have acclimated a large number of Americans to such thing as 

extended periods of unemployment, part-time work supplemented by food stamps 

and the like, and early retirement via disability. In addition to overall economic 

conditions, many individuals find themselves burdened by underwater mortgages, 

unproductive student loan debt, and back taxes and support payments that cannot 

2 
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be discharged through bankruptcy. An overall plan to spur economic growth may 

need to have a component that deals with those who are today counted as 

discouraged and as marginally attached to the labor force. 

An article I wrote in 2009 concerning the way means~tested benefits and ordinary 

taxes affect the incentive to work of low-income Americans has received a lot of 

attentionl I showed, for a hypothetical Virginia family consisting of one adult and 

two children, that there was little change in the total of cash and benefits received 

from working more, until a level of income of about $40,000 was achieved. Only at 

that point was the virtue of work rewarded with an actual gain in standard of living. 

Prior to that point, additional earnings were mostly negated by reduced benefits. 

Figure 1. The Dead Zone Eamed income less social security, federal and state income tax plus Eire, food stamps, 

Med/c8Jd/SCHIP, SectIOn 8 housing (Ime) versus We/fare cash grant and subsidies (dot) for a 

hypothetIcal Virginia FamIly of 3 

120,000 

100,000 

'5 

! 80,000 

, 

... 

~ 60,000 

{! 

] 

~ 

~ 20,000 

20,000 40,000 60,000 80,000 100,000 120,000 140,000 

Earned Income 

1 http://mise<;.org/ciaily/J822 
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To see exactly what is happening, the chart below shows the implicit tax rate on the 

last $10,000 of earned income (initially by comparison to the welfare grant and then 

by comparison to income less taxes plus subsidies). 

At "A", the marginal tax rate is quite high, essentially because ofthe generosity of the 

package of cash and noncash benefits provided to those on welfare. At "8", the 

marginal tax rate is relatively low (!) because of the Earned Income Tax Credit 

(EITC). From "B" to "0", we are in the Dead Zone, with implicit marginal tax rates 

mostly exceeding 100 percent. 

Figure 2. Implicit Marginal Tax Rates Defined as 1-(change in income - taxes + sllbs/dies)/(change in eamed income) 

150% 

125% 

. 

~ 100% 

! 

.. 

. ~ 75% 

:; 

·0 ! 50% 

25% 

0% 

E 

D 

B 

20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 

Earned Income 

4 
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At "C", the implicit marginal tax rate is momentarily "only" 7S percent. This is 

because, in the face of losing other means-tested benefits while the federal income 

tax kicks in, the children of the household still qualify for the State Children's Health 

Insurance Program (SCHIP). The lull in the onslaught is momentary, however, 

ending as soon as that prop is removed from the household. 

At "D", the family is finally done with jumping through the hoops to qualify for the 

give-away programs. Now all it has to concern itself with is paying taxes. But there is 

no rest for the weary because, at "E", the child tax credit phases out. 

Gregory Mankiw of Harvard University liked the basic point I made, which he and 

many other economists make themselves in their textbooks,2 What I did was give 

concreteness to the argument. Mankiw said that the Congress should have CBO 

perform the calculations I attempted, so as to make the calculations more 

authoritative. While that would indeed make the calculations more authoritative, we 

should avoid thinking that the problem is one of making calculations. Ultimately, 

what we should want is to see is real progress in the standard of living of people at 

the low end of the income distribution, something we have not seen since the 1960s. 

The basic point I made in that article is well established in economic theory. 

Assuming a goal of the tax structure is to redistribute wealth from some who have a 

high ability to produce to others who have less ability, and that high taxes rates 
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diminish the incentive to produce, then the optimal tax structure involves zero or 

even a negative tax rate on those who have low earnings and a higher tax rate or 

progressively higher tax rates on those who have high earnings. 3 Such a profile of 

tax rates looks very different from what we effectively have, given our means-tested 

programs. 

In our system, the loss of benefits as a person earns more, in conjunction with 

ordinary taxes, implies that the effective tax rate is very high for people with low 

earnings, when economic theory says that tax rate should be zero or even negative. 

My calculations indicate that the effective tax rate on low-income Americans is 

approximately 100 percent. "Supply side economics" should apply to all of us, 

including those of us who have low income. 

Moving from theory to application, things get complicated very quickly. In 1962, to 

provide income security through an optimal tax structure, Milton Friedman 

proposed what he called the Negative Income Tax. Friedman's proposal involved a 

combination of a cash grant and a flat income tax.1 He had intended the Negative 

Income Tax to replace much of the welfare system, not simply be an addition to it. 

Therefore, when the Nixon Administration transformed the proposal into an add-on 

to the welfare system called the Family Assistance Plan, Friedman opposed it. So too 

OJ The classic reference of this is James A. Mirrlees, "An Exploration in the Theory of Optimal Income 

Taxation," Review a/Economic Studies 38 (1971): 175-208. A useful survey of the literature is Robert 

Moffitt, "The Negative (nco me Tax and the Evolution of u.s. Welfare Policy." Journal a/Economic 

Perspectives 17 (2003): 119-140. 

1 Ch. 12, "Ai!eviation of Poverty," in Milton Friedman, Capitalism and Freedom. University of Chicago 

Press, 1962. 

6 
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did many of the big city mayors and governors of the country, who saw it as 

diverting welfare dollars from their control.s 

Subsequent manifestations of Friedman's proposal as an add-on to the welfare 

system included the so-called McGovern Grant of George McGovern when he was 

the nominee of the Democratic Party for president in 1972; and, the initially modest 

Earned Income Tax Credit enacted in 1975. The EITC has grown so that it is, today, 

the largest cash disbursing part of the welfare system. The EITC, unique among 

income security programs and in keeping with the idea of the Negative Income Tax, 

reinforces the incentive to work over a certain income range. Unfortunately, 

because of the EITCs give-back region and the interplay of ordinary taxes and the 

means-testing of other income security programs, this reinforcement of the 

incentive to work is very limited. 

According to Martin Anderson, little priority was given to comprehensive welfare 

reform during the Reagan Administration. 6 The problem, Anderson said, is that the 

cash grant needed to replace the welfare system would be too low relative to the 

package of cash and benefits given to those who qualified for AFDC. In addition, 

there were indications that liberalizing cash benefits resulted in less work, not 

more, as well as resulted in more welfare dependency and more family break-up; 

and, that cash benefits were easily diverted from the well-being of families to 

r, Daniel P. Moynihan, Politics of a Gtwranteed Income. Vintage Books: 1973. 

6 Martin Anderson. Welfare: The Political Economy of Welfare Reform in the United States. Hoover 

Institution, 1978. 

7 
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undesirable purposes. During the Reagan Administration, the EITe was expanded. 

But, perhaps more importantly in terms of the tax rates facing low-income 

Americans, Social Security taxes - which kick in at dollar one of earned income -

were increased as part of the Social Security bailout. 

The next major step in the evolution of our current income security system was the 

welfare reform movement of the 1990s. Many people were involved in the reform of 

welfare, including Governor Tommy Thompson of Wisconsin, President Bill Clinton 

and the Congressional Republicans elected in 1994. Welfare reform replaced the 

former AFDC program with Temporary Aid for Needy Families. Among other 

provisions, TANF involves time limits on eligibility. 

Following the reform of welfare, there was a tremendous fall in welfare rolls, as well 

as very substantial declines in participation in the food stamp program and other 

income security programs. To what extent these trends were due to welfare reform 

as distinct from the vibrant economy of the 1990s is a tough question. Perhaps each 

- welfare reform and the vibrant economy - reinforced the other. 

During the 2000s, the generosity of income security programs was significantly 

increased, including the food stamp program in 2002 and the EITC in 2006. In 

addition, Congress made extraordinary extensions of unemployment benefits in 

response to the recession of 2007-09. The combination of depressed economic 

conditions and the more generous welfare system was followed by an 

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unprecedented increase in participation in the nation's income security programs. 

Conversely, labor force attachment has been dropping and many of those who are 

employed are employed part-time. 

These developments are roughly consistent with the social experiments conducted 

during the 1970s to determine the probable results of a Negative Income Tax; 

namely, a reduction in work, not an increase. Many people are learning to subsist on 

part-time wages supplemented by cash and non-cash benefits from the government. 

The possibility of revisiting welfare reform in conjunction with reforming the tax 

code is exciting. Friedman's Negative Income Tax idea was, after all, to be an income 

security program administered through the income tax system. Unfortunately, the 

way things have evolved is that the means-testing of our income security programs 

work almost exactly the opposite of his Negative Income Tax proposal. The 

combined effect of our income security programs, along with ordinary taxes, is to 

create a dead zone in which the effective tax rate on working is approximately 100 

percent for people with low income. 

I will offer, as one possibility of how welfare reform might be combined with tax 

reform, that part or all of the funds currently going into the EITe be used instead to 

pay the Social Security taxes of low-income Americans who would qualify for the 

EITe. This should include both the employee and the employer contribution. This 

proposal would create a zero bracket in the payroll tax for qualifying workers. 

9 
49 

f 

Chairman DAVIS. Mr. Steuerle, you are recognized for 5 minutes. 

STATEMENT OF EUGENE STEUERLE, PH.D., SENIOR FELLOW, 

THE URBAN INSTITUTE 

Mr. STEUERLE. Chairman Davis and members of the two subcommittees, thank you again for the opportunity to appear before 

you once again. As already noted, the Nation’s real tax system is 

very different than the tax system we know just by looking at direct statutory rates such as the income tax and the Social Security 

tax. The implicit taxes that derive from phasing out various beneVerDate Mar 15 2010 01:48 Apr 03, 2013 Jkt 078761 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\78761.XXX GPO1 PsN: 78761

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50 

fits in both expenditure and tax programs—I tend to call expenditure taxes because, like tax expenditures, they remain largely hidden from government and the public—and yet they actually are a 

major influence on behavior. 

These expenditures, I want to be clear, are a classic liberal conservative compromise. Mr. Chairman, you commented earlier about 

needing to work together to solve this problem. One reason that 

one has to work together is because, in fact, it is a liberal-conservative compromise that got us there in the sense that liberals have 

favored these types of implicit taxes as a way of increasing progressivity, while conservatives have embarked upon them as ways of 

saving on budget revenues. Both of them are legitimate goals but 

have resulted in very, very high tax rates. And although low- and 

moderate-income households are especially affected and seem to be 

the subject mainly of this hearing, I remind you that you have 

these implicit taxes in the AMT and Pell grants and in dozens, if 

not hundreds, of programs, including most of the subsidies that are 

in the tax system. 

At the Urban Institute we have done a lot of work on trying to 

calculate these taxes. The first graph that you see here on the 

screen is the same as in figure 1b of my testimony. It shows close 

to the maximum benefits for which a single head of household and 

two children may be eligible, and then how they phase out as income increases. 

Rates are low or even negative up to about 10,000 to $15,000 of 

income. It is thereafter that they rise quickly. 

In the next figure, which is the same as figure 3 of my testimony, 

I show the effect of tax rate for a household whose income rises 

from 10,000 to $40,000. Essentially income and Social Security 

taxes take away about 30 percent of earnings, and then universally 

available programs—by ‘‘universally’’ I mean they are available to 

all of us if we have children, there are no queues, and include 

items like EITC or SNAP—raise the rate to about 55 percent. And 

for those households who happen to be into welfare programs such 

as TANF or get housing benefits, the rate can rise well above 80 

percent. 

What used to be called a poverty trap has now moved to what 

Linda Giannarelli and I have called the twice poverty trap; that is, 

the high rates especially hit households who earn more than poverty-level incomes. 

Many studies have attempted to show the effect of these rates on 

work and the results are actually mixed. Work subsidies such as 

the EITC generally encourage labor-force participation and may 

tend to discourage work at higher income levels, particularly for 

second jobs in a family, moving to full time work, or, as I note in 

my testimony, also for marrying someone who has a job. 

Design matters greatly. For instance, Medicaid will discourage 

work among the disabled more than a subsidy system such as the 

health exchange subsidy that is in the health reform; on the other 

hand, that health exchange subsidy will discourage work for older 

people who are encouraged to retire earlier. 

For the same amount of cash, a major conclusion is that a program that requires work will indeed lead to more work than one 


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51 

that does not. In that regard, the earned income credit and welfare 

reform have done better on the work front than did AFDC. 

Other consequences need examining. Means testing and joint filing have resulted in hundreds of billions of dollars of marriage penalties for low- and middle-income households, and indeed not 

marrying is the tax shelter for the poor. Many programs do help 

those with special needs, although they vary widely in their efficiency and effectiveness. So, for instance, there is some evidence 

that a well-developed program can improve behavior such as school 

attendance and maternal health. At the same time, as an economist I have to question our ability to judge the long-term consequences of these programs merely from the empirical studies that 

we perform. 

So just as a classic liberal-conservative compromise got us into 

this situation, so might it require a liberal-conservative compromise to get us out of it. And among the many approaches to reform that I think are worthy of consideration are: 

One, seeking broad-based social welfare reform, far beyond even 

what we are discussing today, rather than adopting programs oneby-one with multiple phaseouts. 

Two, starting to emphasize opportunity and education over adequacy and consumption. We can start moving the budget in the 

former direction rather than the latter. It doesn’t necessarily require cutting back on programs. It means that the growth on government which continues would get redirected in a different way. 

Three, we can put tax rates directly in the Tax Code so they are 

not so hidden. 

Four, we can make work an even stronger requirement for receipt of various benefits. 

Five, we could think about trying to adopt a maximum marginal 

tax rate for at least some programs combined. 

And, six, I believe we can let child benefits go with the child, and 

wage subsidies go with low-income workers rather than combining 

the two. And the goal there is not just to favor work but also to 

try to start including in the social welfare structure many of these 

low-income, working, single people who basically are excluded altogether and have access to this system mainly by going to prison. 

Thank you. 

Chairman DAVIS. Thank you very much Mr. Steuerle. 

[The prepared statement of Mr. Steuerle follows:] 


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Statement of 

C. Eugene Steuerle 

On 

Marginal Tax Rates, Work, and the Nation's Real Tax System 

Joint Hearing of the 

Subcommittee on Human Resources and 

Subcommittee on Select Revenue Measures 

Committee on Ways and Means 

June 27, 2012 

C. Eugene Steuerle is the Richard B. Fischer chair and an Institute Fellow at the Urban Institute. 

Portions ofthis testimony are taken from other work by the author, particularly for Tax Notes 

Magazine and The Fulure of Children. I am indebted particularly to Adam Caras so, Linda 

Giannarelli, Elaine Maag, Caleb Quakenbush, Stephanie Rennane, and Katherine Toran for both 

past and current work with me on marginal tax rates. All opinions expressed herein are solely the 

author's and should not be attributed to any of these individuals or organizations with which he is 

associated. 
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Chairmen Davis and Tiberi and Members of the Subcommittees on Human Resources and Select 

Revenue Measures: 

Thank you for the opportunity to be here today. In my testimony, I make six basic points. 

(1) The nation's real tax system includes not just the direct statutory rates explicit in such taxes as the 

income tax and the Social Security tax, but the implicit taxes that derive from phasing out of 

various benefits in both expenditure and tax programs. What I have labeled "expenditure taxes" 

are like tax expenditures in the sense that both tend to hide the full impact of government and are 

seldom dealt with on a consistent basis. 

(2) These taxes derive largely from a liberal-conservative compromise that emphasizes means testing 

as a way of both increasing progressivity and saving on direct taxes needed to support various 

programs. Although low- and moderate-income households are especially affected, middle 

income households face these expenditure taxes, too, as in the phase out ofPeli grants and child 

credits, the gradual removal of "preferences" in the alternative minimum tax and of the 

exemption of Social Security benefits from taxation. 

(3) At the Urban-Brookings Tax Policy Center and the Urban Institute's Income and Benefits Policy 

Center we have done quite a bit of work on calculating these rates, particularly for low and 

moderate-income households. Through such models as the "Net Income Change Calculator," or 

NICC, we can show their effect for individual states. Adding in health care makes the 

calculations more difficult, but when added in, these rates can be quite high, especially for 

households with children, commonly reaching 50 percent when moving toward full-time work or 

a second job in the household; for those getting housing and other assistance, the rate can easily 

jump to 80 percent or more. 

(4) Many studies have attempted to show that the effect ofthesc rates on work, and the results are 

mixed and ambiguous. Work subsidies such as the ElTe generally encourage work for those who 

might otherwise not work or simply reside on welfare. but may tend to discourage work at higher 

income levels, particularly for second jobs in a family or moving to full time work. Design 

matters greatly. For instance, Medicaid will discourage work among the disabkd more than a 

subsidy system such as adopted in health reform; on the other hand. health reform will probably 

encourage more people to retire early. Perhaps one of the most important conclusions is that for 

the same amount of cost. a program that requires work will indeed lead to more work more than 

one that does not. EITC and welfare refonn have done better on the work front than did AFOC. 

(5) In addressing these issues, other behaviors and consequences must also be considered. Means 

testing and joint filing has resulted in hundreds of billions of dollars of marriage penalties for low 

and middle income households. Many of these programs do help those with special needs, 
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although they vary widely in their efficiency and effectiveness. There is some evidence that welldeveloped programs can improve behaviors such as school attendance and maternal health. At the 

same time, long-nm consequences are often hard to estimate. 

(6) Just as a classic liberal-conservative compromise got us to this situation, so might it require a 

liberal-conservative consensus get us out of it. Many potential reforms replace hidden 

government \vith explicit government, \vhich may make it look bigger. Some reforms may reduce 

benefits for some low-income households; others may cost more, hence raising tax rates for 

others not facing such high rates. Put another way, reform requires looking at hundreds of billions 

of dollars' worth of programs, since phase outs and means tests are everywhere. Reforming them 

means recognizing there will be winners and loser along the way. Among the many approaches to 

reform are (a) seeking broad-based social welfare refonn rather than adopting programs one-byone with multiple phase-outs, (b) starting to emphasize opportunity and education over adequacy 

and consumption; (c) putting tax rates directly in the tax code to replace implicit tax rates, (d) 

making work an even stronger requirement for receipt of various benefits, (e) adopting a 

maximum marginal tax rate for programs combined, and (t) letting child benefits go with the 

child and wage subsidies go with low-income workers rather than combining the two. 

The Nation's Real Tax System 

The tax rates faced by taxpayers include both statutory rates and all the various phase-outs of benefits in 

both expenditure and tax programs, as well as fees that are for the most part unavoidable. I have labeled 

thcse latter items expenditure taxes. Phase outs reduce or tax away particular program benefits typically 

on the basis of income or other personal characteristics of the household. Expenditure taxes should be 

distinguished from voluntary fees or charges for services received by the government. In the direct tax 

system, direct taxes are those that are compulsory. In contrast, most fees are voluntary. "Vhen those fees 

rise. it is generally because the cost of benefits voluntarily purchased by the taxpayer has increased, as 

when one makes greater use of national parks or inland watel'Ways. Obviously, the distinction between 

taxes and fees is sometimes more difficult to make, but the separation is still useful (e.g., T view the "fee" 

for Social Security Part B more like a tax since it is hard to avoid, but one can debate the matter). In the 

case of expenditure taxes, a similar distinction might be drawn between those fees that are given freely in 

exchange for some public services and those reductions in benefits that are mandatory. 

Identifying expenditure taxes does 110t make them good or bad. Some believe that expenditure 

taxes are useful ways of channeling net benefits to the most needy or of restricting participation levels. As 

a policy matter, each expenditure tax needs to be judged on its own merit. To make an informed 

judgment. however, requires that policymakers be fully aware of how these tax-like mechanisms work 

and interact and take into account their combined impact on the economy and on the operation of 

government programs. 

Just like tax expenditures, clarifying the size of both tax expenditures and expenditure taxes helps 

prevent hidden government. When government actions are more apparent, voters and policymakers can 

make better, more informed judgments. Many expenditure taxes apply to ]m\oer income households 

through means testing of programs like SNAP (formerly Food Stamps) for which they qualify 

categorically, but they also apply to many middle-income families, as in Pel! grants, child credits, the 
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phase out of itemized deductions, and phase out of the exemption of Social Security benefits from 

taxation, the removal of exemptions from the alternative minimum tax. Although I will concentrate here 

on the programs affecting low-to-moderate income households, it is quite easy for middle-income 

households to face marginal tax rates of 40 percent or 50 percent or more (J 5 percent Social Security tax 

plus 15,25, or 28 percent in the federal income tax, plus a few percent of state income tax, plus the phase 

out rates, less interactions). 

What Causes Expenditure Taxes and Consequent High Tax Rates? 

Congress enacted Social Security, Aid to Families \vith Dependent Children (AFDC), and various 

housing programs in 1935; the Food Stamp Act in 1964; Medicare and Medicaid in 1965; the EITe in 

1975 (and subsequent expansions of the credit in 1987, 1990, 1993, and 2001, among others); the Child 

Care Development Block Grant in 1990; welfare refonn in 1996 (\vhich replaced AFDC with T ANF); the 

State Children"s Health Insurance Program (SCHIP) in 1997; and the child tax credit in 1997 (expanded 

and made refundable in 2001). The list could go on and on. 

Each program, as well as its subsequent reforms, was the product of unique social forces and was 

designed to address a specific social need. Had they all been enacted as one comprehensive program, 

lawmakers might have been more inclined to coordinate and focus on the combined tax rates, combined 

subsidy rate, marriage penalties and subsidies, and combined incentive effects. So many items are now 

phased out in many of these programs that the nation's true tax system remains largely hidden. 

Means testing particularly represents a classic liberal-conservative compromise. Conservatives 

sometimes favor hidden expenditure taxes because, relative to a direct tax, they make expenditure 

programs appear smaller and avoid raising the top rate of income tax (the one often of most concern to 

supply side economists partly because others are less likely to apply at the margin). Liberals often favor 

expenditure taxes because they allow benefits to be of concentrated more on those who are measured as 

being poorer. Programs with lower expenditure tax rates often extend net benefits to higher levels of 

income and may be less progressive. 

