As evidenced by half a century of federal budget deficits, the American welfare state is unaffordable to taxpayers. The attempts to make it less unaffordable have been feebly concentrated to increasingly pointless tax cuts and the almost universal absence of spending reforms. As I explain in my ebook Tax Cuts Don’t Work: A Libertarian Alternative to the Laffer Curve, tax cuts no longer pay for themselves because of the size of our government.
On the spending side, there has been one notable exception to the “absence” rule: the 1996 PRWORA welfare reform. A signature achievement of President Clinton’s, the Personal Responsibility and Work Opportunity Reconciliation Act was aimed at giving welfare recipients a path out of government dependency and on to self reliance. It worked to some degree, but its effects were hollowed out over time and the reform has had no substantial influence on the cost of the welfare state.
If anything, Congress has sent several bills to the president with the intention to expand the welfare state. In addition to Clinton’s SCHIP, President Bush signed a major expansion of Medicare and – of course – President Obama gave us Obamacare.
It is tempting to suggest that the welfare state can be made affordable if Congress just makes its entitlement programs work more efficiently.
It can’t. I have explained why in three books:
- Industrial Poverty, where I show what role the welfare state played in the Great Recession of 2008-2010;
- The Rise of Big Government, where I pointed to the welfare state’s inherent growth mechanisms, and how those mechanisms are traceable back to the Swedish welfare state, the ideological origin of ours; and
- Tax Cuts Don’t Work, in which I point to the spending-growth mechanisms that are built into the welfare state, and how structural spending reform – and only structural spending reform – can stop the growth of government.
The debate over structural spending reform has not yet reached the mainstream of the American public discourse. The Democrat party is working hard to grow spending, and those in the Republican party who want to apply the brakes demonstrate a deep and thorough lack of understanding of the nature of the very government spending they are trying to reform.
As a case in point, consider this new entitlement program courtesy of Senator Mitt Romney (RINO-UT), as outlined by Ramesh Ponnuru for Bloomberg.com:
Mitt Romney is putting forward a wildly ambitious proposal to re-orient the American welfare state toward children. The federal government transfers a hefty chunk of national income from younger people to the elderly. The Utah Republican senator wants more money to go to the parents of minor children. His plan would create a child allowance. Nearly all U.S. children — excluding only those from the highest-earning households — would be allotted a monthly benefit worth $4,200 a year up to age 5 and $3,000 a year up to age 17.
It is interesting to hear Ponnuru’s take on this reform. He is a moderately right-of-center commentator with his byline in the National Review and Bloomberg. He is not an originator of new ideas, but a good indicator of where the neoconservative mainstream of the Republican party is heading.
The problem with the Romney plan is that it is fully compliant with the ideological architecture of the American welfare state. That architecture, again, is imported directly from Sweden. We have already moved far down the road of giving America a full-blown Swedish welfare state, and more is to come: paid family leave universal child care, to mention two. It is also only a matter of time – unless the neoconservatives change their mind – before Congress creates a single-payer health care system.
Now Romney wants to revamp support for young families in the image of the Swedish child-allowance checks. This is not a good idea. For one, they cost a pretty penny, a fact Senator Romney appears to be aware of. Ponnuru does not have much of a problem with this:
The plan is expensive: It would cost $66 billion a year more than the existing tax credit for children. Romney would pay for it in two principal ways: by folding several government benefits designed to help children, including that tax credit, into the new child allowance; and by wholly eliminating the deduction that lets people write off their state and local taxes against their federal ones.
In other words, Romney wants to make the delivery of entitlements more efficient: one program instead of several. He also wants to increase the cost; normally, when politicians propose merging spending programs it is because they want to reduce the cost of government. Not so in this case. Therefore, to pay for his endeavor he wants to raise taxes on low-and-middle income families.
Mitt Romney can afford to lose the state-and-local-tax (SALT) deduction. A family making $60,000 a year can not. They were protected by the Trump tax reform where the SALT deduction was capped to $10,000, but Romney wants to do away with it altogether.
The counter-argument would be that those families will get a check from government instead of the deduction. However, there is nothing in the reform idea that says the give-and-take of the reform will balance out for young families with small kids. The reform is not even designed to do so: it is designed to be fiscally neutral, which is a far cry from the same as a reform being neutral to the taxpayer and entitlement recipient.
We will have to spend an entire separate article on the concept of fiscal neutrality. For now, let us take a quick look at why Romney’s reform idea will hurt young families with small kids, and why it is bad for the U.S. economy.
The reform changes economic incentives. That happens every time government gets involved in the economy, so this is no surprise per se. However, in this case the change in incentives goes squarely against the idea behind the reform.
That idea, again, is to benefit families. However, this reform punishes families with working parents by discouraging workforce participation. This happens in two ways, the first being the elimination of the SALT deduction. All other things equal, the $10,000 SALT cap that the Trump tax reform created is fully available as a deduction to families making up to $200,000 when the combined state and local income tax is five percent. If you pay seven percent in combined state and local income taxes, you can take full benefit of the cap up to just over $142,800 in combined household income.
In other words, the higher the tax, the more strongly the current SALT deduction works as an incentive for low-to-middle income families to work and provide for themselves. Mitt Romney wants to eliminate that incentive.
Secondly, according to Ponnuru, Romney wants to strip down the Earned Income Tax Credit and move “its pro-family features” over to his child-allowance check. According to Romney’s own senate website, the EITC reform is downright schizophrenic:
- On the one hand, it is “simplified through a larger family benefit that does not vary depending on the number of dependents”;
- On the other hand, it takes away the so-called marriage penalty and “creates better work incentives by slowing benefit cliffs”.
The second part means, simply, that you taper off the EITC more slowly as people’s incomes increase. As I demonstrated in my book The Rise of Big Government, a family making $35,000 faces the same effective marginal tax (rising tax rate and lost benefits) as a family making $400,000. Apparently, the Romney plan seeks to smoothen the phase-out.
It is unlikely that a more gradual reduction in the EITC – in response to rising work-based income – will compensate for the bigger family benefit “that does not vary depending on the number of dependents”. This benefit increase directly strengthens workforce disincentives. Without having seen the numbers, experience tells me that when governments increase lump-sum benefits – which is what the “family benefit” is – and they try to compensate by manipulating income-dependent benefits, the incentives balance always makes workforce participation less attractive.
It is reasonable to assume as much here and to leave it to Senator Romney to prove otherwise.
In fairness, it is unlikely that the combination of the EITC reform, the SALT elimination and the new child allowance will substantially change workforce participation among young families. However, the economic design of Romney’s reform points to an incentives balance that does not favor workforce participation, especially not the pursuit of higher incomes.
It is high time for the Republican party and the conservative movement to have a vigorous debate about the American welfare state, what they want with it and how they intend to get there. This idea from Mitt Romney shows how conventional wisdom has engulfed the Republican party and led them to take the socialist welfare state for granted.