Imagine Congress created a new tax that didn’t just take a portion of each additional dollar you earned — it took more than that dollar, so that earning a higher wage left you with less take-home pay than before. Now imagine this tax applied mostly to single mothers earning as little as $26,000 per year.
People across the political spectrum would be outraged. Yet, that scenario is essentially what millions of Americans already face. It just happens through the welfare system, not the tax code.
For years, economists have talked about “welfare cliffs”: sharp decreases in a family’s overall income when a small rise in wages causes them to lose a larger amount in welfare benefits. But less is known about how these various cliffs stack up — a family receiving one benefit likely gets others, too — and what specific income levels trigger them, for specific types of families, in particular parts of a state like Georgia.
Now we have a clearer picture, thanks to the Georgia Center for Opportunity. The local non-profit commissioned economist Erik Randolph to create a computer model weighing factors such as family size, location and benefits. The range of outcomes is practically innumerable, and you can play around with them at WelfareCliff.com. But an example should tell the story quite clearly.
Consider a single mom with two kids (the typical welfare family in Georgia, per census data) who receives the federal Earned Income Tax Credit along with subsidies for housing, food, health care and child care. When she earns $26,000 a year, or $12.50 an hour, her overall income including welfare benefits peaks at more than double her wages: over $53,500.
From there it’s all downhill. As she earns more at her job, her net income slowly falls: by $1,300 a year if she accepts even a 25-cent-per-hour raise at work, for example. For her net income to actually rise, her hourly earnings would have to leap from $12.50 to a whopping $30.50. Unless she can jump all the way to that level, a practical impossibility, the welfare system encourages her not to earn more money at work.
“What we’ve discovered in general is, the more welfare programs that an individual receives, the greater the likelihood they’re going to have disincentives for earning more money,” Randolph told me in a recent phone interview. “The more urban the setting, also the more likely they’re going to have more disincentives for earning more money.”
That last bit should ring true for anyone who’s read about the stark income divide in Atlanta. Studies of income inequality tend not to include welfare benefits, which makes them somewhat unreliable for judging how life really is for a lot of people. But to the extent true inequality exists, we exacerbate it by forcing low-income workers scale welfare cliffs to improve their lot.
One obvious question is why the programs were created this way. The answer, Randolph says, is they weren’t — at least, not intentionally.
“It is partly poor design, but people also have to remember these (programs) were kind of haphazardly put together,” he said. “You have somebody (in government) sponsor a program, then later on Congress decides to build a different program, and they’re not necessarily in sync. They’re different programs, overseen by different committees in Congress, implemented by different agencies. So they don’t work as a system.”
Getting these programs to function in concert so they encourage more work, not less, is essential. Randolph and GCO plan to offer specific recommendations for Georgia in the coming months, but Washington will need to do much of the work. Fortunately, meaningful welfare reform is a topic to which Speaker Paul Ryan has devoted much attention in recent years.
The people stuck at the bottom of the cliff have waited long enough.