Often both conservatives and liberals support their stances by arguing that high tax rates on 

benefit recipients have little effect on behavior. While this mayor may not be true, as discussed below, 

one really wonders why as a society we worry about 40 percent tax rates on the rich if 50 or 100 percent 

tax rates on the poor have little or no effect. Are the poor really that ditTerent? 

1\ote that we are quite inconsistent in how we decide when to means test or not. Public education. 

Social Security, and Medicare are more universal. Social Security and higher educational benefits and 

farm subsidies tend to be larger for those with higher incomes than those with lower incomes, though 

Social Security also applies a type of lifetime income test that tends to restore some progressivity. Head 

S1art, TA\lF, and housing vouchers are concentrated on low income and are means tested at moderate 

levels. Child credits do not phase out until higher income levels. Medicaid provides a cliff effect: earn one 

more dollar and consequently lose a health insurance package that one dollar before was free. The new 

health exchange subsidies avoid that cliff and start phasing Ollt at modest income levels but then stretch 

fairly high i11to the income distribution. The earned income tax credit phases in and then out. 

What Does the Nation's Real Tax System Look Like? 
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At the Urban-Brookings Tax Policy Center and the Urban Institute's Income and Benefits Policy Center 

\ve have done perhaps the most extensive work anywhere on the size of these combined tax rates. 

Let's begin by displaying two hypothetical cases for a more-or-less "universal benefiC' and then a 

"maximum benefit" system for households with children. Case 1 (Figure 1 a) considers a single parent 

household with children-the type of household most affected by these high tax rates-and shows federal 

income taxes, employer and employee portions of the Social Security tax, personal exemptions, child 

credits and dependent care credits, the earned income tax credit, SNAP, Medicaid, SCHIP, and the new 

health exchange subsidy (as ifit was available in 2011). A focus on this set of programs is important 

because, in theory every household with children is eligible for these programs if its income is low 

enough. The benefits arc generally not restricted by waiting lists and are universally available as long as 

recipients meet certain eligibility criteria, mainly income level, which can vary by state. In a sense, then, 

the tax rates levied by these programs apply to all households, though they may have moved out of the 

very high tax rate part of this regime when their annual earned incomes start to exceed $40,000 or higher, 

and they have moved beyond the income cutoffs for several of the transfer programs. Put in terms of 

panel I, these latter households have moved to the right along the horizontal axis beyond. first the highbenefit and low-or negative-tax rate regime (which applies to earnings of roughly $0 to $10,000), and 

then, the high-tax-rate regime (which applies to incomes of roughly $10,000 to $40,(00). 

Case 2 (Figure 1 b) includes the same programs as Case 1 but also aSSWllCS the single parent with 

two children is receiving welfare cash assistance (TANF), housing assistance, and child care benefits 

(direct expenditures for child care). In 111any ways, it is an extreme case, since only a small minority of 

low-income families receive all these benefits. As a general rule, these aliditional programs are not 

universal, in contrast to those in Case 1. Rather, they are parceled OLlt either through time limits for years 

of eligibility or through queues as to who may participate. Households are much less likely to benefit 

from the programs in Case 2 than those in Case 1. In Case 1, the family receives the most benefits at 

about $10,000 to S 15,00 of earnings-mostly because the EITC is fully phased in by that earnings level, 

while most other benefits are either still phasing in or have not yet phased out. In Case 2, where the 

household is on TANF and receives housing, maximum benefits are still available \vhen there are no 

earnings. Benefits drop off steeply as earnings start to exceed those amounts. 

The health benefit graph (Figure Ie) displays what the health system at the top of Case I and 2 

looks like in isolation from the other programs. There are legitimate debates over how to deal with these 

calculations and their incentive effects, but it is such a large portion of the social welfare system that I felt 

it would be misleading to leave it out. 

Figure 2 then shows the effective marginal tax rate that derives from the combination of income, 

Social Security, and state taxes, combined with the phase out of the various benefits shown in Figure la 

and lb. As can be seen, tax rates begin to spike somewhere above $10.000 or $15,000. This is 

summarized in Figure 3. 

There we calculate the effective average marginal tax rate if this household increases its income 

from $10,000 to $40,000. That is, how much of the additional $30,000 of earnings is lost to government 

through direct taxes or loss of benefits? The average marginal tax rate in the first bar of Table 3, 29 

percent, is based simply on federal and state direct taxes, including Social Security and the EITe. The rate 

rises appreciably as the family enrolls in additional transfer programs in bars 2 and 3. For a family 

4 
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enrolled in all the more universal nOI1-\vait-listed programs like SNAP, Medicaid, and SCHIP, the average 

effective marginal tax rate could be 55 percent Enrolling the family in additional waitlisted programs, 

like housing assistance and TANF, ratchets the rate up above 80 percent. 

Put another way, while we might think of the income tax rate schedule as showing rates of 0, 10, 

15, and 25 percent respectively, the true rate schedule faced by these families includes rates like -40 

percent (from the initial phase-in of the EfTC) and 50 and 80 percent. 

The high tax rates especially affect the choice of a household with children to work full-time a bit 

above the minimum wage or to marry or stay married. J will return to these issues below. However, for 

those in the universal system, the structure does encourage labor force participation, and those in TANF 

also face a variety of incentives to keep or take a job. 

Some caveats are in order. A number of eligible households do not apply for benefits, such as the 

food subsidies for which they are eligible. We have performed some analy~es of the population as a whole 

at the Urban Institute and find that the average rates across households will be lower than what you see in 

the table because ofless than full participation in the programs. By the same token, we have not included 

the child care grants in these calculations. Add those in. and the rate can exceed 100 percent (though keep 

in mind that those receiying those particular grants must work to receive them). 

$20,000 

$18,000 

$16,000 

II $14,000 

~ $12,000 

~ 

~ $10,000 

~ $8,000 

iii $6,000 

$4,000 

$2,000 

Figure la 

Case 1: Universally Available Tax and Benefit Programs 

(Single Parent with Two Children in Colorado, 2011) 

Exchange Subsidy 

(parent) 

$O~~~~~~~~~~~--~~~~~~~--------------~ 

$0 S10,00J $20,(00 $30,000 $40,0C() $So,OOJ $60,(00 $70,0X) $80,(00 $90,0X) $100,000 

Household Earnings 
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$30,000 

$20000 

$10,000 

$10,000 

$9.000 

$8,000 

~ $7000 

c: $6,000 .. 

to $5,000 0 

.. $4,000 " 

~ $3,000 

$2,000 

$1,000 

$0 

$0 

Figure lb 

Case 2: Maximum Available Tax and Benefit Programs 

(Single Parent with Two Children in Colorado, 2011) 

WlC 

Exchange Subsidy 

(parent) 

Dependent 

Exemption 

Child and Dependent 

Care Tax Credit 

$10,000 $20000 $30,000 $40.000 $50,000 $60,000 $70.000 $80,000 $90,000 $100,000 

HousehOld Earnings 

Figure Ie 

Health Benefits 

(Single Parent with Two Children in Colorado, 

Assumes Availability of Exchange Subsidies in 2011) 

Exchange Subsidy 

(family) 

$10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100.000 

Household Income 
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Figure 2 ---------

Effective Marginal Tax Rates for a Head of Household with Two Children 

Maximum Available Tax and Benefit Programs: 

,,---\ Umwrsalsy,templusfederalhou.mgsubsidies; 

I ___ ~---' \ ~ TANF, and food assIstance for women, rnfants and children (WIC) 

ir-~~~,------- t 1---)---' ~ U,'.""IT" "dB"""",,,m,, , ~,~ "-- F,d"" ,"wm, '"" "", ,"wm, '"" ",,,II '"" i SNAP, Medicaid,CHIP, Ex~hQngeSubsidies 

, 0 5000 1 15000 20000 25000 JOOOO 3'>000 40000 45000 50000 5'i000 bOOOO 6~OOO 70000 75000 80000 85000 gooOO 

10% Earnings 

Figure 3 

Average Effective Marginal Tax Rates for Low· and Moderate·lncome Families 

with Children under Different "Tax Systems," 

29.4% 

Federal Income Taxes, 

20% Payroll Taxes (Employer + 

Employee),StatelncomeTaxes 

10% 

Tax System Only 

$10,OOOto $40,000 of Earnings 

54.5% 

tax System + SNAP, Medicaid, CHIP, 

and Exchange Subsidies 

Universally Available Programs 

819% 

UnIversal system + TANF; federal 

housmg subsidl€s; and food 

asslstanceforwomenil'lfantsand 

chtidren(WIC} 

Maximum AvaIlable Programs 
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The Net Income Change Calculator. The Urban-Brookings Tax Policy Center and the Income 

and Benetits Policy Center have also collaborated with government and foundations to produce a Net 

Income Calculator (NICe), which can be found at http://nicc.urban.org/netincomeCalculatorl.' It allows 

individuals to generate a state by state analysis of tax and transfer benefits available to individuals and 

families as income, weekly hours, wage levels, and program participation varies. The calculator does not 

currently include a calculation for various health care programs, in part because of the complex issues 

related to their valuation. Nonetheless it is especially useful in developing specific state data for those 

who are interested. 

Figure 3 below shows the type of calculation that can be done. The example chosen was a family 

participating or potentially participating in a variety of programs (in this case, TANF. SNAP, housing and 

child care assistance) in Alabama. As can be seen, with no work at all this family generates $14,000 in 

benefits. lfit earns poverty level income of about $17,000, its total income would rise to about $26,700 or 

close to $13,000. Once again, we see that rates are moderate for getting into the workforce, in part 

because of the EITe. However, if the family earns about twice the poverty level, or an additional $17,000, 

income would rise by only about $6.900~an effective average marginal tax rate of about 60 percent, to 

which must be added any loss of health insurance benefits. 

Many years ago, the high taxation of welfare recipients who went to work was labeled a "poverty 

trap." In doing these calculations a number of years ago, Linda Giannarelli and I decided that the poverty 

trap had been largely removed but had been replaced by what we called the "twice poverty trap." These 

numbers reconfirm that analysis. 

The Urban Institute Net Income Change Calculator 

Net Income for Single Parent with 2 Children in Alabama at poverty Thresholds 
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The Effect on Work 

Economic theory tells us that distortions in behavior increase disproportionately with the marginal tax 

rate. However, these distortions can take different forms: less work, more work, and other behavioral 

shifts such as avoidance ofrnarriage. Many empirical studies have attempted to isolate the net effect of 

these rates on work, and the results are mixed. Generally speaking, programs like the EITe and various 

work-related experiments shm" that those programs tend to encourage labor force participation. But they 

tend to tend to discourage work at higher income levels, such as taking a second job in the family. This, 

of course, is what we might expect. since in a phase-in range the EITe increases rewards from work \vhile 

providing no income to those who don't (in economic terms, the substitution effect is positive and there is 

no income effect). By the time one reaches the phase-out rate, income is higher as well as marginal tax 

rates, and other programs are also phasing out. Therefore, disincentives are fairly high at this level. 

Welfare reform also attempted to cut the Gordian knot by making bcnetits conditional upon work. 

Generally speaking, work did increase after reform, although there is some dispute on how much was due 

to the EITC, welfarc reform, or the bettcr economy. My own view is that one major reason for the 

increased work effort was that governors started telling their welfare administrators that they were going 

to be judged by how many people they got off welfare, rather than how many clients thcy scrved. Perhaps 

one of the most important conclusions is that for the same amount of cost, a program that requircs work 

\vill indeed encourage work more than one that does not. EITC and welfare refonn have done better on 

the work front than did AFDC. 

Design matters greatly. For instance, Medicaid will discourage work among the disabled more 

than a subsidy system such as adopted in recent health refom1; on the other hand, health reform will 

probably encourage more people not now on Medicaid to retire early, 1 believe those number are 

reflected, though indirectly, in CBO's estimates of the effect of health reform on the budget and economy. 

Many workers face discrete choices to work or not work or try to take another job; it is often not easy to 

vary hours on anyone job, 

In my view, few of these empirical studies do a good job at telling us the 10ng-ten11 effect on 

behavior, Looking at the data over lime, I conclude that the "income" effect-the consequence of having 

higher income-often is more important than the tax effect. Don't forget also that the tax effect by itself 

at times have a reverse income etfect, in that some people will work more to generate the same net 

income that they might need, Some evidence comes from other programs. For instance, the availability of 

Social Security for almost a decade more than ""hen it was first created seems clearly to have induced 

earlier retirement, independently of whether there was any tax effect. There are also psychological 

factors we are only beginning to assess. For instance, once on disability and sometimes unemployment, 

people develop different life patterns that become more habitual; for some, being out of work for a long 

time can also add to depression, which then rebounds on ability later to work. As already noted, the 

disabled are especially reluctant to give up Medicaid. The signals that government shares with its people 

can be powerful, such as whether \\'ork is of intrinsic value to society; at the same time, government 

choices may reflect rather than develop such societal values. 
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Finally, asking whether government benefit programs provide disincentives to work may be the 

wrong question. Yes, they often do. Any such effects must be contrasted with the good they may do so as 

to form a judgment of their merit. Here, I think the more important question may be how we can create a 

social welfare structure that does the maximum good by minimi7.ing distortions and other unintended or 

undesired consequences. When relative comparisons are made, I think we have considerable prospect at 

improving upon a structure that has done a moderately good job at reducing hunger and poverty, but a 

mediocre job at providing opportunity and investment, rather than just adequacy and higher levels of 

consumption, to a significant portion of our population. 

Other Consequences. 

Marriage Penalties. Means testing and joint filing has resulted in hundreds of bill ions of 

man'iage penalties for low and middle income households. 

Essentially. when moderate-income couples marry, their marginal tax rate moves up from, say, 25 

percent, to the 50 and 80 percent ranges shown above. For instance, a moderate income male marrying a 

working mother with children can easily cause her to lose EITC, SNAP, Medicaid, and other benefits as 

well. 

Marriage penalties arise because of the combination of variable U.S. tax rates and joint, rather 

than individual, filing by married couples for benefits and taxes. If graduated taxes were accompanied by 

individual filing or if all income and transfers were taxed at a flat rate, there would be no marriage 

penalties. The EITC, by the way, can provide both subsidies and penalties. and Social Security generally 

provides very large marriage bonuses. 

Someone looking at our system from Mars would conclude that \ve don't want moderate income 

families with children to marry, since we penalize them, but we do want older households (at ages when 

children are likely to be gone) to marry, since we subsidize them. 

Games Encouraged by Means Testing. One thing we have learned in public financc is that 

taxes have significant effects on portfolio behavior even if there is less certain etTect on work and saving. 

Not getting married is the major tax shelter for low- and moderate~income households \vith children. In 

many low-income communities around the nation, marriage is now the exception rather than the rule. 

Marriage penalties or subsidies are assessed primarily for taking wedding vows, not for living 

together with another adult Those who do not feel morally compelled to swear fidelity in religious or 

public ceremonies for the most part do not suffer the penalties. Our tax and welfare system thus favors 

those who consider marriage an option~to be avoided when there arc penalties and engaged when there 

are bonuses. The losers tend to be those who consider marriage vows to be sacred. 

These effects of marginal tax rates extend well beyond the marriage patterns of low-income 

families. Divorced couples allocate child support so as to maximize future college aid. Some couples 

avoid remarriage to avoid losing Social Security or pension benefits. As noted, the disabled sometimes 

avoid work so as to keep Medicaid. while some of the unemployed delay going back to work. 

Options for Reform 

10 
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It is impossible in a single testimony to deal with the many ways our social welfare system might be 

refonned to provide better results. Today that system strongly emphasizes growth in health and retirement 

benefits, while middle income families and children are facing a situation where their share of the budget 

is scheduled for rapid decline even while they are being left with ever more debts to payoff. 

I believe we are at a major fiscal turning point in our history. At one level, it is forced on us by an 

unsustainable budget, but at another level it gives us the opportunity to reconsider broader changes to our 

tax and social welfare structure. In that regard, I believe all of the following deserve strong consideration: 

1. Adopting a broader social welfare reform. An integrated approach to refonn would stop 

adopting all these tax systems one at a time, with little consideration of how they fit together. 

2. Emphasizing opportunity and education more and adequacy and consumption less. Longterm reform could also put more emphasis on opportunity, education and work and less on 

adequacy and increasing consumption levels. 

3. Putting more tax rates directly into the tax code. A transparent system would replace some 

implicit taxes with explicit ones, thus tacing the same political obstacles as eliminating tax 

expenditurcs. Govcrnment would have to admit what it is doing. Just as eliminating tax 

expenditures appears to be increasing size of government when it is not, so also does substituting 

direct for expenditure taxes appears to be raising taxes when it may not actually raise them. 

4. Making work an even stronger requirement for receipt of other types of benefits. This type 

of approach need not reduce beneiits overall, since some or all of any additional saving could be 

applied to those who do work. 

5. Adopting a maximum marginal tax rate. A partial approach at integration would attempt to 

create some maximum tax rate for several or many programs, 

6. Letting child benefits go with child1 work subsidies go with low-wage workers. The EITe 

provides wage subsidies to low-income workers raising children, but then leaves out other lowwage workers and usually creates high tax rates when two earners marry. Refonn could separate 

Ollt the subsidy for children from that from low-income workers. 

Innovative approaches need to be tried. Catholic Charities, for instance, supports a National 

Opportunity and Community Renewal Act for a pilot project that is people-focused and case managed, 

based on local community opportunities. In the suggested programs under this e)'periment, a person might 

qualify for help, but the exact nature would depend on agreement between the case manager and client, 

allowing them together to tie together and reallocate resources for \vhich the client is eligible. That 

reallocation would likely increase labor force participation, as it would be largely aimed at improving 

opportunity and addressing issues that cause the poverty in the first place. 

11 
64 

f 

Chairman DAVIS. Mr. Bernstein. 

STATEMENT OF JARED BERNSEIN, PH.D., SENIOR FELLOW, 

CENTER ON BUDGET AND POLICY PRIORITIES 

Mr. BERNSTEIN. Chairman Davis, Ranking Member, Representative Doggett, I thank you for inviting me to testify today. 

My first point, however, is that I believe that it is essential to 

broaden the question at the heart of this hearing. For policymakers 

to best understand the impacts of the policies under review, we 

must investigate not just any work disincentives they may engender, but also work incentives. For example, as has been heard nuVerDate Mar 15 2010 01:48 Apr 03, 2013 Jkt 078761 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\78761.XXX GPO1 PsN: 78761

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65 

merous times today, the Earned Income Tax Credit, an important 

wage subsidy for low-income workers, has been found to have large 

work-incentive effects. It lifts millions of families out of poverty, 

working families. Surely this is why it was one of Ronald Reagan’s 

favorite anti-poverty programs. 

And that raises another necessary dimension along which these 

programs must be evaluated: To what extent do they achieve their 

poverty-reduction targets; in other words, to examine only the marginal tax rates and work disincentives associated with our anti-poverty programs, risks and incomplete understanding of the impact 

of the programs on work, on poverty and on well-being? 

So research on these questions finds the following. While benefits 

of means-tested programs are, by definition, reduced as incomes 

rise beyond a certain point, their work disincentives differ. And a 

number of significant programs, including the EITC and SNAP, formerly food stamps, are found to have either positive or neutral effects on labor supply. 

The EITC extensively studied in this regard has yielded the following finding from a recent comprehensive review. The overwhelming finding, the empirical literature, is that the EITC has 

been especially successful at encouraging the employment of single 

parents, especially mothers. A recent exhaustive review of the poverty reduction effectiveness of the full scope of our safety net and 

social insurance programs found ‘‘the combination of the means 

tested and social insurance transfers in the system have a major 

impact on poverty, reducing deep poverty, poverty and near-poverty 

rates by about 14 percentage points in the U.S. population as a 

whole. 

The next finding from that study is particularly germane to today’s hearing. Quote, ‘‘This poverty reduction impact is only negligibly affected by work incentives, which, in the aggregate, have 

almost no effect on the pretransfer rates of poverty in the population as a whole.’’ 

In other words, what is notable about this research is that it 

finds these significant and quantitatively large poverty-reduction 

effects after accounting for any work disincentives implicit in the 

programs. 

Other recent research has found positive generational effects of 

safety net programs on later education and earnings outcomes of 

children from families that receive such benefits. For example, one 

study finds that raising a poor family’s income by 3,000 a year— 

and that is a fairly typical amount for a poor family to receive from 

the child tax credit or the EITC before age 5—is associated with 

a 17 percent increase in earnings and an average of 135 hours of 

additional work per year compared to similarly low-income children 

whose families do not receive the benefits of these safety net programs. 

One poverty expert summarized the findings as, quote, a remarkably strong body of research, much of it based on large-scale, wellimplemented, experimental research designs showing that 

supplementing the earnings of parents helps raise families out of 

poverty and improves the school performance of young children. 

This research clearly suggests that reducing those benefits 

would, net of any work disincentive effects, lower income, raise 


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66 

poverty, and harm future generations in terms of their educational 

and earnings outcome. 

Finally, to the extent that work disincentives exist, policymakers 

should consider ways to reduce or eliminate them. In the final section of my testimony I offer three ways to do so. First, lower marginal tax rates by extending phaseout ranges, though of course this 

increases costs. Provide work supports such as child care and 

transportation assistance. And third, increase number of jobs available to low-income workers through demand-side policies. 

Given the persistent weakness in the low-wage labor market in 

recent years, I want to be sure to stress the importance of this last 

point. Research over the last few decades has shown that the most 

effective work incentives for working-age members of low-income 

families are tight labor markets with rising pretax wages. In this 

regard, policies such as the job creation measures in President 

Obama’s American Jobs Act will prove far more effective in 

incentivizing work than lowering marginal tax rates on safety net 

benefits. 

