If Paul Ryan really wants to encourage more Americans to work, and to move up the income ladder, he could start by urging his fellow Republicans to expand Obamacare.
The House speaker recently rolled out his grand vision for reducing poverty and increasing upward mobility, part of his effort to brand the GOP as the “party of ideas.” A recurrent theme in his 35-page plan is how today’s social safety net discourages poor people from working, or at least from earning more money.
Here’s how that can happen.
If you make sufficiently little money and meet other eligibility requirements, you might qualify for some welfare programs, such as food stamps, housing vouchers, child-care subsidies and Medicaid. But if you get a promotion, or longer hours, or a second job, or otherwise start making more, these benefits will start to evaporate — and sometimes quite abruptly.
You can think about this loss of benefits as a kind of extra tax on low-income people. That is, of every additional dollar of earnings that a person brings in, some portion of that dollar is lost not only to the IRS but also to higher food, housing, child-care or health-care costs.
Last fall, the Congressional Budget Office estimated that when you include both taxes paid and benefits lost, Americans at or just above the poverty line typically face marginal tax rates of 34 percent. That is, for every additional dollar they earn, they keep only 66 cents.
And that’s just the median. One in 10 families with earnings close to the poverty line faces a marginal tax rate of at least 65 percent, the CBO found. (For comparison, the effective marginal tax on wage and salary income earned by the top fifth of households is 38 percent, according to estimates from the Tax Policy Center.)
You don’t need to be a hardcore conservative to see how this system might make working longer hours, or getting a better job, less attractive than it might otherwise be.
Ryan’s poverty report emphasizes a particularly pernicious way the safety net discourages low-income people from earning more money: benefit “cliffs.”
These cliffs occur when a welfare program drops off sharply: At your current income level, you get the benefit in full, but earn one dollar more, and you lose it entirely. That’s good motivation to be very careful not to earn (or at least report) any additional income.
Traditionally, the most notorious benefit cliff has been Medicaid.
Until recently, in most states, Medicaid was available only to the poorest of the poor.
In the typical state, working parents could earn no more than 61 percent of the poverty line (about $12,300 for a family of three in 2016) if they wanted to remain eligible for Medicaid, according to the Center on Budget and Policy Priorities.
This was not a sliding-scale system, because beneficiaries typically didn’t pay premiums. A working mom either qualified for public health care or she didn’t. If she made just a dollar above the state’s threshold, she’d tumble over the “cliff” and lose her insurance completely.
Fortunately, there’s an easy fix for such “cliffs”: just phase out safety-net subsidies more gradually.
We already do this for other programs. Most of the safety net is cliff-free. The earned-income tax credit, for example, is often considered a shining example of how to craft a transfer program so that it helps the poor without penalizing them for moving up in the world.
The designers of the Affordable Care Act applied these lessons to health care. Rather than dumping poor people off Medicaid abruptly, Obamacare expanded the pool of people eligible for the public health-care program to all non-disabled, non-elderly adults with incomes up to 138 percent of the poverty line. For people with incomes above that threshold, Obamacare offered tax credits to buy marketplace coverage; these credits slowly phased out as incomes went up.
Hence the “cliff” — this major work disincentive — disappeared entirely.
Or at least, it was supposed to.
Nineteen states have held out on expanding Medicaid, leaving that detested “cliff” in place — and, arguably, discouraging about a half-million Americans who are below the poverty line from working or earning more money, lest they lose their health coverage.
If Ryan really cares about encouraging the poor to move up in the world he should urge state-level Republicans to expand Medicaid nationwide once and for all.