Over the last five or ten years I have become increasingly sympathetic to in-kind or restricted welfare programs as opposed to unrestricted cash grants to welfare recipients, but a reason to replace welfare programs, as much as we can, with a program of refundable personal tax credits administered through the income tax has just struck me, and I want to air it.
Wednesday, December 09, 2015 :::
Occasionally one encounters on the internet someone who misunderstands how the income tax system works, thinking that if one earns $1 more than the threshold between the 15% tax bracket and the 25% tax bracket that one keeps less money than if one earns $1 less than the threshold. It will be assumed that anyone who reads this knows that that is false, but something like that is true for Obamacare subsidies; if you earn just below the cutoff the subsidy can be substantial, and it abruptly drops to zero when your income inches above the threshold. Even where marginal tax rates aren't infinite, they are often very high on "welfare programs"; AFDC, from 1935–1996 (at which point it was officially eliminated), never had a cliff of that sort, but did have a 100% phaseout rate for most of its existence, and had a 2/3 phaseout rate in the short periods in which its design was less mind-bogglingly stupid. SNAP isn't quite as bad — it appears to be 30% — but that, of course, is on top of phaseouts for other programs that might be happening at the same time, not to mention various taxes.
Obamacare subsidies are, famously, administered through the tax system, but they are very much made to feel different to people, in a way that child credits and even the EITC don't. If those could be recast to feel more like tax credits, with SNAP replaced by a refundable credit as well, perhaps the cumulative effect of the phaseouts could be made more salient both to Congress and the electorate and keep aggregate rates below 40% for all people, regardless of income level.
(I believe I have previously suggested here, as a different sort of safety valve, that one be able to elect to split 50/50 with the IRS any portion of one's income in exchange for having it officially removed from income for all tax and welfare benefit calculations; for logistical reasons, one might exclude payroll taxes from that deal. I still think that is perhaps the way to go.)
::: posted by dWj at 4:09 PM