Conversely, it would be a significant policy mistake to require recipients of benefits to work without first ensuring adequate job 

availability. Even in a climate of strong work incentives, without 

adequate job availability, this is a policy recipe for rising poverty 

and the accompanying strain on families and children. Thank you. 

Chairman DAVIS. Thank you Mr. Bernstein. 

[The prepared statement of Mr. Bernstein follows:] 


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Testimony before the Subcommittee on Human Resources of the Committee 

on Ways and Means 

Work Disincentives and the Safety Net 

Jared Bernstein 

. Senior l"ello\V 

Center on Budget and Policy Priorities 

Ht'rnstcil1rakbp.p~2L-Q; 

6/27/2012 
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Introduction 

Chairmen Davis and Tiberi and ranking members Rep. Doggett and Rep. Neal, I thank you for 

inviting me to testify on this important question of our safety net and tax benefit programs and 

their impact on work. 

My first point, however, is that I believe it is essential to broaden the question at the heart of this 

hearing. For policy makers to gain a full understanding of the impacts of the policies under 

review, we must investigate not solely any work disincentives they may engender, but also work 

incentives. For example, the Earned Income Tax Credit, an important wage subsidy for lowincome workers, has been found to have large work incentive effects. 

The EITC also lifts millions of working families out of poverty (surely, this was why the EITC 

was Ronald Reagan's favorite anti-poverty program) and that raises another necessary dimension 

along which these programs must he evaluated: to what extent do they achieve their poverty 

reduction goals? 

In other words. while it makes sense to examine the marginal tax rates and work disincentives 

associated with our anti-poverty programs, to stop there risks an incomplete understanding of the 

impact of the programs on work, poverty, and well-being. 

A review of work disincentives, work incentives, and poverty reduction yields these central 

findings: 

--While benelits of means-tested programs are. by definition, reduced as incomes raise beyond of 

certain point, their work disincentives differ, and a number of significant programs, including the 

EITC and SNAP, are found to have either positive or neutral impacts on labor supply. 

--A recent, exhaustive review of the poverty reduction effectiveness of our safety net and social 

insurance programs found that ", .. the combination of the means-tested and social insurance 

transfers in the system have a major impact on poverty, reducing deep poverty, poverty, and 

near-poverty rates by about 14 percentage points in the U.S. population as a whole in 2004." 

--Importantly, the study concluded that " ... this impact is only negligibly affected by work 

incentives which, in the aggregate, have almost no effect on the pre-transfer rates of poveliy in 

the population as a whole." 

--Recent research also finds positive generational effects of safety net programs on later 

education and earnings outcomes of children from families that received such benefits. In the 

full accounting that l' III advocating, these benefits too must be assessed against any costs of 

work disincentives. 

Finally, to the extent that work disincentives exist, policy makers should consider ways to reduce 

or eliminate them. In the tinal section of my testimony I offer three ways to do so: 

--lower marginal tax rates by extending phase out ranges (though this increases costs); 

2 
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--provide work supports, such as child care and transportation assistance; 

--increase the number of jobs available to low-income workers through demand side policies. 

Given the persistent weakness in the low-wage labor market in recent years, I want to be sure to 

stress the importancc of this last point. Rcsearch over the last few decades has shown that the 

most effective work incentives for working-age members of low-income families are tight labor 

markets with rising pre-tax wages, Tn this regard, policies such as the job-creation measures in 

President Obama's American Jobs Act will prove far morc elTectivc in incentivizing \vark than 

lowering marginal tax rates on safety net benefits. 

Conversely, it would be a significant policy mistake to require recipients of benefits to work 

without first ensuring adequate job availability_ Even in a climate of strong work incentives, 

without adequate job availability, this is a policy recipe for rising poverty and the accompanying 

strain and families and children. 

Evidence Regarding the Impact on Work 

By construction, the benefits fi'om means-tested safety net programs are reduced or eliminated 

once the income of beneficiaries rises beyond a certain level. That is, beneltts face marginal tax 

rates~which could be 100%--once incomes surpass a particular program parameter. This has 

led policy makers to question the behavioral impacts-for example, regarding labor supply-on 

program recipients who face these "benefit c1ill's" or high marginal rates. 

In some cases, since higher earnings can reduce benefits, otten quite steeply, the prediction is 

that beneficiaries of means-tested programs would reduce work to maximize benefit receipt. 

However, program parameters matter and can greatly influence the actual behavioral responses 

of beneficiaries. 

Consider, ftl[ example, the EITC. For a worker from a low-income family with two children, 

every pretax dollar eamed retums $1.40 between income levels of$1 and about $17,000. At 

income above these levels, the wage subsidy begins to phase out at a rate 01'21 %, and it is fully 

exhausted at about $42,000. In this regard, it is incorrect to conclude that workers exposed to the 

phase-out rate do not benelit Irom the program, though their incentive to work more is clearly 

diminished in the phase-out range. 

It is thus an empirical question as to the net effective of these incentives on labor supply, and 

considerabJe research has been devoted to just this question. One authoritative review of this 

literature concluded that "".the overwhelming finding of the empirical literature is that EITC has 

been especially successful at encouraging the employment of single parents, especially 

mothers."J 

Research also investigated the role of the early 1990s EITC expansion in helping to incentivize 

single parents, mostly moms, to move from welfare to work. One study found that the 

I Nacb Fissa and Hoyncs, "lkhayioral Responses to Ta'Xcs: 1 ,csson~ ft"Om the FITC and Labm Supply," October 

10. 2005. llill"U-""'''''':Cill=Jdill"g'ill~=1hl'1!1-I'''l'=,='''''~l'<'l. 
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refundable tax credit had a larger effect than the welfare law in generating the considerable 

employment gains that occurred in those years.2 

Both the EITC and Child Tax Credit are only available to working parents. Thus, they have 

unambiguously strong work incentives at the "extensive" margin. meaning they significantly 

increase the incentive of non-workers to enter the labor market. Their impact on hours work--the 

"intensive" margin--is more ambiguous, depending on where a worker locates on the ETTC 

schedule, and is thus an empirical question. Tn fact, various studies have found large, positive 

effects at the extensive margin and little impact on hours worked. Ben-Shalom et al (20 II) 

summarize this point: "The evidence suggests that the [ETTC] has had a positive impact on the 

employment rates of single mothers but no effect on their hours of work if working ... " 

Thus, even with its work disincentive etfect in its phase-out range, on net, the EITC is widely 

recognized as encouraging work, and, as discussed next, reducing poverty. In announcing this 

hearing, Rep Davis pointed nut that "Americans should helieve with confidence that hard work 

pays otT." Surely, we would all agree, with no less the President Ronald Reagan, that the ElTC 

meets this venerable criterion. 

Of course, the American system of safety net programs goes well beyond the clearly pro-work, 

refundable credits discussed above. There are many more means-tested programs targeted at 

poverty reduction, nutrition, retirement security, and subsidized housing. Fortunately, a group of 

academic poverty analysts recently released an exhaustive review orthe impact orthe tul1 set or 

anti-poverty programs, including means tested benefits and social insurance programs, such as 

Social Security, Social Security Disability Insurance, Unemployment Insurance, and others (the 

authors are Ben-Shalom, Moffitt, and Scholz, or BMS). 

The research question of this work is the "holistic" one that I view as essential in evaluating 

these programs: do they, on net (factoring in both work incentives and disincentives) accomplish 

their goal of improving the economic conditions of their target populations? Their main finding 

is in this regard particularly gennane to today's hearing: 

"First, the combination of the means-tested and social insurance transfers in the system have a 

major impact on poverty, reducing deep poverty, poverty, and near-poverty rates by about 14 

percentage points in the U.S. population as a whole in 2004. Second, this impact is only 

negligibly aflected by work incentives which, in the aggregate, have almost no effect on the pretransfer rates of poverty in the population as a whole." 

Of course, since a relatively smal1 share of the total population participates in anti-poverty 

programs, it is reasonable to look more closely at the participant population themselves. BMS 

provide a quantification of any disincentive effects in the fol1owing way. They first calculate the 

pre-transfer poverty rate (and deep poverty rate) for recipients of various programs. They then 

factor in estimates of behavioral etTects--work disincentives--and recalculate these pre-transfer 

poverty ratcs absent the disincentives. These simulated rates wil1 be lower since work 

"The Fffects of Time 1 ,imlts, the FTTC, and Other Policy Chang-eo on \Yelfart' lYse, \\"'mk, and 

1 ;amihc~," RI'I'II'I/' rf E((jf!OlIIIIJ alld St(lt/rtiIJ, J\by 2003. 

4 
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disincentives lower incomes and raise poverty. Finally, they calculate the post-transfer poverty 

rates. 

This enables us to quantify what might be regarded as a core question of this hearing: accounting 

for work disincentives, do these programs still have substantial poverty reduction effects" 

Suppose, for example, that pre-transfer poverty rate for recipients ofTANF were 50% and posttransfer rates were 20%. We might conclude that TANF lowered poverty rates by three-fiilhs. 

But suppose that in the absence of work disincentive, we estimate that poverty rates among this 

population would have been half as large-25% versus 50%. In this case, accounting for the 

impact of work disincentives, poverty reduction attributable to the program is only live 

percentage points, not 30. Not accounting for work disincentives, we'd argue the program quite 

impressively reduces poverty by three-fifths. But accounting for disincentives, we'd see it 

reduces poverty by only Ol1e-fifth. 

Table I shows these results with the key variable in the last column: how important are the 

behavior rcsponscs for both poverty reduction ami for deep povcrty reduction (for familics under 

half the poverty line)? For most programs, the ditferences betwecn columns one and two arc 

small relative to the base, less than 10% of the poverty reduction. 

Still, the general impression tram the table would probably surprise those expecting large 

disincentive impacts. In the popular imagination, for example, TANF is thought to generate 

large work disincentives among the poor. Yet, the poverty rate among TANF families after 

accounting for estimates of the actual behavioral elTects on labor supply is just about the same as 

before such an accounting. 

Moreover, the poverty reduction effects dominate. T ANF benetits lill 17.5% of families out of 

deep poverty, and less than two of those percentage points can be attributed to behavioral effects. 

Unemployment compensation reduces poverty by 13 percentage points, while work disincentives 

account for less than one ofthose points. While work disincentives show up in this analysis, 

they are quantitatively small relative to povelty reduction. 

SNAP, formerly food stamps, does not show up in BMS's table because their read of the 

literature suggests tl)od assistance has no impact on labor supply.' However, my CBPP 

colleague Stacy Dean points out that "Over the last two decades, the share of SNAP households 

that are working households has risen significantly. In 20 I 0 more than three times as many 

SNAP households worked as relied entirely on welfare benetits for their income. Nearly half of 

all SNAP households with children have earned income." 

Dean attributes this increase in part to the fact that the SNAP benefit fornmla incentivizes work, 

similarly to the ElTC incentives described above. "For every additional dollar a SNAP recipient 

carns, her benetits decline by only 24 to 36 cents - much less than in most other programs. 

Families that receive SNAP thus have a strong incentive to work longer hours or to search for 

better-paying employment." I return to this insight regarding such pro-work mild phase outs at 

the end of this testimony. 
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Generational Impacts 

The central point of this testimony is that in order to fairly and fully evaluate our safety net, any 

net work disincentives must be considered against beneJits like povcrty reduction, as above. But 

recent research goes beyond the short-term impacts of higher family income and looks at the 

longer term impact on children in these families, both in terms of educational and employment 

outcomes. Some of these findings include: 

--One recent study finds that raising a poor family's income by $3,000 a year (a fairly typical 

amount for a poor family to receive Irom the CTC and EITe) between a child's prenatal year and 

fifth birthday is associated with a 17 percent increase in earnings, and an average of 135 hours of 

additional work per year, compared to similarly low-income children whose families do not 

receive the increase in income. 4 

--Researchers analyzed ten anti-poverty and welfare-to-work experiments and found a consistent 

pattern of better school results for children in programs that provided more income. Each $1,000 

increase (in 2005 dollars) in annual income (the equivalent ofa full Child Tax Credit for one 

child) sustained over two to five years, led to modest but statistically significant increases in 

young children's school perfonnance on a number of measures, including test scores. While the 

study did not specilieally analyze the ElTC's impact, the researchers noted that their results are 

most gennane to "income-boosting policies that link increases in income to increases in 

employment" - an apt description ofthe EITCs 

--Researchers analyzed administrative data from a large urban school district and the 

corresponding U.S. tax records for all families in that school district. They found that even 

under conservative assumptions, additional income from the EITC and eTC leads to significant 

increases in younger student test scores. 6 Another study using different data--nearly two 

decades worth of survey data on mothers and their children--concluded that additional income 

from the EITC raises the combined math and reading test scores of students by similarly large 

magnitudes. 7 

--Gordon Berlin, the president of one of the nation's leading research organizations-MDRC, 

with a long history of rigorous evaluation of anti-poverty and welfare-to-work programssummarizes these results, noting: 

Poverty and ,\dult ,\ttainment, lkhayjo1", 

, Duncan, :\forris, <1nd Rodrigues, 2010 

Chcttl\ fohn N. fncdm<ln, ilnd ronah Rockoff, ":-:lew EvidcnC{: on CJ'cdits," 

of income Paper Series, N(;\Tmber 20 11, bJfj,"-i_"-",,jL~~Vti.plli2Lj!L'i>iLlJlc'Clli:w:jiL',.l!lli"lli>!Ohlillj2ill 

- The fignre~ in rhe Dahl and Lochner study aft' 

C;ordol1 Dahl and Lance Lochner, "The 

Earned Income TaA Ctcdit," NBER Working Paper ::\:(). 

6 
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[There is] a remarkably strong body of research - much of it based on large-scale, wellimplemented, experimental research designs - showing that supplementing the earnings 

of parents helps raise families out of poverty and improves the school performance of 

young children ... We have reliable evidence involving thousands offamilies in multiple 

:~~~~: ~:~o~::,~~~n,f that "making work pay" causes improvements in young children's 

This research clearly suggests that rcducing these benefits would, net of any work disincentive 

effects, lower income, raise poverty and harm future generations in terms of their educational 

and earnings outcomes. 

Lowering Work Disincentives 

A full assessment of the impact of the US safety net suggests we are getting a good "bang-forour-hucks" in terms of poveliy reduction and positive outcomes for children in heneficiary 

fiuuilies. Yet, as Table 1 shows above, "net" work disincentives can be found in some of these 

programs ("net" meaning that unlike the EITC, the net of work incentives and disincentives is 

negative). How could policy makers reduce or eliminate them? 

--End cliffs; lengthen phase out ranges: Means-tested programs, by definition, cease their 

benefit payout at some designated income level. Some programs, like SNAP and TANF, have 

steep clit1s-their benefits phase out quickly once family income reaches a certain threshold. 

Other programs, like the CTC or the EITC, phase out more slowly, and in the case of the CTC, 

starting tram a relatively high income level (over $100,000 for married couples). 

In the context of to day's hearing, steep cliffs and high phase out rates cause high marginal tax 

rates and thus theoretically disincentivize work (as I've stressed, however, this is an empirical 

question). To get rid of them is technically simple: Congress would simply need to lower the 

rate at which benefits are reduced for each extra dollar a family earns. 

Of course, this would make the programs more expensive, though the net cost would be reduced 

to the extent that the change incentivized more work by program recipients. How much more 

expensive is beyond the scope ofthis testimony, though if members are interested in learning 

more about such options, I would be happy to pursue such research. 

The larger point is this: there is deep hipartisan agreement that our economy needs safety net 

programs to catch vulnerable families, particularly in periods of market failure, like the Great 

Recession from which we are still climbing out. Yet, partially for fiscal reasons, these programs 

are generally means-tested-their benefits are tied to income. 

Once benefits are tied to income, marginal tax rates that can disincentivize \vark are created. 

That is an unavoidable outcome or the structure of these programs as I've just described. An 

important point stressed throughout is that the actual impact of such disincentives cannot be 

II Cordon 1.. Bct'lin, j'cm<1rks <H '\latiotlal Sl1mmlr on \merica's Children. \lav 22. 20C)7. 

hi m: I / W\\,\" "11ltlli;_ . ..'1.1,[~1 ica 11(111~ L-±3{>i+'n_'~t'l1tan()n.b rml. . 
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assumed. It is an empirical question, and in most cases, the research shows little negative 

impact. 

--Work supports: As shown in Table I, the research on the behavioral impacts of marginal tax 

rates on safety net programs shows that they have minimal impact on poverty reduction. 

Therefore, while reducing those rates could help mitigate what effects exist, a more promising 

margin to further incentivizc \vork among safety net benciiciaries would be to increase work 

supports: policies to help low-income, ollcn low-skilled workers, who are often parents of young 

children, get and keep jobs. 

These include assistance with child care, transportation, job training, job placement, wage 

subsidies, housing, and even mobility, as such workers may be stuck in areas with less 

opportunity, yet unable to relocate to more promising areas. 

--More Job Opportunities: Finally, the sale focus of the discussion so I'lr has been on the 

"supply-side" of the equation-examining how individuals respond to incentives created by 

safety net programs. Yet, even with perfectly aligned incentives, the absence of enough jobs is a 

far more influential determinant of employment outcomes of workers from low-income (or any 

income) families. 

The marginal tax rate arguments implicitly assume that jobs are available to program recipients, 

but that they don't take them because the increase in the after-tax income (including benefit 

losses) doesn't meet their reservation wage. But that assumption is far less relevant at high 

unemployment than at full unemployment. And the low-wage labor market has been 

characterized by high-unemployment for years. 

For example, Figure 1 below shows unemployment rates by education level for persons 25 years 

and up for those with less than high-school, high-school, and all. The rates for less-educated 

workers are consistently above the average, and the least-educated, unemployment has been in 

double digits since the fall of2008. Data from the Economic Policy Institute reveal that the 

hourly earnings oflow-wage workers have been fiat or falling for the past few years (a 

continuation ofa longer-term trend).9 This combination of high unemployment and falling real 

earnings provide a clear sign of weak labor demand. 

My own work has found that the benelits of a tight job market-one characterized by very low 

unemployment-are significantly greater for those at the low end of the wage scale. For 

example, for each percentage point lower unemployment, the increase in real hourly wages for 

low-wage workers is at least twice that of high wage workers. lo 

In this regard, if this committee wants to support the most effective work incentives for workingage members of low-income families, they should consider those demand-side policies that 

quickly raise the number of jobs and employ the most jobseekers. For example, President 

Obama has proposed temporary liscal relief to states to attack the persistent flow oflayolTs of 

(J FPl data show that l"ea1 hourly wages at the 10rh and 20,h percentile are down 3-..J-% since 2007 (fonhcoming, Stare of 

Ikrnstl'in and Baker, The BC!I(jilJ (:/1'111/ Elllplq),1J!('Il/, Economic PoliC) Institutc, 2003, Figure 4E. 
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public sector workers from states facing steep revenue shortfalls. Infrastructure programs, such 

as addressing the maintenance backlog at our public schools, could also help quickly create 

needed employment, as would the passage of a robust transpOltation bill. Particularly given 

today's weak demand climate, such policies will prove far more effective in incentivizing work 

than lowering marginal tax rates. 

Conversely, it would be a significant policy mistake to rcquire recipients of benet its to work 

without first ensuring adequate job availability. Even in a climate or strong work incentives, 

without the jobs, this is a policy recipe for rising poverty and the accompanying strain and 

families and children. 

Conclusion 

Work disincentives in the f(mn of marginal tax rates on benefits are, by construction, a feature of 

means-tested, poverty reduction programs. The question is thus not whether they exist, hut what 

is their impact on poverty reduction and the wcll-being of economically vulnerable families and 

their children') This is decidedly an empirical question. 

The research reviewed here finds that in virtually every safety net program that has been 

empirically evaluated, poverty reduction effects swamp any work disincentives. That is, even 

accounting for any poverty-inducing impacts, the net increase in income and reduction in poverty 

rates offamilies that participate in the American safety net are substantial. As one 

comprehensive study summarized it: 

"First, the combination of the means-tested and social insurance transfers in the system have a 

major impact on poverty, reducing deep poverty, poverty, and near-poverty rates by about 14 

percentage points in the U.S. population as a whole in 2004. Second, this impact is only 

negligibly affected by work incentives which, in the aggregate, have almost no etTect on the pretransfer rates of poverty in the population as a whole." 

Recent research has added an important finding to this summary: the poverty reduction that 

occurs thanks to these programs has significant, positive effects 011 the future education, 

employment, and earnings outcomes of the children in recipient families. In this regard, 

measures that reduce benefits will be far more likely to lead to lower incomes, higher poverty, 

and worse child outcomes than to increased work eff0l1. 

However, to the extent that Congress wants to mitigate any work disincentives in means-tested 

programs, I recommend three areas of policy intervention. Extending phase-outs lowers any 

marginal tax rates on benefits, but it raises program costs. Work supports, such as child care 

assistance, have been shown to be extremely useful in helping low-income parents find and keep 

work. And most importantly in today's weak demand climate, demand side measures such as 

those put forth by President Obama in the American Jobs Act are essential. No matter how 

c1cverly wc align incentives, if there are not enough jobs for job seekers, those incentives will be 

ineffective and poverty will rise. 

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I thank my CBPP colleagues Arloc Sherman, Indi Dutta-Gupta, Wi/I Fischer, and Stacy Dean for 

help in prepm';ng this testimon.v, though any mistakes are my own. 

10 
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Table 1: Poverty Reduction Impact of Safety Net Programs, Accounting for Work 

Disincentives 

safety Net Program 

551 

TANF 

Housing Asst 

Socia! Sec 

Disability Ins 

Medicare 

Unemployment Camp 

Workers Camp 

551 

TANF 

Housing Asst 

Social Sec 

Disability Ins 

Medicare 

Unemployment Camp 

Workers Comp 

Source: BSM, Table 9 

Pre-transfer 

80.2% 

81.1% 

80.9% 

49.2% 

70.5% 

54.2% 

53.1% 

53.9% 

Pre-transfer 

73.0% 

66.4% 

67.7% 

36.8% 

60.0% 

41.6% 

35.2% 

42.3% 

11 

Poverty Rates 

Pre-transfer 

(accounting for 

behavioral effects) Post-transfer 

78.6% 72.2% 

80.6% 74.1% 

74.7% 66.0% 

48.6% 12.5% 

67.8% 40.7% 

54.0% 14.0% 

52.6% 40.1% 

51.5% 4.6% 

Below 50% of Poverty 

Pre-transfer 

(accounting for 

behavioral effects) Post-transfer 

70.5% 39.2% 

64.8% 48.9% 

61.3% 25.5% 

36.4% 2.4% 

56.9% 12.8% 

41.5% 0.4% 

33.8% 17.6% 

40.1% 0.7% 
78 

f 

Chairman DAVIS. Mr. Brannon. 

STATEMENT OF IKE BRANNON, PH.D, DIRECTOR OF ECONOMIC POLICY AND CONGRESSIONAL RELATIONS, AMERICAN ACTION FORUM 

Mr. BRANNON. Thank you very much, and I want to thank the 

committee for the invitation to speak here. 

As a tax economist, the one thing I have realized through the 

years looking at the research is that tax rates matter. And very 

high tax rates, no matter where you are at in the income ladder, 

tend to deter employment and how much people want or are willVerDate Mar 15 2010 01:48 Apr 03, 2013 Jkt 078761 PO 00000 Frm 00082 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\78761.XXX GPO1 PsN: 78761

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ing to work. And one of the things we have seen from a plethora 

of research in the welfare rolls is that because of all these various 

programs Mr. Steuerle has pointed out, you have marginal tax 

rates that regularly reach 40 percent for low-income people and can 

in certain situations go up as high as 80 percent or even 100 percent if you take into account the various State and local programs. 

No one really designed the programs to be this way. 

To quote a former Treasury Secretary, just like the tax system, 

we should have a welfare system that ‘‘looks like it was designed 

on purpose.’’ Every program was designed well and was put in by 

well-meaning people, but when you have 12 or 13 different programs at the Federal level, the State level, and sometimes at the 

local and regional level, these things act to create tremendous disincentives. 

I think this is something that appeals to a number of people on 

the committee, and I suspect that is why you had the Honorable 

Duncan Smith here to talk about what they are doing in the 

United Kingdom. To me that makes a lot of sense. Instead of having several different programs that might be at odds and, combined, create tremendous disincentives to work, it makes a lot more 

sense to have one overarching program. 

It is very difficult to implement, I understand that, especially 

when you consider my hometown of Mossville, Illinois. People who 

are low income there get benefits at the Federal level, they get certain benefits at the State level, and they also get benefits from the 

township itself. Having a Federal Government design one overarching welfare reform program can be very, very difficult, and it 

might be impossible to tell the States and the townships to butt 

out. 

But nevertheless, we need to do something so that people aren’t 

facing 70 or 80 percent tax rates. Both this Congress and previous 

Congresses have looked at this program and there have been bipartisan efforts to do this. 

One thing I would just like to recommend that this committee 

look at again, in 2002 and 2003 there was discussion about reforming the unemployment insurance system. One of the things we see 

with the unemployment insurance system is that if the unemployment benefits go on for 26 weeks, what happens is that when 100 

people get laid off, about 30 or 40 percent find new jobs the first 

month, another 5 or 10 find jobs the second month, and then hardly anyone finds jobs until month 7, and then the majority of people 

who are still unemployed find employment that seventh month. If 

you extend it to 9 months, the magic month is 10 months. If you 

extend it to 12 months, the magic number is 13 months. 

One of the suggestions—a bipartisan effort was put forth in the 

Senate Finance Committee in 2002 and 2003—was to change that 

to something they called personal reemployment accounts, where, 

when people were laid off, instead of being given a monthly benefit 

as long as they didn’t have a job, they were simply given an account, money that they could use to support their family or to get 

additional training or education or something like that. It totally 

eliminates the marginal disincentive that unemployment insurance 

provides to recipients against work. 


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Doing such a thing might be difficult and impossible for other 

welfare programs, but it is a model that people need to recognize. 

People respond to incentives, and as Congresswoman Moore 

pointed out, they might not have college degrees but the typical 

welfare recipient is able to figure out whether or not it is worth 

their while to work. What we don’t want to do is make sure people 

get just enough to get by and then provide disincentives for them 

to work. 

Chairman DAVIS. Thank you very much. 

[The prepared statement of Mr. Brannon follows:] 


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women-over the last three decades. In short, we are in an economy where more and more people 

have options to toiling at a job for forty hours a week-and if it isn't worth their while they wil[ work 

part-time and/or live off the financial support of their spouse, their parents} their savings, or welfare, 

None of these options are necessarily problematic: we can a[[ conjure the image of a graduate student 

bunking with his family, or a husband who remains at home to raise their children, or empty nesters 

scaling down their lifesty[e and retiring early to take care of their parents. However, [ submit that these 

scenarios do not describe the vast majority of people dropping out of the labor force. 

To be sure, the main reason that we have seen greater numbers of people unemployed the last four 

years than at any time since 1982 has been our moribund economy, but not a few of the 12. 7 million 

people currently unemployed are not working because they have decided it is not worth their while, and 

recent policy changes have led many more to reach that conclusion. 

High Implicit Margina[ Tax Rates Deter labor Force Participation 

There has been a [at of work-and contentious debate-over how high marginal tax rates on upper 

income earners and small businesses deter work and reported income; indeed, it is the primary point of 

contention between the two parties with regards to tax policy today, it is safe to say. [n the spirit of 

comity and quest for brevity [ will focus on people in the [ower portions of the income distribution. 

Most people imagine that our tax code is uniformly progressive, with effective marginal tax rates 

gradually rising with income. However, the combined effects of our tax code and the myriad welfare 

programs result in a very jagged marginal tax rate profile for [ower-income individuals. For instance, the 

earned income-tax credit program phases out benefits for [ow-income earners at a rate of $1 for every 

$6 earned, with benefits ceasing for households earning above roughly $50,000. 27 million families 

received the benefit in 200g4 SNAP benefits (i.e. food stamps) are another benefit for those at or near 

poverty that quickly phases out as incomes increase, and nearly 47 mil[ion people receive them. 

The reason for the relatively rapid phase-outs is that some in Congress wanted to make sure that these 

benefits disproportionately helped [ower-income families that pay no taxes, and the right was willing to 

accept these limitations to keep benefit costs down. As a result, people at the bottom of the distribution 

see their benefits quickly diminish as their obtain jobs and start to work. A working parent in a family of 

four may see an effective marginal tax rate above twenty percent at an income between $40,000 and 

$50,000 a year-a result that makes no economic sense at a[[ to anyone on either side of the aisle. 

There are also situations where the cost of earning more money can exceed 100 percent. For instance, 

the Obama administration has encouraged states to implement "broad-based categorical eligibility" for 

SNAP benefits, meaning that they are to deem an applicant eligible if he is receiving another [ow-income 

assistance program or merely received a brochure inviting him to apply. Making enough money to be 

ineligib[e for TANF wil[ thus trigger the [ass of a[[ SNAP benefits as wei!. Restricting eligibility of SNAP 

benefits to actual TANF beneficiaries would save $11.7 billion over the next decade, incidentally. 

4 "Policy Basics: The Earned Income Tax Credit," The Center for Budget and Policy Priorities, February 2012. 
82 


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Recent Changes to Welfare Programs have Depressed Work Incentives 

In the wake of the Great Recession, Congress substantially altered eligibility rules for various welfare 

benefits. For instance, it extended the length of unemployment insurance benefits to 99 weeks, 

exempted a portion of UI benefits from taxation, awarded a weekly $25 bonus to recipients, eliminated 

extended benefit experience rating, and for a time covered 65 percent of COBRA expenses after a layoff. 

The government also relaxed asset and net income tests for SNAP benefits, increased the maximum 

benefit twice (October 2008 and then in April 2009), excluded more income from the benefit formula, 

and took other steps to expand the ranks of eligible food stamp recipients. 

The result of this munificence is that the statutory safety net generosity for non-elderly heads or 

spouses markedly increased since 2008. University of Chicago economist Casey Mulligan estimated that 

it increased by nearly six percentage points from 2008 to 2009, reaching nearly fifty percent of the 

average laid-off person's income, including foregone taxes5

. 

One thing that economists know-and the data show-is that when the net benefits to working are 

lower, people are less likely to find work. For instance, increasing the number of weeks that a worker 

receives unemployment insurance is commonly done whenever there is a recession, although 99 weeks 

is well beyond what was done in previous recessions. What we observe when benefits last 26 weeks, as 

is normally the case, is that a fair proportion of people find jobs the first month or two, a trickle of 

others find jobs in months three through six, and then most of the rest become employed in month 

seven, when benefits expire. When we extend benefits to nine months we see the same pattern, except 

that the magical month when the bulk of the unemployed rejoin the work force becomes month ten. Or 

if we extend it to 52 weeks then it becomes month thirteen. Most people would rather not work if they 

can afford not to, it turns out, and I include myself among that number. 

In essence, these changes have increased the effective marginal tax rate on lower and middle income 

workers. Mulligan estimates that the effective marginal tax rate for workers receiving the standard mix 

of benefits for unemployed workers has gone up by over four percentage points since 2008. 5 People 

with relatively modest incomes are losing as much as forty percent of each dollar earned, and this has 

definitely had an impact on labor market behavior. This includes the effect of the "temporary" two 

percentage point reduction in the employee portion of the payroll tax. 

Incidentally, Mulligan estimates that the brunt of the increase in the cost of federal income security 

programs resulted not merely as a consequence of the severe recession, but primarily due to the 

increased generosity of the benefits. Government spending on unemployment insurance and SNAP is at 

least triple of what it would have been if the real benefit and eligibility rules had remained as they were 

in 2009. 7 

5 Mulligan, Casey B. "The Expanding Social Safety Net." NBER working paper no. 17654, December 2011. 

6 Mulligan, Casey B. "The Labor Market and the Great Recession: How Redistribution Distorted the Economy. 

Oxford Press, 2012. 

7 Mulligan, "The Labor Market and the Great Recession. JJ 
83 

f 

Chairman DAVIS. We will move on to questions now. I would 

like to recognize Mr. Tiberi, the chairman of the Select Revenue 

Subcommittee, for 5 minutes. 

Chairman TIBERI. Thank you. Mr. Bernstein, I have a chart 

that you will see on the TV monitor. In your testimony you note 

that, ‘‘for each percentage point lower unemployment, the increase 

in real hourly wages for low-wage workers is at least twice that of 

high-wage workers.’’ That is in your testimony. 

In January of 2009 you were the coauthor of an administration 

report titled, ‘‘The Job Impact of the American Recovery and Reinvestment Plan.’’ In that report, you may remember, you forecast 


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the unemployment rate today would be 5.7 percent with the administration’s stimulus plan passing. As we know, today’s unemployment rate is at 8.2 percent and has been above 8 percent for a postDepression record of 40 straight months. 

Is it your testimony that low-wage workers have disproportionately lost out on higher wages due to the elevated unemployment 

rates we have seen, especially compared with the unemployment 

rates you forecast in the administration’s trillion dollar stimulus 

plan as it became law? 

Mr. BERNSTEIN. Yes, I think the research is very clear on this, 

as I cited in my testimony. The wages of low-wage workers are, in 

economics terms, more elastic to the unemployment rate than 

wages of higher-income workers. And in fact, their unemployment 

rates are higher as well. 

Chairman TIBERI. So what happened? 

Mr. BERNSTEIN. Well, you are asking about the forecast? 

Chairman TIBERI. Yeah. 

Mr. BERNSTEIN. Clearly a different topic than marginal tax 

rates on safety net programs. When we—that was the administration forecast for unemployment. That is the same one that shows 

up in the administration’s first budget. It is the forecast by what 

is called the troika: OMB, Council of Economic Advisers, and the 

Treasury. 

That forecast was made by an incoming administration that was 

just forming in the fourth quarter of 2008. At that time, unbeknownst to us, the economy was cratering, GDP was falling at a 

rate of almost 9 percent. Now, if you look at the statistics from that 

time, as we did, it looked like the economy—that the recession was 

far, far more mild than that. And that is why the forecast for unemployment that you saw was actually the median forecast of all 

the professional forecasters at the time. You are absolutely right in 

that we missed the depth and severity, but so did almost everyone 

else. 

I will say that once the Recovery Act was implemented, it was 

a matter of two quarters later, by the third quarter of 2009, GDP 

was rising again. And I think that is a real mark of how successful 

it was in breaking the back of the ‘‘great recession,’’ albeit the unemployment rate continues to rise. 

Chairman TIBERI. Thank you. Mr. Brannon, you testified on the 

additional work penalty that the new exchange subsidies—work 

penalty that the new exchange subsidies provided by ObamaCare 

would create. 

I would like to highlight the fact that these subsidies also impose 

a marriage penalty through the Tax Code, and that is because they 

key off the Federal poverty guidelines; and under the Federal poverty guidelines, the poverty level, let’s say, for a family of two, is 

at 135 percent of the poverty level for a single individual rather 

than double. That means that, for example, two single individuals 

earning $22,000 a year would lose about $1,400 dollars a year in 

subsidies if they became married in one household earning 44,000 

rather than 22,000 each. 

Can you expand on that? 

Mr. BRANNON. Well, the major problem with the Affordable 

Care Act in terms of how it is increasing the marginal tax rates 


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in general is that it provides a subsidy to people who go to the exchange and buy health insurance if they are below the poverty 

rate, and then the phaseout is relatively steep in order to contain 

costs. 

And so research that my boss, Doug Holtz-Eakin, and Alex Brill 

did on the subject basically indicated the marginal tax rates for 

certain individuals will go up anywhere from 5 percentage points 

to 10 percentage points based on the phaseout of the subsidies to 

the exchange associated with the Affordable Care Act. 

Chairman TIBERI. Even on the lower end? 

Mr. BRANNON. Even on the lower end. 

Chairman TIBERI. So this impacts low-income individuals at the 

lower marginal rates and not just in this area of the Tax Code. 

Mr. BRANNON. That is right. 

Chairman TIBERI. Thank you. I yield back. 

Chairman DAVIS. Thank you. The chair now recognizes Mr. 

Doggett for 5 minutes. 

Mr. DOGGETT. Thank you Mr. Chairman. Do each of our witnesses agree that it is important to maintain in its current form 

the Earned Income Tax Credit? 

Mr. THIES. Yes, the positive part yes. I would like, if it is possible, to eliminate the phaseout or blend that into the Tax Code. 

Mr. STEUERLE. I would actually expand it to try to figure out 

ways to include single people. And by the way, I would do it as a 

substitute for the type of Social Security tax break that I believe 

is both on Keynesian and supply-side grounds, a weaker incentive 

for recovery than could be some expansion of the earned income 

credit that could be cheaper. 

Mr. BERNSTEIN. I would add that the expansions that Congress 

supported to the EITC in the Recovery Act have proven to be extremely helpful in all of the ways you have heard this morning, 

and I would try to ensure that those expansions remain a permanent part of the program. 

Mr. DOGGETT. Mr. Bernstein, let’s talk about health care just 

a little bit. 

If I have a high-tech employee in Austin who has a great idea 

for a start-up, but a family of children with serious illnesses, it is 

an informed decision for that person to stay with their group 

health insurance rather than go out and benefit society perhaps by 

creating a tech start-up. 

Similarly, if I have a poor person who can qualify—and in Texas 

it is very difficult because the State under Governor Perry is mainly about trying to prevent anyone from getting health care—but if 

they manage to qualify for benefits in the State of Texas for health 

care, with a sick family, and they choose not to seek a higher-wage 

job in order to maintain that eligibility for Medicaid, that also 

would appear to be not an indication of a lack of willingness to 

work but of an informed decision to try to provide health-care protection. 

We attempted to respond to both types of informed decisions with 

the Affordable Care Act, and, over time, want the availability, particularly the expansion of access for poorer people to health care, 

remove any cliff or disincentive to work, to create new jobs and 

new businesses, and new economic opportunities. 


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Mr. BERNSTEIN. Yes, Congressman, I think you are adding precisely the kind of nuance that I tried to reflect in my testimony 

which must be brought to these criticisms by my colleagues here 

on the panel of the implicit tax rates in the Affordable Care Act. 

There are a lot of moving parts. You just mentioned a number of 

them. One of the most important is that the Affordable Care Act 

expands Medicaid, therefore pushing out and lowering any marginal tax rates or work disincentives associated with that program, 

quite significantly. 

And one of the studies that I brought with me today simulates 

this impact and predicts that the Affordable Care Act, accounting 

for the disincentives you heard here but the incentives that I just 

mentioned, would actually increase the employment of single mothers. The Affordable Care Act also reduces job lock which is what 

you mentioned. It is a highly inefficient problem for people stuck 

in the wrong job because they will lose coverage if they leave. It 

increases subsidies for small business. And by the way, if it successfully lowers health costs as expected, that will of course be very 

positive for job creation as well. 

I think what I tried to express in my testimony is that you simply can’t do what some of my colleagues have done today, which 

is look at the marginal tax rates and assume that they reduce labor 

supply. You have to get into the actual functioning of these programs and look at the empirical outcomes. Now, we can’t do that 

with the ACA yet, because it is not in place, with one exception— 

Massachusetts. Massachusetts has a health plan much like the Affordable Care Act, and there is a very nice study that looks at the 

employment effects of health reform in Massachusetts compared to 

neighboring States which face the same economic conditions but 

don’t have that health-care difference, and it finds no employment 

effects at all. 

So I would be very wary of the simple prediction that says if a 

tax rate bumps up X it must have Y effect, without considering the 

kinds of nuances that I think occur in the real world. 

Mr. DOGGETT. Thank you very much I yield back. 

Chairman DAVIS. Thank you. The gentleman’s time is expired. 

Mr. Marchant from Texas is recognized for 5 minutes. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

Mr. Steuerle, Mr. Steuerle, economists and researchers have 

noted for decades that the interaction between welfare and tax benefits can create little incentive for low-income families to work. Is 

that still pretty much the consensus among economists? 

Mr. STEUERLE. Well, I tried to point this out in my testimony. 

What has happened over the last 2 or 3 decades is we have moved 

out what used to be called a ‘‘poverty trap’’ to what I now call the 

‘‘twice poverty trap.’’ 

So Mr. Bernstein is right that if you ask about what those reforms have done, they have probably increased labor-force participation. What the research is showing is that although it has increased labor-force participation and particularly for, say, welfare 

mothers who didn’t work, the incentive can only be clearly positive 

in going from welfare to an earned income credit, or going from 

welfare to a welfare where you require work. The incentive is only 

positive towards participating in the labor force. 


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What has happened, however, is that once you earn a little bit 

of money, once you get to about 10,000 or 15,000, that is when the 

disincentives largely strike. And so that is also one reason why we 

get mixed effects dependent on how you are measuring work. 

There is also something we haven’t even discussed. You can actually decrease productivity but increase number of workers. So if a 

second earner doesn’t take a job at $40,000 (a full-time job), but a 

couple of low-income workers work for 10 hours, you can increase 

labor-force participation, yet decrease output. 

I realize I am giving you a more complicated message. But the 

disincentives have basically moved up the income distribution. 

The same thing occurs with the Affordable Care Act that we 

were just discussing. You have moved away from this disincentive 

in Medicaid and now you have moved the disincentive higher in the 

income distribution. So I pointed out in my testimony, for instance, 

that the Affordable Care Act probably will very much help the disabled to go work who are afraid of losing their Medicaid, but it will 

probably encourage more elderly people near to retirement to retire 

because now they can get health care without having to retire. So 

it is a complicated story in how tax rates discourage work. But the 

question is how much and for whom. And is this particular design, 

once you accept a social welfare structure, better than some other 

design? 

Mr. MARCHANT. Another part of the testimony of Secretary 

Smith was that they had seen some disparity in those that are disabled. And as you know in our system now, we have over the last 

few years we have almost 700,000 more people on our permanent— 

our disability rolls than we did before the recession. 

So I would like each of you to make a comment about whether 

you think this disability, this enrollment in disability has to do 

with obtaining the benefits of Medicare or, slash, Medicaid, and is 

there a—in his case he said there was very little incentive for 

someone that was disabled in the U.K. to go into the ranks of the 

employed—and do we have a similar trap in our system now? 

Mr. Thies. 

Mr. THIES. I would say if people have a robust incentive to 

work, then we could rely on their good judgment about whether 

they are permanently disabled or not in applying, and that when 

we don’t have that robust incentive to work, we might suspect that 

the person is not balancing the considerations that person faces individually, and we face as a Nation in terms of having a safety net 

in place, and nevertheless wanting everyone who can to work to 

the extent that they can. 

Mr. MARCHANT. Mr. Steuerle. 

Mr. STEUERLE. Mr. Marchant, you are asking what I think is 

the toughest question in all social welfare policy: how do we design 

a program for the disabled? As I mentioned, among those near to 

retirement, disability insurance, for instance, favors retiring on disability rather than old-age insurance. If you retire on disability at 

62, you get 30 percent higher benefits than if you retire on old-age 

insurance. So it creates an incentive, if you have moderate disabilities, to try to figure out if you can qualify for the system. 

Among those who really are disabled and have huge medical 

needs, the system has huge disincentives, once you get that MedVerDate Mar 15 2010 01:48 Apr 03, 2013 Jkt 078761 PO 00000 Frm 00091 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\78761.XXX GPO1 PsN: 78761

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icaid, to go back to work. You are really scared not just about losing your health insurance. But even if you take a job that has 

health insurance, you are not sure how long you are going to last 

on the job. And then you are afraid of having to get back in the 

system. 

So I don’t have an easy answer for you. Disability, reforming disability I think is absolutely required. I think there are too many 

disincentives in the system to go to work, but it is a tough issue 

to handle. I think there are some margins where we clearly can 

make the system better. 

Mr. BERNSTEIN. Two very brief points, Congressman. 

First of all, and this is just repeating something that I think 

Gene said a minute ago, the Affordable Care Act, by pushing out, 

extending, expanding Medicaid eligibility, including to the disabled, 

actually reduces a work disincentive; and it is pro-work inducing 

for folks with mild disabilities such that they can go to work. So 

it kind of reduces a cliff there, which is helpful. 

My second point is I think implicit in your question was the 

idea—and numerous folks have looked at this—the extent to which 

disability rolls are rising faster than we might expect them to, faster than they have in prior years. And there is a question, are some 

long-term unemployed people simply using disability as a replacement for unemployment insurance? I am sure that—research suggests there is some of that going on, but one of my colleagues has 

looked at those numbers. Adjusting for age in the population, as 

the population ages there is going to be more disability, and that 

has created significant upward pressure on the rolls as well. So at 

some level, it pushes back on that idea that folks are illegitimately 

getting on the rolls. 

Chairman DAVIS. Thank you. The gentleman’s time has expired. 

The chair recognizes Mr. Neal for 5 minutes. 

Mr. NEAL. Thank you, Mr. Chairman. 

Just a point that Mr. Bernstein mentioned earlier. One of the 

things that is significant about that Massachusetts plan is the consumer satisfaction rate. It remains pretty popular across the board. 

Small business, large business, it was carefully negotiated, and I 

think that bears noting in the discussion that we are currently 

having. Once it was implemented and people had a chance to see 

the fruit of the investment, it has been fairly well met. And I don’t 

know anybody in the State, Republican or Democrat, who are talking about going back to the previous system, including the Massachusetts Hospital Association. They have all made sure that it 

would work, and regardless of what the Court does tomorrow, the 

people in Massachusetts, again—left, right, and center—they are 

committed to making this plan work and nobody talks about breaking it out. 

Let me just, Mr. Bernstein, before I go back to Mr. Brannon, because I raised an issue with you, I spoke earlier of one of the things 

that we did in 1996 with the welfare reform bill, which, in the end, 

was a series of artful compromises. We did talk about job training, 

transportation incentives, child care, daycare; but also one of the 

things that was very, very important, and it was done on a bipartisan basis, was the whole notion of child support. Would you speak 


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about that experience, because I think it bears noting as we go forward. 

Mr. NEAL. You may. 

Mr. BERNSTEIN. The Council of Economic Advisors did a study 

when I was back at the White House and they looked at the impact 

of the Affordable Care Act on businesses small and large and they 

wrote as follows, creating a well functioning insurance market also 

prevents an inefficient allocation of labor away from small firms by 

leveling the playing field among firms of all sizes in competing for 

talented workers in the labor market, which is a complicated way 

of saying what you said very plainly, which is that since large 

firms are much more likely to offer comprehensive health insurance 

for their workers a system like the one we have today outside of 

Massachusetts gives them an advantage and a disadvantage from 

the worker’s perspective in terms of job lock. If you have a more 

comprehensive system as the Affordable Care Act would present, 

small firms then lose that competitive disadvantage to large firms 

in competing for talented workers. 

Yes, child support is one of the many work supports that I would 

argue go far further in incentivizing work than tweaking marginal 

tax rates, whether it is quality childcare, transportation assistance, 

job training and education, subsidized employment, which by the 

way was a program that worked very well in the Recovery Act in 

incentivizing employment. These kinds of work supports have been 

shown to be much more consequential in helping people move from 

welfare to work than changes in marginal tax rates. 

Mr. NEAL. And Mr. Brannon, in New England where we saw the 

textile industry leave and then we saw the old line manufacturers 

begin to depart over the last 50 years, I must tell you based upon 

that solid old manufacturing history I never met anybody, the families that I have known all of those years, that were inclined to extend unemployment benefits if they thought they could get another 

job in a similar industry. 

Mr. BRANNON. Well, I also come from a major manufacturing 

center. Mossville, Illinois is the home of Caterpillar Tractor Company. In the early 1980s Caterpillar went through the recession 

with the rest of the country, and basically over 50 percent of the 

blue collar employees from Caterpillar’s factories in Mossville and 

East Peoria and Morton were laid off. We had a great example of 

that just in our hometown. What happened was that anyone who 

had any home building done, any work on the side, basically hired 

someone who did it for cash, presumably with no taxes paid. And 

who were these people? These were blue collar Caterpillar workers. 

So people might indeed be working but they are not necessarily reporting their income. I think you see a lot of that. 

Mr. NEAL. But you weren’t suggesting then that people with 

that strong history of work and a good solid work ethic didn’t want 

to go back to work if they could find a good job or similar to the 

one that they lost? 

Mr. BRANNON. No. I think if you have a blue collar job and you 

get laid off for 2 or 3 or 4 months, it becomes a rational decision. 

I think if you realize you are getting exactly half your salary it 

might make sense for you to take a few months off. When I was 

a professor in Wisconsin I knew people who worked at Oshkosh 


ccoleman on DSK8P6SHH1PROD with HEARING
90 

Truck. And what they would do when they knew they were going 

to have to lay off workers is they would ask for volunteers. And 

there are all kinds of people who would volunteer to be laid off for 

a month or two because they had various other things they wanted 

to do. Some of it was they had jobs that they wanted to do on the 

side in winter. 

Mr. NEAL. Thank you. Thank you, Mr. Chairman. 

Chairman DAVIS. Thank you. The chair now recognizes Mr. 

Berg from North Dakota for 5 minutes. 

Mr. BERG. Thank you, Mr. Chairman. And I thank the panel for 

being here. This is obviously a critical debate and issue and probably won’t be totally solved today. But obviously our goal is to lift 

people out of poverty and try and create a system that encourages 

the end result where people are self-sufficient. So I guess the thing 

that obviously is clear today is the programs and the tax, if these 

are combined, really create an unintentional barrier to help lift 

people out. And so I guess we talked about the dead zones and the 

poverty traps. And I guess my question is real simple, is how do 

we fix this to encourage people to work? So if we could just—Mr. 

Thies, do you want to start? 

Mr. THIES. Well, I think if we could address the payroll tax it 

comes in at dollar one of earnings. And so while the Federal income 

tax is highly progressive, has a very generous zero bracket, the 

working people of low income and moderate income today are paying much higher taxes than did people during the 1960s when the 

payroll tax was 3 to 4 percent and the employer matched that. 

Mr. STEUERLE. Mr. Berg, actually my first comment reflects 

the previous discussion on unemployment compensation and on disability. There is some evidence, and I think all the members on 

this panel agree, that if you design a program so that you have 

quicker, earlier, intervention it seems to make a lot of difference. 

In some cases for the unemployed and the disabled it is the habits 

that are developed in these periods of unemployment and disability 

that will continue. And so there are some proposals that are trying 

to figure out ways to give more incentives to employers, for instance, to try to intervene early so as to affect those habits. So that 

is one area we can work. I mentioned a lot of other relative shifts 

I think we can make. I think once we agree we are going to have 

a social welfare structure we are going to have to struggle with this 

work disincentive issue. The issue is not going to go away. And so 

the question is what are some relative shifts we can make? One of 

them is that I think we could make work a greater requirement for 

some other benefits. 

Another one that I think of, along the lines of a much broader 

thesis I have been examining, is that our social welfare budget 

keeps expanding every year. It doesn’t matter whether the Republicans are winning or Democrats are winning. If the economy doubles in 50 years or 30 years, typically we will devote more to that 

budget. Maybe we will devote 90 percent more if the Republicans 

win and 110 percent more if the Democrats win. It is still growing. 

We can orient that growth not so much towards consumption and 

adequacy, and, quite honestly, not so much toward paying very 

high cost health care and retirement benefits, but shift it more towards incentives for work. 


ccoleman on DSK8P6SHH1PROD with HEARING
91 

I have a variety of other proposals at the end of my testimony. 

I don’t want to take too much time here, but I would be glad to 

discuss them more with you. 

Mr. BERNSTEIN. Congressman, if we are going to have means 

tested programs that phase out as incomes rise, which is very 

much a function of our safety net, we are going to have these marginal tax rates. So my answer to your question is the best that we 

can do is to have that phaseout be as long and gradual as possible, 

but of course there is a tradeoff there with cost. I think the evidence is quite clear that that helps in the case of the EITC or in 

certain States with food stamps where that marginal tax rate is 

kept low. 

Second, work supports are critically important, as we have mentioned earlier, such as transportation and childcare assistance. I 

would argue that these are more important than the marginal tax 

rates in terms of work. And third, and this is key, the adequate 

availability of jobs. And that takes you more to the demand side. 

I certainly wouldn’t think of adding work requirements to other 

programs that don’t currently have them in a climate where there 

is simply inadequate job availability. 

Mr. BRANNON. I just want to pick up on something Mr. 

Steuerle said about the importance of people entering the workaday world and learning how that works right away before they get 

trapped. To that I just want to add one other thing, that the minimum wage can often be a disincentive for young people, especially 

teenagers, to enter that workaday world. I just want to encourage 

the Congress to think long and hard before they increase the minimum wage again. 

Mr. BERG. Thank you very much. I yield back, Mr. Chairman. 

Chairman DAVIS. I thank the gentleman. The chair now recognizes Mr. Larson from Connecticut for 5 minutes. 

Mr. LARSON. Thank you, Chairman Davis. And again I want to 

commend you and Mr. Tiberi for the spirit and bipartisanship in 

which this is held. I had the recent opportunity, well, about a year 

ago, to travel to China, and got in a heated debate, and one this 

committee is familiar with, about China currency and also the 

trade disparity that exists between our countries. And former Ambassador Zhen made this point. He said, do you know, how many 

people do you think we have lifted out of poverty in China. And I 

did not know, to be honest. And it was around 320 million, which 

is the entire population of the United States. They were able to do 

so by investing in their infrastructure. And to prove that point we 

drove from Beijing to lower Mongolia and witnessed all the investment in infrastructure. 

I raise this point because, Mr. Bernstein, you pointed out the 

adequacy of jobs. And after all the discussion about marginal tax 

rates and incentives versus disincentives fundamentally people 

aren’t going to be able to work if jobs aren’t available to them. And 

so while there has been much ballyhoo about how we are going to 

create jobs here we sit in a Congress where we have yet to take 

up after more than 100 days a transportation bill as the season 

eclipses, and fundamentally the President’s request of last September to have his bill taken up in terms of jobs is not. 


ccoleman on DSK8P6SHH1PROD with HEARING
92 

Mr. Bernstein, I will ask you, and then I have a question for Mr. 

Steuerle also. What would the effect of passing the President’s jobs 

plan be on incentives for millions of Americans that currently can’t 

find a job. And then, Mr. Steuerle, the German system where they 

incentivize people staying in work by instead of paying unemployment they provide the company with direct subsidy to retain the 

person in that job instead of having them go outside to work. 

Mr. Bernstein. 

Mr. BERNSTEIN. Right. If I may poach for a second on Gene’s 

question. We actually now have a work sharing program here, and 

I think it is exemplary, and I commend the Congress for passing 

it. There is—and some of my colleagues up here may well agree 

with what I am about to say, even though I know they are more 

focused on the tax rate side of this. There is no better social welfare program, no stronger social welfare program for reducing poverty than an adequate availability of good jobs for low wage people, 

than a tight labor market, a full employment labor market, where 

instead of an excess supply of lower wage workers there is an excess demand for them. And I think we saw that most clearly in the 

second half of the 1990s where there were a lot of moving parts, 

welfare reform, the EITC, a higher minimum wage, lots going on, 

but even in the midst of all the disincentives that we have been 

talking about today we saw the employment rates of less skilled, 

disadvantaged workers, of poor workers, of single moms, go to the 

highest rates on record and poverty rates drop to some of their lowest rates on record. So simply put, no better program. 

Mr. LARSON. Mr. Steuerle. 

Mr. STEUERLE. Mr. Larson, I think you make a very good 

point. I think we can learn a lot from the German system, although 

it extends far beyond just the part that you mentioned. The German system is especially good at sponsoring apprenticeships and 

favoring education of people who don’t go to college, not just those 

who do go to college—something I don’t think we do a very good 

job of in this country. My colleague, Mr. Lerman, works a lot on 

this issue and perhaps has talked to you about that already. I mentioned earlier that I think you can change the incentives in unemployment and disability and engage the employer in the sense that 

maybe you can experience rate these programs a little more so 

there is some greater consequence for the employer. It is not so 

much that the employer has to pay the full burden, but it would 

be nice to have somebody who would help with this early intervention, which sometimes is harder for the government to do. 

So I think there are ways in which we really could learn from 

the German system. 

Mr. LARSON. George Will used to express frequently that government works best when it is a collective enterprise. And by using 

the term ‘‘collective’’ I think what he meant is, know what he 

meant was that by embracing our academic private sectors, labor 

sector and government pulling together we do have this engine of 

growth in opportunity. 

What models would you suggest or do you have any that we 

should follow to achieve those goals and address some of the concerns that our chair has raised about coming to the precipice of this 

cliff and making sure that we are doing the right things? 


ccoleman on DSK8P6SHH1PROD with HEARING
93 

Mr. STEUERLE. Well, this actually fits in a bit with what Jared 

Bernstein was just saying. The long term engine for all of this is 

economic growth. And I keep mentioning that we think the economy is going to expand over time. So I really encourage you to 

think about how we restructure our social welfare system in a very 

broad sense as we move forward 5, 10, 15, 20 years from now. If 

you look, for instance, at the government budget put forward by 

President Obama. I would say the same thing if there was a Republican budget. We are planning on spending about $1 trillion 

more per year in another 10 years. Yes, about $1 trillion more. 

Now, it turns out almost all of it right now is going for interest on 

the debt and Social Security and Medicare and Medicaid, but not 

the children, in ways that for the most part don’t favor employment 

at all. If we think about how government shifts its resources more 

towards favoring employment, we can go a long way. Then the 

other advantage we get is that if we get it (economic growth) then 

the relative wage from working starts growing and growing relative 

to simply living off a subsidy from the government. So you can affect partly through marginal tax rates the relative hurdle or point 

at which going to work and engaging in the market makes one better off. 

Mr. LARSON. Would you agree with Mr. Stiglitz that the war cost of some $3 trillion and having the two wars and the tax cuts 

paid for—— 

Chairman DAVIS. The gentleman’s time has expired. Thank you. 

Mr. Bernstein, on page 9 of your testimony you say it would be 

a, quote, significant policy mistake to require recipients of benefits 

to work without first ensuring adequate job availability. This is exactly the same argument that some made against welfare reform 

in the 1990s, that it was wrong to require work without guaranteeing, quote, adequate job availability, closed quote, for everyone, 

which makes me wonder, how do you define adequate job availability? 

Mr. BERNSTEIN. That is a fair question. And I was there at the 

time thinking, writing about welfare reform. I didn’t mean to imply 

that there should be a guaranteed job for everyone. What my statement in my testimony was meant to stress, that absent stronger 

labor demand, right now if you look at the low wage labor market, 

for example, you will find that there are far more job seekers than 

there is job availability. Obviously that is partly a function of the 

recession. But even in a stronger economy when the business cycle 

is expanding the low wage labor market is often characterized by 

excess supply and not enough jobs. If you look at welfare reform, 

which I would argue was quite successful in moving people from 

welfare to work through this period of full employment in the latter 

1990s that I mentioned, it has actually been quite unsuccessful 

ever since, even with relatively low overall unemployment rates 

into 2000. So while welfare reform is largely regarded as a success 

in this regard it really hasn’t been over the last decade or so as 

the job market has weakened. 

So my point is simply kind of, as Gene and I were just reflecting, 

that you have to have a very strong demand side functioning on 

the low wage labor market if you are going to require work and expect it to reduce poverty. 


ccoleman on DSK8P6SHH1PROD with HEARING
94 

Chairman DAVIS. Would any of the other panelists like to comment? Mr. Thies. 

Mr. THIES. Yes. It is understandable during a period of depressed economic conditions that through statutory means and administrative discretion the public and the private charity system 

also will relax eligibility standards, extend unemployment benefits 

and so forth because of the objectively more difficult circumstances 

facing people who are vulnerable. Having said that, it is understandable that when we do have a robust recovery we are going to 

revisit some of those things. 

Chairman DAVIS. Mr. Steuerle. 

Mr. STEUERLE. Just very quickly to repeat something I said 

earlier, is if we had taken more of the stimulus money and put it 

into job subsidies, particularly for lower income people, that that 

could have cost less and it would be a better change in stimulus 

because these people are more likely to consume. It would have 

been a better supply side incentive because you would have a better set of work incentives than some of the just across the board 

way we spent some of the other money. 

Chairman DAVIS. Thank you. Mr. Brannon, would you like to 

have the last word? 

Mr. BRANNON. Yeah. Casey Mulligan, the University of Chicago economist who testified in front of the House Budget Committee a couple of months ago, pointed out that if you look at what 

happened to the array of welfare programs in 2008 and 2009 we 

dramatically increased spending on a wide variety of them, and 

again we did each one of those individually. I come back to Mr. 

Duncan Smith’s point that we really have a haphazard welfare system that creates terrible disincentives to work in all kinds of 

places. And as Mr. Steuerle has pointed out, not only at relatively 

low incomes, but it also has disincentive effects at higher incomes. 

And it seems to me it is beyond time for us to redesign a system 

and think about it more holistically rather than program by program and come up with something that removes these disincentives. 

Chairman DAVIS. Great. I want to thank all of our witnesses for 

coming today, for your patience through the early changes in the 

schedule. It has been very helpful, the insights that you have provided how tax policy and welfare policy can create disincentives as 

well as incentives to work. And hopefully we will continue to work 

together in the time ahead to address the broken processes that we 

have between the various agencies to harmonize this and to get to 

the point that Mr. Brannon talked about at the end in a hopefully 

bipartisan way. 

If members have additional questions they will submit them to 

you in writing. We would appreciate it if you would reply to the 

committee so we can have those inserted into the record. Thank 

you again. And with that I conclude the hearing. 

[Whereupon, at 12:20 p.m., the subcommittees were adjourned.] 

[Submissions for the Record follow:] 


ccoleman on DSK8P6SHH1PROD with HEARING
95 

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Wt.: .. )"ou .,," '0 10<>1:: .1 !>ow """'~ ront~""I. "" goi~ '" ,he """" ",,"""'k of pro"i""'" hk. Man"",.-c,. ~t. ,im .... Gond"illlod ... ...,., 01 •. ",ilb i"'do,,,,,I\<XI;""" 10 HilS 

"om;"'"""ioo.;, i •• 1", """h .... i~ )'"""",1, ... ifard ,,""" (ong ..... "ill ",,,";~ ... I ..... ,,,,,11,,10 ofi"'~? 

II, nl ; (:,\0 Ut:Tt:II.l lIl' t; U '1"1 1" '1' OCSt: FA'fIIt:lIlIOOU l'IW(;1{,\MS 

II~: IlIULlU; LI WI'I'II t'II" UII, 

' u ..... ~'_.....w..I , .... ""O"_ ~_._("IOJd"'"""""_'of ..... 'H.'.f. ........-·'''''"' _L __ , ... '' .. A".'''''A ...''''''''">". '''_'''' ... ,q _II. ItI<_ 

-,~ 

'-~F_""("_', T_""' dw W ..... F ... ")', ~' .. """"" "_0.-.,;''1<""". "..mo .. " .. "'_"''''' ... ''''''' ,.."'" )01"".,,, ,,-w.o .... )Ic. ... b<o 2000 Imp ... " ., .... ;r""'n,.orn. ..... ~l'>l ' ... htn\ ·_'nJurWI ........ J"" .... s,"' ... ·"y" .... " .. _ _ ,(:_ .................... M., 1.lOIl 

""ro' ...... ",oott._ ... ~""_ ~.j1o:.~, ........... !, ~ ..... S) ~ ... 
98 


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In Z008. ' h< GAO ,<1<0>«1 . ,.,..,11 <",I,ltd -IIJ:AI.1'IIY .If,/RRIAGJ;ANIJ 

RES/,().\'SIJlJ.J: J"A1'IIf;RIIIKJ/) 1,1"1l1ATII'H: F,.,,/o<r I'nw,,,, I. N«<hI ,n 

/k, .. I.>pj"ll Q Rbk·/Jmfi) .!/.",'rorin8 "",..",,~ '" Ildp 111/:0; I"'p'aw 1''''1''''''' 

(}.,..,.I.o:III " '"!hal <_10 ..... -<1 I ..... ,tI<s« pn,¥""" "~'" riddkd " 'i,h [flno! ond "'" 

"",f"""ini_ Ttl< GAO """" IWtd tM' IIIIS f,llo<.I ID <"'''e D.""";¥h, ..... hanisnu. Of 

... ""-'01 p«f""""",,< ~"' ' prior '" di,buni,,!! S500 million In """" to """il)' <hose. 

pro"""n, OlOan' '0 ""' .. child"", 11" og In hl);.h-rid r.mllks: 

- 1111:; ... /«1:.< ""c"'ml, ... 'a ilknl/f), ,,,,,I ~I 11"'''.''' lhal art ,"~ In 

romtHiIm<r ~'I'~ pin" mt"I,..,,,,,,,,,. or "" "," "'..,,"!: P"jiJr""uoN -' .... 0., 

......... ~, of g"'''''' «'" fit .. fo"",1 dt",,,,,,,,,,¢I,,,, ,,/ .0:'0""" 11><# "',,, "'" 

"""""1( ".di"""UK"' ''''gt"t< ... f1f" no, ill romp/II"'N! .j,h ~"' ",~"i ... ""'n". tuck", p .. w/dlng onJ}' ,Iw< ,,,,'1«. ai/"M"" WO<k, 'M ",.,,,,, -

S500 Million Unrondi,loo'IIJ (;inn ToM' ;" I,'o:I"",,,,/"I( "",kr u 

okwl/ ... ,Ita, "jln ~,1 1II1S 7 """"lis 10 ao",ro gr'""~ IIIIS ,""",,,,,,111, 

'X/;1/11): ",«<.<$ '" ",,'IHOl Ik,,/r!o), .u" .... lI>gr ",,.J R£."."..ihl, Fa,/o,,1roo<1 

1("'''''' 10 pllb/I<" INf(/ ",I",,, """I1''''I=IIII<;m JwJ. ~11!/.!.p''IC"t'~ I/I/-'' ,Ikl 

"'" iJ!lIr u"",/..c tr/mIu,' "",,,,"'" ," ok.«rihr,V. IIr<!" "I'f?!.k<JIiam 

indutl;"" ,''' "",Ivl( .. Ih,.. plfflt",'d IO"'~ Ihj, <,""",,01 ,""lImr;r. 

~"" "'"","*-' fo< 1(''''''''' /,n" '" l/wl" 11JIp/''''''''Ie'/ 'hr" prof(I'tl.... - I'. , 

.'.llu •• w ' mvl,m,n' UnlfQ"n St>od ,,,b. Pol",,,,,. and I'I'O<.-.i " ... " 

If/IS ~ ... ",..,/r()J, ,/o;n /,.d"",-' "I. "j"I> ",0/1""1(1'<-'> "'P<I'" '" .",.jI"" !(TU"''''. b", II locL- lNt'/o;m"'''' 10 liklUify "ntI 'UI"g<'I g",,,,,t> ,''''' "" 

... u In ,,,..,,tlon<Y M'II~ 11"'"' "~uh_"'. '" oJn "'" """'/'11): 

1""1"''''''''''' gooJ •. "ntI /1 "/,,, liKL- r/.''''''''; <",,,1,',,,,,, !;u/da" ... jx 

l"',jiJrml"N .110 "",.,,,,,1"11 "J.;". 1'.2 

En,t.."l<m.n' .nd •• .. uJ W., Ukd)' "',' b' Un,lor .;..Im • • td: 

\~''''''~,.. M" ,lid "'" ,un ,· "'1/1,,,1=,,,;,,,,, ,ltal "wl",,1 " '0"<,), 1m ... f(FW" m-lpI"''' '0 pro"M, Jim-, ,,,,-lIT •. ,"""'·",ok .. SI,.... ""'*1":<1 ,/w 

i.'II,,/ """ud<. ~ '''It'',,i=atiam Ita ... ',//'''Iu/,''''d ,Jo,>/, I(TU'H.'. / 

'''1I'ml,"""", "'.1 ,,, I¥QI" ''''''",,,,'rJ. "",/ I I .. '" #'''''' ."" "".m-tkd. 

n....., "'" 6 '11).",,,1=,,,,,,,,,· ,,,",,,,I), """,/1"11 """"""",n"",,,,,, 11/ ,,"ur./ 

;.., 

.. . llliALTlfr M.'A"'A"lA~·" U.'iI"OXSI.U "A "'''''"(1)'' ""rIA r".~. '_r""-",,,,,,,,,,,,,, .. o.w"""""."'._~_A __ .. /Mp/IIISI_ '-o..r,,...-C' .... _~~'iltOfll«~<pOn .. ""a.. ____ .. , _ 

_ io)""" ... ;Iy_C __ .. ... ·., ......... ~II, .... ".f._.;,.n.""""'"""""" . .... ' __ /nM.po ... ' · ..... ;"""<IOI'OOl.pdl 
99 


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Pk.s< """II tha"he: ilTCSflOO'i"'" ~ 01'< r«rui'ins "iolen, off.1lIkn dim:,ly fmnl 

poi"",." '" he:lp 'I>om obI.in log.ol."d phl'.;"al <~~ "f'""child "k'im "'ilO ...... 

,he:)' hun, )",Iho GAO • .,,001 dircclly lO«oon' for Iho ><,i,-i,k. or ,he: fundinll i"in~ inlO 

,1>0 r>«>W"""s, 

Altl»ugh II""'''' c'nOOl u,"" TANI' morJ<)" fOf .tlOfTI<)'o, '"" Ii" ...... ""' """"" ,113, """" 

)l1'l>I\'" li~. IIlinoi, C""""il 00 f"hc:rhoxod" 1"">I'ide, r .. lIm "'i,n logol O<i"io<: and 

exccp'ioo.>l """os!; 10 joo)lcs, MknilO"" i. prm''';n, dod. ,,'i,n lqal .,,;'tan«." and ,II< 

Moo"","" Cowuy. Colorado F .. hcrhood~' m".h up f.1h:r< ,,-i,h "F.1h<fhood 

C_I>o," ".., aloo juS! ",,,,,,,n 10 1>0 .. ,"""')'. " . .., "an' to 11<11' ,I>om ,,-;,h ,I>oi, <hHd 

OIJpport and <"",<XI), probIenu. 

You "","Id uk )·"" .... h~" lie> ",,,,,,",,.U ,1>0 "k,im child', in' .... " " 'hi,,, ,I>oi. ,·iol.", 

", .. ""."o,li,1 r.1h:r< "K <""""oled .hild support and (<<1<.-.1 ..,iSl....,. '0 ""ild "P lq;al 

.". ... 1' 10 lal;c custody .rId .il<I'IO< ,he:m11111S 1""I!mn> on: """ ... 11), • <kadl)' 

in,..""""" Ki,,,,,, '''''' {ala .... ;,.., ""'" "in .WOO) of'hoi. ic~m.10%0r'l>o 'i""," 

"t.cn Ihc:y uk ro"; •• and {b) ~JI< .. of ,he: gcl>lk. oflhc: "ielim. ;, is • I"'blic .. fely 

i ..... """" IlOr S!odi.-.'· ""'" MO. 1>0"1'<,.-.10 """" III3n ~j % of "ioIo.' .... "" •• ~.i .... 

,,'<>mL'ft, '11>0 Con'" for 1);,''''soCon'rof. 2010 Nali"""l ln,im"o P"""",and s..xual 

Violence S",,~y" 01", "",,1..&.1 I"" MOn'r< ",1'<'1 by ",he< MO" '""'" ,I-..,n 93'1'. of'he: 

lin ... and "'.,...." .'" nopod 1»' m<n """" !han 9S% "f'l>< ,im<. 

I'rogranu Ii •• 1110 M:wach .... U 1l<p;u1mc-n1 ofProb;o,,,,,,'," p'''''i<k .,,,,,,,,,..,," 10 

Ihou>anW of un,,,,,,,,,,,,,. incurabl< "iolen, oflroJcn and _""",II< larg<1ing ,he:i, 

,-""iou 'hrotJih Ibo <,,",,-, Al,hough ,'1oknee is • ,'olun"'", ""'. HilS 0011' in' .... ''''' our 

"'" <1<>11= in'" n:lI3bilita,illj; ,hi: i""u.-.bk " '110 choose ,n ...,.iI,he: "..,., "ul ... ,..bI< 

....... "bt-r> "r _",~, So.>mo S,,>,li .. " of""'''' IlV ""'I"',,,,'or.,,"",,, tha, SO% or,l><", .... 

_iopaths .nd lMIhc:r 2S% ha, .. _iopoIhic trndancid. p,,.<hOI',"M "'" pcopIc: ,,"" 

f, ... 1 .. , cmotioo.>l .,.""...Iions '0 ",lim and """. ,/,"0 rqonl rot ,1>0 1'111<0 . nd ..-gulali"", 

of ..,.ic'~. 'her do not =pond '0 ,1>01111')'. and canOOI be ","""i\i""OO. IJr, Robel! H,,,, 

"'1'0'10 tha, p<)·.hop;I,h, ""'~. "I' \% of.he: K.""",I popul"ion, b,n 25% of ,he: pri ..... 

""",,1.'iOft, 

"Hoi,,,,,,, h "'" u""' .. ""'" '''''''''I{ oil"")'" /1<1pI<i"'iom, b", "")~"''I''''/u; ",II '''''''''I«' Id ."nrJ "'Ii. "h< SU)~, "11Ir" ",,,,,,,,I, """, ,"'on ""k< '" "'"'I)' "1<1/<", .nrJ 

"iW'~"';\" ""',, "'"h /. and"", <>/ I";'0ll '" J" "''''" cr;mht<u, TIt<- ,,,i<h,';_'", 

"N • .,..,f' .......... ' ........ , .... , ...... ~ __ "' • . _-"'9'<"'"" 111 

" .... · .. "'n'."""" ...... ..,.-',Ji_ ... '_prACCT ' ..... STORy ""''' .. ....,0'·''. lOO'l)(IOoI')6"""'ll"'~~ 

"I!!,,,"' n .. ~ipo .,., ..... O.I607.'·'l'_"1~1=.90"'"'! ""'_roxl'_.C._""p, .... ", ___ ~ ...... "_v;..'m' 

~"

" .... ' """ ......... i.,,""""" __ .. ""'---..:., ........ \OOO .... _ ............... , ... _ 

_""""' f_ il, ...-u 

~ ..... , "."._, ___ - ....... ~D.,..~_'Of' .... h ............... 

" ..... ,-.. " ·"' .. _..".N .. """'Pr" ... ""''N'sv<·_, ..... , "hop, """ . ..-.... ~,,..-... po061>01 ..... 1 " ... ,.",,"_"", __ .... ~'OOJ.O,_ ....... "'~_~.,_ 
100 


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T~" <if fU"''''''''"~S h aiJn", <ImIM< ,"'~ <if ",h<.,. offin<kn TIH! "j,lirn< 

""Wi"hln '"" "fI",}~h<~",'''' i, ""'"" ";pi"""">! OI/Jr"1frlOk'$, • 

R<sr>«lfully. "W]J ) . .,.. os. ,,,,,,,,I,,,, oftOllGf<'SS. _110'" )'",", ohild '" "" <ami fQl by 

coo,;""'" mu""'",,, and fdomllf,·oo ""1i<1< Ih<>e "f'lhe,," "'" lurrnl .... "loy do )'00 

p.u:< I:M.o<Ig.1S ,1\:01 ",,)I'ido fot . nn<d g~ 10 proo«t Congr<: .. i"""ll'I<.ri"<l' ."" family 

"",1ft.? 'I1 .... l"">irnn .. ba,'. "" i<J!iti"..l< purpI>SC bc<,u .. "" .. i. "" ""idemk of "f.lll<rlc<;ne,." ,lIat in ;""If harm. children. 

Tho", i. no ··falh<rl .. "", .. cri,i," """ ,,""ldj .... ify .... h "'1"I< .. ly ilTt_ibl< 

~ """"'ing. Wc ""'" ""'K>r< of>l""'lp i"llk motllcr.o "ho",i!«l P=;.Jen" li\;. 

Uill (;Iinton.1Id lI.lta<:k Obam .. hothaf"bom "'m: """ucd from ,1'1< <1u ...... off.'h<fs 

,,110 "~'" ;,,,,...,.,,..ibl<. "101m, odtli<1. 1»' 1h<i, ,not ..... , Tho .. F ...... hood P<OII"'"IS 

no'" """"""i"" and pwti.h mothe" ,,'110 lry """ rt'S<1I< tl'l<ir childlm """ ""'y ofT p<Jblk 

... i'( ...... "hil< punishil\jl (IOO<l f.l ..... and '''''"ingll'1< i,...,...,...ibk. """""OT """ 

rkhOl"poor, 

III. O1G Ut:n :R,\ II NU) TlI,\T OCSt: PROG RAMS ARI: RIIJIJI.F.IJ \\"1"1"1 1 

FRAUlI. 

In 2011. 1"" 00;.< of the 1"""",,,, (;,,, .. ,,,1 rek>«<l • re...",'" c.IIN "R,II'"p R .. ,/.., "" .<it"",' <"."'in~ <ifUndi",iN.lIJhl< CAiid S"PP'''' ('<>1'«1/,,,,, '" ''''W''''' I"""",," 111>, 

oonoludcd 21 of'l'I< 23 S .. ICS auJi'N r.ikd 10 pnlfl<rly I<'pOr1 J'RlI!"'''' i ... orne: .• "" "cr< 

boarding ten, of milli"", in child ,urr- coll«'1ons~' (intcmionalt), QI uninl<mionallyl 

f.iling 10 "I.l'< ..,rr",knl o/T".,. W 1<><.1< I"" ,hikl",. tilt "'>OUf<CS.,.. '.",n<Icd to> 

""""fll, Onlp hmd full cf CO<UI,i .. ""t cf'he ","' ..,,1 h,"","'" con",ined in tho ",I",,,,, 

S .. ICS " ."'" auJil.,j. ond. ",,·i.w .. f lilt inili.II'CfIOI\' """'~ di .. "' ....... Ocs ,II>, ,""i""l<: 

''''' problcn, ... y he nH .. h larg« 'II>n ... 11>, I"" AdminiwalK>r< i .... illing to ""m;!. 

n.. S'alc "iI0""y dos,ir", child ,uf'P'K1 os -,"",i>lribuubk on=;o" "· ... n il 001""" • 

,hild StlI'P'>'1I"')'n"'"1 bul <.'">01 idenlify,~ 1"",,< ''''' ,llSl00;,1 """,.1 '" ""urn 1'" 

fW>do W , ... """"""ooi.1 p<U<t1l Fode .. 1 """"'-'1< ""lui .... tha, 01 ''''' lin .. "hen SI ... law _ 'll< fund. '"lIbou1<loncd." s, .... mu<t r«''ini,,,, .nd fqKIf1'l'I< """ IIoc01N 

fund, as f"'Jwam ;""""'" in ",...,. W "rr ... J'If'>I:"'''' o~ .. Tho Fode .. l polky i""-,, 

.00nd00cd «>Ike,""" .'" lhen 'l'lil 66% F«k",1 share. 34% arc ", .. ined by'''' SIa' •. 

Il",,~,~ 11'1< OIG \klm"ined ,hal .11 ufll'1< ... 'cs Sia,,,, had (in'rn,i"""Uy or 

unin1\ .. ti"""lIyl tk,·i.oo ,'llri ..... "oct "II 10 fail" OtJPf>OI1 di,"ibulK>r< ') ".ms thaI allo,.. 

tho AgolIC)' '0 improperly hootnll'" <hild', IIIOftO)' in Sial< corr"", by mi>.b""lj.~ i, 

".1»"""""'-1.......,...,)':. 

IXImpk> of""" u~ 10 f.il" polk;". the OIG Ii" .... i.d<>lk, 

••• ""'f' .,,"" _5<"',' ~"",,,,~"_"iI>_ c.""...,.,. , c_,,-'" "-_,""-- l111S OK;..,.., 114)·, l-OOOW. ~ lO. 20' 1 

<hn'·'~ _'''''''''''''';':''~ 5''00005,'''1 
101 


ccoleman on DSK8P6SHH1PROD with HEARINGInsert offset folio 62 here 78761.062

ilklO"llic ... 011 0<r0<III" <re'''' massi,'< ..... ars. IIi ,. d>d lho IalC bonor". Ihon ~:trni"" lho 1>.< bonolil. 

f"" child suPl"K' i, in '''''' """""" .. durin¥ \i'ilO"'.",.ih:Jtl ..... """" ,han J )'.ars. 

~'h'd)' .baI ............ 'hon "'1' il f'" thorn""'" ,,'i,...,., "'lIink .i,ho, 

1""""'. 

'""'010 dc",,,,,inodthai "'hik ., .. ". Sut ... l.oim<d '0 be .... ".,.. ofl'c.krnl "'Il"I'inM 

requiremrnl>, -1M" okfld,,,,,;,, OC<IITf't!d b«a",. Slm,,· did "'" ikl," t><kq""" 

""""01, ,~ ,~,.,,-, ,hil( .,"1,.", ;/",,,,bk (h!l.l .'''l'P'''' ",~I«I;',"s M"',,' ""'I!nl'~ ,UU/ 

'~/",,"d '" progriNtt /""""" ,. ~""'" •• 11h fril,,,,.} 'Nt.i",,","'" -

In .ad, i<lSla""" ,n. 010 rewm ... ..Jed ..,Iut""" ,t.al f .. l<:d 10 requi", S"'I< ">ic""i .. '" 

imr>'''''' dis/>urso:"",nt """I>c>d, 10 "n",,,, dolil'<ry of'l>c fund,lO lho <hild', """"'. 

Insl.ad. ib< 010', fotus ,,'" 10 ..,,= 'Il< i"" .. asc.l ,hi: 51:>1<' ""cu""')' and rompHancc "i," f c.krnl "",uning ""Iu;"'",... .. 'o."""" lho, ,hi: Fc:d<r.l' tillS ,,(tic. ~i,'<:d il" 

66% >Iw< ofprog""" inromc, 

Tho """i .. ,,= dooo fOf SUIlPOfl «>11",,«<1 bell'''~n 1'199·2001. 23 >I., .. o""i,«I. b ... 

<KIt)· • <'"'ric <ou",i .. " 'i'hin <lIOh ... ,. "'cr< """i,<:d···NOT the en,i", ... ,.', ,hild 

SUIlPOfl 'l .... "'. So IhI: f"", ,h., li~. Michigan .... Y """e .wi«<l IS <ou,,,i .. <HIt of a K>t.:rJ 

of8S roun';'" and In., tho>< 18 cownics "ok S8 millioo froo. Michill"n f.mil,.,. i. 

,il;J\ir,<:UI\!. Woo, "ould 'Il< "umber be if'he)' did audi, ,It< "hok ... ,,1 

lIu, ,It< 2011 mil "" rcr<><t is .1", i_I ro< """,Ita' ...,ason···;, awoars '" 1\0,-. undcr 

""imal«! ,he ori~i ... 1 """i,or'. findinp. lhe 2011 "mil up" rt'pI)<I i, • <0110<1100 of tho 

lindi"i' i" ib< ori¥inal 23 .,,""" """" of " 'hielt "'= """,pic'" by 21JO'J. So I _inod 

""" ... of'he origjllOl .wi, re"""" for "1:1)' ... to .• ,0:,1 r"",.J ih:Jl maoy SUI ..... ~..., 

<.ugh' "ilh ,hei, hand, in lh< roo<.", jor for millKlno and millKlno of dollar$. bullho 2611 

""" !hem ,Jo"n ~' c"iJlj; SO ""'''''i ..... 

(I) C ...!.£!!!!!!,:. lirA .. " 1101 C"un ,I •• in.!l, •. no' ~rr'rr"~ 

o:m. ... · 1 i> " ud'lfd l 

2611 1(011 UpT","I; 51.8 millioo 

200S "'port: SM Millioo 

h"p:/loig.hhs.~0·.,,,,,sItq>oruIl'<lIiooS/so.wooJ9.""f 

2011 Roll UpT" •• I: SU mill"'" 

2006 o>port, $8 Mill;'H\ 

h"p,ll"ig.hho.go""""""'P"'''''''giooS/SOSOOOll.""r 
102 


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(3) (; .... ~i"' ( ~~ ,ounli< .. aOQ, ~d""", i .. ,' Ib, . , . ... P,"& ..... - ... "'1: 

!m" ...... ,ion ~ .• , ,b, lb. 'oun'}:.!!!!t!! ... "n' .... "dJIX-'h. S, ... "b" 

•• " ....... --' ur n "'d'I!!:!! d<~I'" hu' no' ,h,""&b ' lo' .... ff.", "'« n .. · • • ",,·i< ... d) 

2011 RQI I UpT.,..I, S238.000 

2001 "'porI: 11 .2 mill ... 

loil1-hhs go. ~"'~ioft.I 4060H06 pdf 

2011 RclllJpT"",I: SI.4Sm 

2007 "'pon: SJ.J Million 

" OnmKe ",,"n'y: $2.2 million 

h"plloil1-b ... ~"' 08l"'f'OI1$I"' K ... 91'106OO1).10,hlm 

" Ri,,,nideC"""'y:$245.000 

h"I'"Jloi ,hhs IIO,'/08I~",,,,gion9/907(1O(1.19,hlm 

c I .... Afij;<(nc""'nl)"U78.000 

hllp11oill·hhs.lIo,'/08I1'<'f'OI''''",ginn'J/908000N.asp 

1M II>< LA ."",n'l" "'pori i. ""maps ill>oCCUf'IIlc for 01l0I1,,,, "" •• " ... b«-""", ., ,he: same 

,ime lbe OIG roOO,-"",d II>< a""i~ AI"""")' Ri<hard Fi .......... LA C"""'Y r, ... l>old;,,~ 

$14 ",ill;OII in child ,"wort collcclion< f"",, I.A ",,"01)" child"",." lie ,,"" lbe "." •. and 

lbe ",,"nl)' had '" d; ..... ~ lbe $14 million I. II>< families. !lUi Ihi.,oul i. "'" i""ludcJ in 

!he OIG". "'pM. 

IV. TAN.' CIII LU SlJl'l'OIlT I'II{)( II \~I S ,\1)'\ j"r TO ANTI FI<:I,\I. l. \' 

INCIU:ASt: i'O.:t:U .. OR TlI[lIl OWN St:KVrCF .. ~ 

"I""", "'f'Onsand o,ben reneel tbe rocl!ha, TAN"" g ..... "' •• colleelion ;"",.,i," 

I"'lic><s "'"'Y 1Io,'c in crr"", cre,tcd. ehild S"ppoo '1>Cuwn .. Sial", 10 adapt lI><ir ,.....,i= 1<1 ",fl,"1 • ¥"' ...... domo"" and ....,.; for ~""" 111>1 on: "1Iima",l)" "ilhbeld 

from """;)' fumiliell. Thi. 2011 "'pori" rouod ''''''although I"" Am«"'". 11«.,'« , ' 

" n,1 IId Q' ·. " m. nl <1<1 of lOO'/ pro. id«l ." .... "' m""hi ,,~ fund, on S •• " , up ",," ",11 .... io • .: 

" ........ ~ .... , .. "'. ' .""'Jm'I<b70 "".., '_11< 

" "p I/"· 1"' .... /p<w •• """A""'I·' " 
103 


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I~ fi«,.1 )~"r 1(J(J9" .114 Wppw! roI/«,ion. foilrd 10 Inc,"" R'I"".·jJr for 

'hr fin, ,I"" In 'hr An'",}' of'Ar P"'INl'" Infuc 1 J""" 1(J(J9 ... ,1/.'0 18fo.,..' 

J"a' 1(J(J9. 'hr n~"''''' of CSf: """. c~",,,'IJ" r«r;"I~1/ pdJk ."n'.ncr I"""",,,d ...• 

11"0"'", Atl: T~ .ft~ , OJ' II« .... '}" Atl Con,.,,<, and Gnn' lI«ipio .. " 0". 

lI "nd~. o'Miliion, i. F ..... RI ·' .. .. 

~ttr :/I,."""W.~~IpmIl"'":liGAO-...1.L-636T 

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IIiIS """' ""'ipic .... 0"'" ... suugglill$ "'" PO) ini f....,ili<> hundre<b of HlI.1.I0NS in 

~~ 

G,\O IIEPOIIT: Child Support I:. '.",.m,"t: 11<1t .. 1I. , . . .. d "'o ... ln' ....... 'lon 

Oft U ... Ii>',lb"'«I Col,«!;' ... A ... 1'>"..-.1«1 

h"~:/I,",w.~prnd..ruIGA().{I4.J17 

o\I«Ii<o ...... d M«Ii<.id Fraud. WO>l •• o .. d Abu,,: 1:««li," Impl ..... " ' OIioK 0' 

K ..... ' !, . .. · •• M A~.".,· "''' . ... t..;."'d " <'p K<d"« Impeo".., l'ol""n" 

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Chi~1 Support I:n'.,«m.nt: 1)<1'011 .... , r,om on .rm T ...... d, in So.,«, of 

Cull«,ion ••• d Cn.lood. R<ll«, 11.«., I:oonomi< Co"d;,ion, 

h"p:I"' .... ,_.~ ... ·,pn>d."'/GA O·II·I'.IIi 

In fiscal )""or 2009. tht child "'PJ>I>II .n'"", ... """ (CSE) 1""111"'" .ol~,,:d .bou, 5:26 billion in <hild.<uppon po)m<nIJl'rom """,""ooial parm" on be""'fof""",,!han 17 

mi1li"" .hild ...... lhc CSE PfOI'IlI'1 i. "'" by 'laic' aod o' .. rs«:n by tbc De"..,,",,", of 

IIcalll> aod IIwnrn 5<f>ic .. (IlIIS). S ..... .-.c.;, .• f<d<ral po""""""'" i""' .. ,i, .. PO},""n" ond • f«l< ... 1 match"" both ... ,< CSI: fooo •... Tho [)"n<i, Rcdu<'ion A<, of 

2005 (IlRA) "li"'1"",«1 ,hi. i .... n'i' .. match bogi""ing in 2008. b"' ,h. Am« i< •• 

R'<O'·'I)· .nd 1I.;nn'>lmon, M, of 2009 ,.mporuily ... in.,.' .... i, fo. 2 yo." .... 

In fi ... 1 y<v 2009. lbo CSE ~ <"p<1"ic~ ""c,,,1 dcJ»"u .... from pasl 1.-.nd5. 

F ... _. "hild '~ pol1 <~II«lion' f.il"" ~ in« . ... ,ion~ id< fo. ,~ . ro", Ii." in 

Ih, his'.')" .r .h. p«> ~ ... '" In Ii"., ) .... , 2009 ... AI,. in 1i".I)" ... 2009. Ih. numher 

.fCSI: ..... <~r .. n'lj· ..... i, ln~ publir .,,""n« In ...... ..-.I ... ,. ... J;"'I"''''.IIIISd.d'' 

.""~. ,,,.,, ,,,,aI CSt" u~""i/ura IV .... by ] 6 ~'anl infima }~,,,. ]IXJ8 ill" ".,(1 .... ","" In<ua>.J 1;"1, .~ n f-I;"II I. ImJ;",,,ln 0jE "/",,,,,10,,, I>rn lilt folk"" ;",..,,/1, ... 

"",'ch ...... rlimiIW"J ... ln <on""" to f($Cal y"'" 2008. "Ji/f,"'''' pk'''', '''''II''J 'n 

f",,,/ J~'" 1()()9. .·""n ,,,.. I",..",,, ... _Irk wll.! I" .. ,.."..,..i/}· ,worrJ bu, 100di ("Sf." 

upr,"",,,,, . foil .lighlly hy I 8 pr''''''. ~hkh III/.~ offirM, roIJ GAO •. ", J ... III >lair 

h",/~" rom'rainl>. "''''' >1_'" ",ion~id . h .. ·• nol impl.m.n'«I "'.mily n ... ," 

polk)' op'ion, ... her,u" _I I'·'_1 ."'" •• ild ' UPl!'<rt .00!.Klion, ,. ,.""Ii<> ...... . 

,.I< "",,".in "",'_"'_<oimbu,,,.m ... , rur publi< .,d.,.n« «I,h. 
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v. CO;o.'CI.USiO;o.' 

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1bc 1 ... \owf.1I progr:>mS.", , uJ'lllU'<'<l '" b< AD~ II HRA1WE. but ,hey ..... quas, 

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badly nt.lIIOgcd and c""," c"""'cd in'<rfcm-.:< "hen liliganlS ... hU<l. 

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. 'I"n'"", r ... ",'<-!I' -tnt: r1 'M ''''w, " .. I K" ,h;"I; ,lot ""w~'"' o'il/ haw 
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00 """"'"' 

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... ,,·ing lhen, 011' of ,hei, ,"""",. II', ,i"", 10 Got """""" • ..,.,. der .. " ..:.lll<'iun.. and 

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106 


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Too ,,,0 . - AOL Computer Checkup , • 

tocarefof yourPC? :k 1I;iI WI ·lld' oltautomatlca 'II y. ~ ~ 

HUff 

I'OST POLITICS 

Top 5 HHS Programs Endangering Women 

and Children 

The so-called "War 00 Women" Is raging. and bill>ons 01 you' tax dollars are baing misused 10 

lual II Yia the U.S. Dapartmen1 01 Health and Human S8fVices (HHS). The soIlIIion is 10 

remove the middle class !rom the we are roles and do away with gender·based lunding 

incen~ves. 

The Personal BesppnsjbllllY and Work Opoonllnhy B!IOO!lCjI'aiIOO Atl pi 1996 and \he 

Temporary Aid to NeedY Fllmlhes crANF) program il created transformed we~a'e policy by 

drastically ,educing and shilling laderal assistance away trom Ina homes ot mothe,s and 

children and Into the hOmes of violent offenders. In an w:II!;;III entitled "How Fede'al Wella'e 

Funding Drives Jooicial Discretion In Child·Custody Determinations and DomeS1ic Relations 

Matters" tathers and rights activists lary Hol land and Jason Bo\1omsly e"l:Main that this policy 

has backli'ed because the incentives iIIe S1n.ICtUIed so that the stata will only banelit ~ 

children are ramoved Irom IoYing homes: 

"In e»ence. the federal guidclines wanted the Slates to funClion as colle-ction agencies. 

re<:O\'cring IlMn~i31 support from parents who had willfully abandoned thcir parental 

responsibilities to their .hildren. The result. howe ..... r. W8$ different from th e intcnt and h ps 

caused the e welr .. re p .... grams to .. <\just Iheir cn" irunmcnllo h,,,·c ,, g reu te r 

n...,d , whi<h haseaused the program tocoll"'" from willing parents that would ordinarily 

pro"ide a loving environment for their .hild"," absent. court ortler limiting. parent's 

i, ... olvemen1. ilespite lheoriginal intent of the IV·D wei f.", pros""". it now provides.n 

in""nt;"e for the states to se their familyoourt. to produ"" foreibly.bsent po,..,nl. in order to in.",...., the states' IV-D ,,'elfarocaseload." 

These HHS policies created a new breed 01 dangerous We]lare Ktoos through HHS Office ot 

Child Support Enlorcement when ~ began subsidizing the homes and legal battles 01 the unm. 

unwitling. and violent fathers. At the beginning 01 a custody case, only the oHender is sick. but 

~ one violent off&nder gets custody. the whole family needs treatment. Consequeonv illS also 

_" __ , __ .-'-.......... -._ ..... '" ,.".---.... -.... 
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.".",~" ... !!OI "!JlQ!!!rnoo for dozens of family court momtal neaJth and legal profossionals onto lhe case 

to $Ustain hiS ooadly custody rights thrOUgh HHS Plo(uams, 

The top 5 HHS programs endangering women and children are: 

I Child SupPOrt Enforcement (Accell and Vla l!allon programs and Responsible 

FolhertJood Inltlatlye) A 201 J reooo from the Of1ice of the Inspector General demonstrates 

lhatthe States are collecting child support. bLI1 not disblxsing h to the eNldren ~ is Inlendad to benem. So where is the money going? Although pre\'\oLls graduates Incll.de mass murderer 

DC Sniper JgtlO MytJammad. the 2012 HHS budget ref~s President Chama's $t billion 

endorsement of the Iraud·rlddled latherhood Industry. 

Using the virtually unregulatad child support system as a \l9h1cie and the father's will to ~ 

pdson lime as collaleral. lhe lathers are told they can risk their liberty and property at\Elmpling 

10 pay down a!fears, Of altematively. sue the mother lor custody using a variely of lederaUy 

lundad ·supports,· Unlike the weHare programs lor women and children which had reslricti\19 

Income eligib41ily requirements, HHS Responsible Fatherhood program be""ms are nol needs 

basad and are availabfe 10 all latherHV(ln billionaires 6!mI!l.JJ.:i from Responsibfe Fatherhood 

programs to abusers iIlI::!.I.Is:!I; 

Ch,1d support OOl'gabons are suspended 

Free anorney representation in the family courts to foghtfor custody 

Free housing 

D~ect cash incentives 

Free groceries 

Free car maintenance. gas, and o!hertransportalion costs 

Free healtheare and dental care 

While many upstanding lathers honestly complain about TANF programs and tnc courts 

victjmizing them. tnc dirty lilde seeret in the latherhood inslustry n that the grant recipients who 

train court personnel. sodat services. and child SLlpport personnel are often fathers dgbls 

WIIJlI.5 tike the fathers aQd Eaml!fQs CoallllQll the Cbddroo's Righls Coone" (FounOOr ~ 

LIM'- sits on the board 01 the SuQlfYised YiSitalloo Network) and the NaIlQoal Falherhood """"'. 

Clearly. judges understand !he danger abusers pose, which is why their courts are guarded 

with armed deputies and not ,-",armed social workers. HHS programs are actually a deadly 

irtves!ment gi\l9n that (a) abusiva men WIn custOOV ot th!Hr mums ZD"it of the lime when they 

ask lor;!. and (b) regardless Of the gander 01 the >Actim. it Is a pobfic safely Issue when QQJ 

.sIII!Ix..

~ 

aloo 

show 

shows 

men 

that 

perpetrate 

men are 

more 

raped 

than 

by 

95% 

other 

of 

men 

violent 

more 

assau

than 

lts 

93

against 

% Of the 

women. 

~me. 

A 

and 

~ 

women 

_,, _____ .-_. __ .-..."'"."._._.1-' ..... , ... "., 
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--' .. '------,- " .... "." ... are raped by mttn more than 98% 01 the Ume. 

2. IncarcerallolV'BetBlry Prpg[lJ]]l. Thtt P'JrpoStl of theStl programs Is to reau~ violent 

oHenders who are stltl Incarceraled ojirectly Irom prioon. then help them gain custody 01 

victims. It ;s unclear 10 mtt how a child benttlits lrom the dangefouS Influence of a vkJIeot 

otIender insolar as ~ reduces 5Upporl to the horoo they are recovenng In. Thtt program paints the oHender as the victim and domestic violence as a diStlaStl they are alllicted with, curable 

by !he removal 01 witnesres 10 their crimes. 

Although vkJIence Is a voluntary act, HHS now invested our a~ oollars Into rehatlililating the 

incurable who choose to assault the most vulnerable members of society. ~ 01 male DV 

pe<petrators show that 50% 01 them are sociopaths and aoothe< 25% have socIopati"Oc 

lendancies. Psychopaths are people Who feel 00 emotional connections to others and ha'ffl 

zero regard for !he rules and regulations of society, they 00 oot respond to therapy, and 

canOOt be rehabilitated. Pr Roben Hare ~ thai psychopaths make up 1% of \he general 

population, but 25% 01 \he pr;son population: 

"Violence is O(It un<:(lmmOn among offcndcr populations, but psychopaths still manage to 

stand OUt," he says. ""They <:(IOIm,t more th.n twice as many ,iolenl and "MT"I'SS"'" ""IS, both 

in and out ofl'rison. as do other crimin31s .. , The recidi.·ism rateofpsychopatns i.about 

double th.t of other offender>; ... '[lie ,·Iolen, re<:idi.'i$m rateofpsy.:hop.ths is abonllriplc that 

of other offender>;.· 

Recipients inctude: 

Massachusetts Prpballon Oeoartmeor Thtt Probation Department condllClS all pre·trial 

mediations In the MA lamilycourts. As 012007. the depar1ment daims to have helped 

1,600 male oflenders with \heir custody cases, Including Springlield inmate Shawn SlIarftl 

who was recruited into \he cuslody switching program from Jail, was released, won custody, 

then was sent back 10 prison on another vkJIation. In 2011 and 2012, ~ high ranking 

administrators in the Probation Department were Indicted by \tie DOJ and ~ with 

conspiracy and fraud under \he Aac~e eer , In~uence, and Corrupt Organizations Act. 

Cp/Qradp:S 'parM~nq from Pri$Qt'!" received grants fO im~efTleftt programs which recru~ 

violent oflenders who are still incarcerated directly from prison, \hen help them ~ajO custody 

of children. 

CT Child Rapist and mass murderer Joshua KomjsarieV'S/nls nine·year old daughtef was 

brOught to visil him 55 times while In prison awa~ing trial for murde!"ing and raping tl ·year 

old Michaela Pelit. and also killing her sister Haley {age 17,1 and their mom. Prior to 

murdefing and raping the Pe~t lamily, Komisarjevsky {lalned sole custody of hisdaughler, 

who he promptly handed over to his parents 10 raise. The same parents who he blamed for 

his crimes aher being lound guilty 01 17 counts, Including \he three homicides, and 

sentenced to death. 

3. Foster care Despite the fact that the National Center for Child Abuse and Neglect found 

that children are $I ! t,mn mora hb!y to die in the State's eare than trose with \heir parents, ~ 

is assumed by some politicians that ~ you afe poor, then you must need \he US Department 01 

-,_._,-_.-..... _-----._", .. ,,_.-......, .... ...., ... 
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__ ' .. ' ___ ,_.._. __ cII,.,"'" ... 

Health aod Human Services programs!O tell you wllat's best 10< your ownlamily. 

In 2012, C%radQ GovtmlQf John Hic;Jdfmhoopero<oored an ove<haut ol lhe State's chlkl 

weHara system alter lila Denver Post reporled 43 dJjldrao W9re murdered as a 

consequence oJ social wor1<ers who dropped \he ban, 

In 20 t t, San Francisro Deparrment of Child Prole<;tiw) Sarvices paid out4 mtllion to a 

lormer 10Ste< child who Suffered years oJ abuse alter his sister was beaten aod starved 10 

death by the laster parent. AOO1her reDO!l showed that mo<e than 1.000 CA loster homes 

matched the addresses ol registerad sax offanders, 600 01 whom W9f9 high riS\<. 

~ talks about /he 1.5 minion mothats wllo say they were "coerced." "manipulated," 

and "duped" Into handing <>ver their babies for adoption, These women say someIimes theif 

parerna forged oonsent documents. but mo<e Olteo they say these forced ~tions were 

coordinated by the people their temi!;es (justad mos1... priests, nuns, social wor1<ltI"s. nurses 

or doctors.' 

~ by ABC News reporter Diano Sawyer showed that 25% 01 all loster kids were 

on psychotropic drugs . aod 1he States did not do enough to oversee them. 

""Faith I~adcrs a", t ..... ted partners in local communities. You h.,'c 3 unique ability to reaoh 

]leOl'lc. esped311y the nwst ,'ulnernblc. ",ith the tools and inform.tion the)' need to let healthy. 

st.y ",cll. and thrh'e.· 

The consequence ol this policy Is that urlSlJbsidiZed secular nonprolits that provide oommunity 

seMceS soch as chiidcare. education, and healthcare cannot oompete with lila radical anllwoman nonproflts the Obama adminIstration giVll'S preference to. Examples include: 

Calbolic Cha!ihes f8C9ived $650 million Irom HHS be1WEH!n 2008·2Ot1 , desp!te lila lact 

tha1 they have lobbied to uphold lhefr discriminatlon based policies tlla1 deny adequate 

heallhcare ta women. children. aod the lGBT community. This Inc/ude$ pGfides which 

reluse women birth control, abortion, and rape counseling 1() lila lIlIl£f:.lbau 10.600 children 

allegedly raped by some 4.392 pre<sts as 01 200.2. 

Atfanta based New Birth Missionary Baptist Church r8C9ived $1 mjll joo !tam HHS 1() 

support accused pedophile B4sbog Eddie LPrl9's $3 million salary and benetita package. as 

well as anti-gay marriage IOObying e1l0<l5. In 2012, the SEC announced charges against his 

suexessor. Fatherhood promoto< EAtnn Ta!/loi: who "was aclually peddling was a giant 

Ponzi scheme. one aimed to · swindle ova< $11 million, primarily Irom Atrican'Am9fican 

churchgoers," that reached inlochurches nationwide. trom Long's megachurch In Atlanta!O 

Joe! Osteen's lakewood Church cong<ega!Oon in Houston." 

.... -.,..,----,---------" ."_·_· .... 
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."0,,, 0." ... 

"FrnaJ Defendant Pleads GlIilty to Medicaid FraiJd in Scheme mYDlving Homeless and 

Pregnant Teenagers" (312212012). This press releaSf! lrom Iha GA Office of the Attorney 

General regarding God's Promise Centflf, a bIJslness located in Hervy COo..o'lIy which 

pufported to be a residential treatment program lor hQrnoless le(Inage girls_ 

Domestic violence Is a multibillion cIoliar Industry complete with its own ambigUOus geode< 

neutral lingo olten callseS victims In pro bly dangflfOUS hQrnos. The CDC estimated thaI in 

2003 Amflficaos spent $8.3 billion on the domestic violence Industry, which does not take into 

consklflf8tion the nearly- 8 mmjoo wade days per year that victims miss as a direct 

conseqlJeOCe (II being assau~ed, nor the costs associiIted with the children they care 1(1( who 

might alSO be ablJsed. With as much as $585 bi ll ion also spent subsidizing the child ablJse 

industry, SO Ws no wonder some unethical abuse Industry professionals cash in by keeping Ihe 

public in danger and placing children in dangerous homes. 

_" -.--_----,------.. ,."."-... --...~ ...... . ... , .. , 
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Center for Fiscal Equity 


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Comments for the Record 

U.S. House of Representatives 

Committee on \Vays and Means 

Subcommittee on Human Resources 

Subcommittee on Select Revenue Measures 

Hearing on How Welfare and Tax Benefits Can Discourage Work 

Wednesday, June 27, 2012 

By Michael G. Bindner 

Center for Fiscal Equity 

Chaimlen Davis and Tiberi and Ranking Members Doggett and Neal and members of the 

subcommittees, thank you for the opportunity to submit comments on these issues. These 

comments are an update to comments we submitted last September. We find, however, that they 

are just as valid. 

Let me first highlight our main point - which is that simply putting people to work in low wage 

jobs is not enough. Indeed, if child care and pay are inadequate and these jobs have no future 

than removing disincentives to work is simply code for slavery. This should NOT be the goal of 

public policy in 21 ~I century America. Instead, the focus should not be on making people go to 

work as soon as possible, but instead giving them the skills to make full use of their potentialwhich most likely involves making up for badly funded rural and inner city schools, where the 

lack of funding bears some relationship to their ethnic backgrounds. Failure to recognize the 

racist roots ofpovcrty in America simply pcrpeluales the sins orthe past. Thal is simply 

honesty, not playing the race card. 

The work opportunities available to most TANF participants can easily be described as low wage 

work and, without signiticant resources in human dcvelopment, are likely dead-end jobs. Such 

jobs often receive tax subsidies, such as the Eamed Income Tax Credit and the recently expired 

Making Work Pay tax credit. One must look askance at any programs which transfer the 

responsibility for providing adequate wages from the employer and the consumer to the taxpayer. 

The expired Making Work Pay tax credit enacted as part oflhe Recovery Act subsidized low 

wage labor where the preferred option would be a higher minimum wage, forcing employers and 

ultimately consumers to pay for the services they receive. Minimum wage laws are necessary 

because they level the playing field so that employers cannot initiate a "race to the bottom" by 

allowing workers to compete against each other to otfer ever lower wages, often leaving families 

in the impossible position of having to bid well below what would otherwise be a reasonable 

standard of living in order to survive. 

Increases to minimum wages and benefits, such as mandatory sick leave are, by far, the best 

incentive to get people to work. Mandatory sick leave would also help the prospects of health 

care reform, as parents would no longer be forced to resort to emergency room care because the 

doctor's office is closed during working hours, thus decreasing costs for all. 
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Another area that will help make work more attractive is income support for families. Such 

support addresses real market failure in the employment market. It is entirely appropriate to use 

tax benetits to assure that all families receive a decent wage. 

The United States Department of Agriculture estimates that it should cost $1,000 per month per 

child to provide a decent level of subsistence. The federal government could easily guarantee 

half of this amount using tax refonn, with states providing the other half with coordinated tax 

benelits. 

This credit would replace the earned income tax credit, the exemption for children, the current 

child tax credit, the mortgage interest deduction and the property tax deduction - and possibly 

the 10% tax rate. Any consumption tax pre bate should also be included in this total. This will 

lead employers to decrease base wages generally so that the average family with children and at 

an average income level would see no change in wage, while wages would go up for lower 

income families with more children and down for high income earners without children. 

This shift in tax benefits is entirely paid for and it would not decrease the support provided in the 

tax code to the housing sector - although it would change the mix of support provided because 

the need lor larger housing is the largest expense faced by growing families. Indeed, this relorn1 

will likely increase support for the housing sector, as there is some doubt in the community of 

tax analysts as to whether the home mortgage deduction impacted the purchase of housing, 

including second homes, by wealthier taxpayers. 

One major obstacle in getting TANF recipients into the working world is the quality of skills 

they bring to the table. Indeed, a recent survey of the vocabulary of T ANF recipients in public 

housing puts it below the level of the average seven year old. Not seventh grader, seven year 

old. 

Slate based enorts to improve T ANF participants to a level of basic - or even advanced literacy 

- should be applauded. Indeed, provisions to not only provide remedial education to all who 

require it should be a mandatory part ofTANF retorm, not just in states that chose to. 

Literacy training must also be provided to fathers if required. Indeed, to facilitate this, the 

restriction on benefits to intact families must be abolished. Furthermore, compensation for this 

training should be as rewarding as work, so participation should be compensated at the minimum 

wage. 

[n addition to the wage, participants should also receive the same Child Tax Credit as those who 

work, as well as the same level of health insurance, which could be offered to them as ifthey 

were employees of the education provider - thus ending the second class care they receive 

through the Medicaid program, as well as the need to pay benefits through large, yet 

underfunded, social welfare bureaucracies at the state level. Public housing should be replaced 

with residential training programs lor both parents and children. 
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Cherie Boeneman 


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The Hon. Geoff Davis 

The Hon. Pat Tibiri 

Cherie R. Boeneman 

286 E. Thirteen Mile, #101 

Madison Heights, MI 48071 

June 25, 2012 

Subcommittee on Human Resources 

Committee on Ways and Means 

U.S. House of Representatives 

Re: Hearing on How Welfare and Tax Benefits Can 

Discourage Work 

Dear Sirs: 

I am a 55 year old woman from Madison Heights, Michigan. I 

have, until three and % years ago, worked my entire adult 

life. I was laid off from a major drug store chain where I had 

been an assistant store manager. The company took the 

older, salaried assistants, put us on midnights and then 

discontinued the entire shift for all but a handful of stores in 

the state. After we were gone, they reestablished midnight 

shifts with hourly assistants. I had worked there for almost 

6 years. 

Since then, I have lost my health insurance and 

unemployment benefits, while helpful, ran out a year and a 

half ago. I have no income, no assets or bank account. I live 

with my 78 year old mother who has to keep working part 

time just to keep a roof over our heads. This, in spite of the 

fact that she is in the midst of her second round of 
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chemotherapy for Non-Hodgkin's Lymphoma. Our condo, 

which we purchased for $70,000 in 2005 is now worth about 

$15,500 (which is what the last identical unit sold for). 

I have never quit seeking work, except for those times when 

my mother needed me to take her to the doctor and hospital 

appointments. I have sent out hundreds upon hundreds of 

resumes, filled out on-line and on premises applications and 

have had some interviews but no employment. I have made 

use of MI Works Program for those over 55 years of age. 

While the resume makeover has been quite helpful, it has 

not been enough to get me work. I try to remain hopeful but 

it is increasingly a struggle. Creditors pursue me at every 

opportunity and I have every desire to pay my bills, I simply 

have no way to do so. I struggle with despair and depression 

every day. There seems to be no hope. Sometimes, I just 

want to end it because there seems to be no place for me in 

the world anymore. 

Added to my struggle is the fact that I have Asperger's 

Syndrome. The social deficits alone make keeping a job 

quite difficult. Nevertheless, until recently, I have managed 

to deal with these issues. Many people with Asperger's are 

chronically underemployed or unemployed, in spite of being 

bright and talented individuals. I happen to have a Master's 

degree but that has not changed my situation at all. 

So now, finally, in sheer desperation, I turn to 551. It is truly 

my last hope. And I am ashamed because I had to file. I 

would really, truly rather have a job. Please do not say that 

Welfare and tax breaks are disincentives to work. They are 

LIFELINES for people who want the dignity of work. 
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CLASP 


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CLASP 

policy solutions that work for low-income people 

Elizabeth Lower-Basch 

Center for Law and Social Policy 

Testimony for the Record 

June 27, 2012 

Hearing on 

How Welfare and Tax Benefits Can Discourage Work 

Subcommittee on Human Resources 

Committee on Ways and Means 

U.S. House of Representatives 

elowerbasch@clasp.org 

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Thank you for the opportunity to submit testimony for the record on this important topic. 

CLASP develops and advocates for policies at the federal, state and local levels that improve the 

lives oflow-income people. Much of CLASP's efforts focus on improving low-income people's 

connections to the workforce and access to quality jobs. Stable employment in a well-paying job 

is the best pathway out of poverty and into the middle class. Moreover, employment is one of 

the key ways that people contribute to society. However, we also believe that public benefits are 

essential to fill the gaps when work does not generate enough income or provide needed benefits, 

jobs are scarce, or employment is not an option. We believe that it is possible to have a system 

of income and work supports that prevents material hardship, strengthens families, and rewards 

work. When our current system of benefits - whether implemented as programs or through the 

tax code - falls short of this goal, it should be improved. 

Making Work Pay 

To begin, it is important to recognize the significant progress that \\'C have made toward this goal 

during the last two decades. Prior to the improvements of the 1990s, low·-ineome single mothers 

were ot\en made worse otfby going to work - even though welfare benetits were (and remain) 

meager, mothers who began to work would often lose Medicaid coverage for themselves and 

their children, while incuning child care and other work expenses. This is no longer the case, as 

the result of a set of critical program improvements that were designed to "make work pay": 

EITC and CTC: During the I 990s, the Earned Income Tax Credit (EITC) was 

transformed from a modest refundable tax credit into the largest federal source of income 

support and asset-building assistance for low-income working families. The EITC 

provides low-income working families with a tax credit representing a pOition of their 

earnings. If the amount of the credit exceeds the family's tax liability, the excess amount 

is paid to the family, typically in an annual lump sum, In 1990, the maximum value of the 

EITC was just S953, with the credit fully phased out once earnings exceeded $20,264. 

The expansions of the early 1990s effectively ensured that parents who worked steadily, 

even in very low-wage jobs, would have higher incomes than they had on welfare. In the 

2000s, improvements to the refundable Child Tax Credit (CTC) made it another 

important work support for low-income families. 

Child care. Parents need child care to work. Quality ehild care is expensive and often far 

out of reach for low- and middle-income families. Research is clear that parents are more 

likely to work when they have reliable ehild care, and they find it challenging to work 

when they do not. Simply put, helping families pay for child care makes it more likely 

they can get and keep a job. The 1996 welfare reform law increased federal funding for 

child care both directly, and through states' ability to use Temporary Assistance for 

Needy Families (TAN F) block grant funds ror child care. While families on and leaving 

welfare generally continued 10 receive priority for services, the new resources expanded 

the availability of child care to other low-income working families. Between 1996 and 

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2000, combined federal and state spending for child care tripled, the number of children 

receiving child care subsidies nearly doubled, and states were able to initiate a set of new 

initiatives to promote child care quality. Yet, since 2002, federal funding for child care 

has been relatively flat with only modest increases. Today the Child Care and 

Development Block Grant reaches only one in six federally-eligible children and the 

number of children served is projected to soon reach a IS-year low (Matthews, 2012). 

Health Insurance: Congress took action during the 19805 and 19905 to broaden health 

care coverage for families and children outside of welfare. Originally andwith few 

exceptions, Medicaid coverage for families was limited to those receiving cash welfare, 

so loss of welfare meant a risk of lost medical coverage for parents and children. Low-

\vage jobs have increasingly become unlikely to provide health insurance coverage, and it 

is often un affordable even when offered. Bet\veen 1996 and 1991, Congress extended 

Medicaid eligibility to more low-income children, regardless oflheir families' welfare 

status. The delinking of Medicaid for adults from receipt of cash assistance, and the 

creation of CHIP, the Children's Health Insurance Program, helped assure that parents 

could go to work without losing health insurance coverage for their children and oftcn 

could continue their own coverage. 

TANF: Under AFDC, earnings were disregarded from the benefits calculation for only a 

limited time after recipients started work; after that point, benefits were reduced nearly 

dollar for dollar. Nearly all states havc changed the ways that their TANF cash assistance 

programs treat earned income, allowing recipients who go to work to keep a greater 

portion of their earnings for a longer time than under AFDC. Although time limits and 

other countervailing pressures prevent most recipients from taking advantage of the 

opportunity to combine welfare and work (Matsudaira and Blank, 2008), this policy 

change allowed welfare offices to unambiguously tell recipients that they would be better 

ofrifthey worked. 

Supplemental Nutrition Assistance Program (SNAP, formerly knmrn as food stamps): 

While the federal eligibility and benefit calculation rules for SNAP have been largely 

stable over the past two decades, during the 2000s, most stales adopted policies and 

practices that had the effect of making it easier for eligible workers to receive and retain 

benefits. These include longer recertification periods and simplified change reporting. 

Many statcs have also lIsed broad based categorical eligibility to streamline benefit access 

and modestly expand eligibility to low-income workers. 

As a result of these changes, the employment rates oflcss educated single mothers shot up 

during the 1990s and are now comparable to those of similarly situated single \vomen without 

children (Trisi and Pavetti, 20!2b). That is a truly dramatic change of the sort that is rarely seen 

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in public policy. Moreover, the EITe and eTC have also been critical portions of the safety net 

in the recent deep recession, lifting an estimated 9.2 million people - including 4.9 miltion 

children - above the poverty line in 20 I 0 (Charite et ai, 2012). Medicaid and CHIP have also 

been quite effective in maintaining insurance coverage for low-income children in the face of the 

recession, so much so that the share of uninsured children declined slightly from 2000 to 2010, 

even though coverage from employer-sponsored insurance fell by nearly 12 percent (Gould, 

2012). At least for low-income families with children, we have been remarkably successful in 

building a system of benefits and tax supports that both promotes work and helps low-income 

workers meet their families' basic needs. 

Plateaus and Cliffs 

Recognizing this key success does not mean we should not pay attention to the question of 

possible work disincentives in the benefit and tax structures. It is true that the interaction of 

various programs' phase out ranges can create long income "plateaus," where gains in eamings 

arc partially offsct by loss ofbcnefils, leaving workers and their families only modestly bettcr off 

as earnings rise. As Steurle testified before this committee, one of the effects of the expansion of 

means-tested programs for low-income families has been to shift the area in which there arc such 

plateaus, and thus possible work disincentives. to a somewhat higher income range - what he 

refcrs to as thc "twice poverty trap" as opposed to the fonner "poverty trap." 

Moreover, our benefits system is riddled with "cliffs" - situations where a small change in 

earnings results in a sudden loss of a benefit. These are far more visible to recipients than 

gradual phase outs, and thus much more likely to have behavioral effects. Moreover, such cliffs 

violate our basic notions of fairness, our sense that our benefits systems should never leave a 

worker H·orse off as a result of an ea111ings gain. Some areas where workers experience benefits 

cliffs in our current system include: 

Our current system of Medicaid and CHIP creates two cliffs for working parents. The 

first comes at the ea11lings level where parents lose access to Medicaid. (As of January 1, 

2012, in the median state, the Medicaid eligibility threshold for working parents is only 

63 percent of the federal poverty level (Heberlein et ai, 2012).) The second comes at the 

much higher income level point wherc children lose access to health insurance through 

CHIP. These clifts will both be eliminated when the health insurance subsidies provided 

under the Affordable Care Act (ACA) are implemented, as shown in the graphs in 

Steurle's testimony. At least, they will in those states that adopt the Medicaid expansion 

under ACA. Currently, only 18 states, including DC, extend Medicaid eligibility to 

parents at or above the federal poverty level. Irthe remaining states do not adopt the 

expansion, working parents will continue to hit a cliffwhere they lose Medicaid 

coverage, and will not gain access to the tax-based subsidies until their family income 

reaches the federal povcliy level. 

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Another major cliff occurs at the gross income limit for SNAP benefits. Households 

with high child carc, child support, housing or medical expenses may reach the gross 

income limit while their net income (after applying the appropriate disregards) is still low 

enough to qualify them for benefits. This is one of the reasons why more than halfofthe 

states have used broad based categorical eligibility to effectively raise the gross income 

limit under SNAP (FNS, 2012); if Congress eliminates this option in the Farm bill, it will 

create a new benefit cliff for recipients in those states. 

Working parents in many states experience cliffs at the point where they lose eligibility 

for child care assistance. Eleven states have designed their child care programs to avoid 

cliffs by establishing higher exit eligibility level that a11ow·s families to stay on child care 

assistance even if their incomes grow to exceed the initial eligibility cut-off. I-Imvever, 

given the vel)' limited pool of funding for child care assistance, there is an acute tradeoff 

between serving more low-income families and reducing the benefit cliff. Congress 

should expand funding for child care assistance so that more families can get the help 

they need to go to work. Making the child and dependent care tax credit refundable 

~~~~~~~~~~=~~~~~~ 

subsidy limits. 

It is worth noting that low-income childless adults face a very different schedule of benefits and 

phase-outs. They do not receive the child tax credit and arc only eligible for a very modest 

Earned Income Tax Credit. In some cases, especially when they are non-custodial parents, they 

may face very high effective marginal tax rates beginning with the first dollars earned, because a 

portion of their earnings is withheld to meet their child support obligations CLASP therefore 

strongly supports proposals to expand the EITC for childless adults in order to help "make work 

pay" for all workers. 

Young low-income adults are particularly likely to live in multi-generational households and to 

be the second or third potential carner in these households. Programs that treat all household 

members' earnings as equally available to the family may result in high effective tax rates for 

these young adults. Therefore, it may be appropriate to consider excluding from the benefits 

calculation the earnings of young adults who are not the head ofhollseholds, in order to 

encourage work. It is also worth exploring proposals such as those of Gordon Berlin (2007) to 

provide earnings tax credits that are based on individual, rather than household, income. 

Do These Incentives Matter? 

Having established that the combination of public benefits and tax policy does create, at least for 

some workers, a set of income plateaus and cliffs, an important next question is \vhether workers 

actually respond to these incentives by reducing their work effort. In fact, economic theory 

predicts that Volorkers could respond to lower effective \vage rates either by reducing paid work 

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(because the relative value of non-market activities including caregiving, household production, 

and leisure increases) or by increasing v'iork effort in order to achieve a desired target level of 

after-tax and after-benefit income. In order for incentives to matter in either direction, workers 

must be aware of the effects of benefit and tax policy, must think ofthc111 when they make their 

choices, and must have the ability to control their hours of work and/or their \vages. 

The research literature on this question suggests that any work disincentives caused by the phase 

out are relatively limited in their scope, and are certainly modest compared to both the workincentive effects of the Earned Income Tax Credit and Child Tax Credit and the overall antipoverty effectiveness of the safety net (e.g. Ben-Shalom et ai, 2011). Very few ifany lowincome workers are fully aware of the complex system of phase outs and threshold that affect 

their eligibility for benefits. They arc likely to receive only indirect and delayed information on 

the effects of earnings changes on benefits, which reduces the degree to which these effccts 

actually influence behaviors. 

Qualitative studies of lo\\-income parents confirm that whcn faced with the decision about 

whether to accept an offered promotion that "\j\.'ould result in a modest increase in wages, the 

phase-out of public benefits is rarcly a consideration. By contrast, low-income workers do talk 

about the effect the position would have on their work schedules and commutes, and sometimes 

tum down promotions that would shatter fragile child care arrangements (Seefeldt, 2008). 

Studies focused on the EITC indicate that the availability of the credit has a far stronger effect 

encouraging Jmv-income parents to work in the first place than its phase-out has in reducing 

work effort. This should not be surprising to anyone - because orthe nature of our employment 

system, workers have far more control over the decision whether or not to work than over how 

many hours per week to work. Workers who do wish to reduce their work hours in order to 

meet personal or family responsibilities often find themselves unable to do so without paying a 

very high price in reduced hourly wages and benefits. To the extent that the phase-out of the 

EITe has any effect on work effort, it appears to be concentrated on second earners within a 

family (Eissa and Hoynes, 2005). 

Tradeoffs 

It is important to recognize that there is a very real tradeoff in program design between the cost 

ofa program and the steepness orthe phase-out, which results in plateaus and cliffs. We need to 

be honest in acknowledging that eliminating cliffs and slowing the phase-out of benefits both 

increases benefits to higher earning recipients and adds new less-needy individuals or families to 

the pool of eligible recipients. 

Some conservative organizations have been promoting an inaccurate narrative that means tested 

benefits are growing out of control. They rarely acknowledge that, prior to the recent recession, 

the gro\\ th in non-medical spending was overwhelmingly driven by the program changes that 

were made to make work pay. In fact, for families with the least labor market income, the safety 

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net has become even more fragile, as the TANF program only reaches a small share of even the 

poorest families (Trisi and Pavetti, 2012a). 

To the contrary, these organizations give a deliberately misleading portrayal of our safety net. 

First, they come up with an inflated value for the amount we spend on safety net programs, by 

combining spending on programs that provide funding for schools and communities with 

spending on programs that provide direct benefits to individuals and families. Then they divide 

this figure by the number afpoar families. Hearing how much the government supposedly 

spends per poor family, the listener is left to conclude that the safety net for poor families is quite 

generous, that the government is wasting a lot of money, or both. 

Sometimes, these figures are followed by an acknowledgement that not all of the benefits of 

these programs go to poor families. The implication then is that if we strengthened the means 

testing of these programs to cut the near poor out, we could save significant money without 

hanning the most vulnerable "very poor." This has two major problems: 

The official poverty threshold is helpful for statistical purposes, but is far below the 

levels needed to achieve a modestly acceptable standard of living in most areas. When 

work expenses, particularly child care, arc taken into account, many families with 

incomes as high as twice the poverty level have as much difficulty meeting their basic 

needs as families with incomes below the poverty level. 

Making programs more means tested implies either creation of new benefit cliffs or 

increasing the phase-out rate for benefits, and therefore increasing the implicit marginal 

tax rate. In other words, it makes the problems highlighted by this hearing worse. If you 

are serious about being concerned about the work disincentives under benefit programs, 

and not just using them as a rhetorical cudgel to criticize such programs, you should 

strongly oppose such changes. For example, you should reject the current proposals to 

eliminate categorical eligibility under SNAP. 

What about Work Requirements? 

Some have suggested that the solution to possible work disincentives is to add work 

requirements to more programs. However, as discussed in the first section, low-income parents 

already unambiguously experience earnings gains as they move into work. The challenge that 

remains is that they do not always experience significant gains as they move from some work to 

"more work" (more hours or weeks of work per year, or higher wages). A \vork requirement 

aimed at promoting "more work" would be hard to define and would require an unacceptably 

high level of government intrusion into both the lives of low-income workers and the businesses 

that employ them. Moreover, the target population would be qUlte large and such a requirement 

would necessitate a significant new bureaucracy. Given the lack of evidence that work 

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disincentives caused by phase-out rates are a real factor, this proposal would almost certainly 

create more problems than it solves. 

8 

Work requirements are often couched as "building on the successes ofTANF," which does have 

a strong work requirement for participants. There is no doubt that welfare reform understood 

broadly - including the changes made under T ANF, but also the improved work incentives 

under the EITe, Medicaid coverage, and expanded funding for child care assistance - did 

increase employment rates of single mothers. But work requirements were only one piece of this 

package. 

It is also important to recognize that the work requirements came at a real price in terms of 

adequacy of support While the share afpoor single mothers who are working increased in the 

wake of wei fare reform, so did the share orpoor single mothers who are "disconnected"-

neither \vorking, nor receiving cash assistance. In 20 I 0, during the height of the recession, 38 

percent of poor single mothers were disconnected in this way (Gabe, 2011). Whilc many of 

these families receive SNAP, not all do. Ifdisconnected families were also turned away from 

SNAP benefits, there is little question that more children would go hungry, with long-term 

developmental and economic consequences. 

Finally, one of the key lessons from TANF is that we simply have not done a good job of 

figuring out how to enforce work requirements in a way that is helpful and respectful and 

distinguishes between those who are capable of work with the right incentives and those who are 

not. Instead, we have created a system where job search programs often have far more to do 

with discouraging welfare receipt than finding work. and that fails to provide meaningful help to 

many of those with the greatest barriers to employment. We need to get this right before we 

should even consider expanding work requirements to a broader set of programs. 

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References 

Ben-Shalom, Yonatan, Robert Moffit, and John Karl Scholz, "An Assessment of the 

Effectiveness of Anti-Poverty Programs in the United States," Institute for Research on Poverty, 

Discussion Paper 1392-11, 20 I I. 

Berlin, Gordon. "Rewarding the Work of Individuals: A Counterintuitive Approach to Reducing 

Poverty and Strengthening Families," in The Future o.lChildren: The Next Generation of 

Antipoverty Policies, 2007. 

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