Thoughts On An Hourly Wage Subsidy

While this article tries to show that marginal taxes on low income earners are so high that a person could do better making minimum wage than making $60,000/year.  It is quite a bit off  (for one thing you have to be pretty clever to get all those benefits), but if you take the total spending on just means tested welfare programs* and divide it by 20% of the USA population you come out with a subsidy of about $10,000 per person (per person not per adult person).  That is without including the huge items like our very expensive free Government Education system and medicare and SS all programs which supposedly exist to benefit the poor and unwise.  I would think that an hourly wage subsidy or as Charles Murray proposes a fixed payment to every citizen would be much more efficient.  (I might ad to that Gov. provided health insurance with a deductible equal to last years adjusted income minus the poverty rate (outlined here) would be sufficient for the sicker than average people.) 

While the current US welfare system is a bureaucratic mess and replacing it with an hourly wage subsidy would probably help, fraud would be a problem.  The federal Government is very bad at finding and prosecuting fraud (I have seen estimates that as high as 30% of medicare spending is fraud).  For one thing the Federal Government does not have enough people on the ground to find fraud.  Policing fraud requiters people going undercover and doing stings. So I wonder if an hourly wage subsidy could be done at the state or local level.  If done on a local level it might attract low skill workers into the area offering the wage subsidy and that would be bad but it would also attract low wage employers into the area and that would be good. It might net out positive and might be a more efficient way to attract business into that the tax holidays land deals that are used today. 

It would require some changes in federal law to allow the states and localities to produce an hourly wage subsidy.

Still the current system is so expensive and ineffective I think that it would be worth a try. 

Notes:


*Means tested welfare that includes AFDC, food stamps, subsidized housing etc.

Excerpt below

Means-tested welfare spending or aid to the poor consists of government programs that provide assistance deliberately and exclusively to poor and lower-income people. By contrast,  nonwelfare programs provide benefits and services for the general population. For example,  food stamps, public housing, Medicaid, and Temporary Assistance to Needy Families are  meanstested aid programs that provide benefits only to poor and lower-income persons. On the  other hand, Social Security, Medicare, police protection, and public education are not means-tested; they provide services and benefits to persons at all income levels. In the typical year, around 71 percent of means-tested spending comes from federal funds and 29 percent from state funds. Nearly all state means-tested welfare expenditures are matching contributions to federal welfare programs. Ignoring these matching state payments into the federal welfare system results in a serious underestimation of spending on behalf of the poor.

In FY 2008, 52 percent of total means-tested spending went to medical care for poor and  lower income persons, and 37 percent was spent on cash, food, and housing aid. The remaining 11 percent was spent on social services, training, child development, targeted federal education  aid, and community development for lower-income persons and communities. Roughly half of means-tested spending goes to disabled or elderly persons. The other half goes to lower-income families with children, most of which are headed by single parents.

Here is another calculation below of marginal tax rates on the poor:

With more than 70 overlapping means-tested programs serving different low-income populations, it is difficult to determine the average level of benefits received by low-income persons. One way of estimating average welfare benefits per recipient would be to divide total means-tested spending by the total number of poor persons in the United States. According to the Census Bureau, there were 39.8 million poor persons in the U.S. in 2008, the most recent  year for which data are available. An additional 1.5 million persons lived in nursing homes.  (These individuals, though mostly poor, are not included in the annual Census poverty and population survey.) Total means-tested spending in 2008 was $708 billion. If this sum is divided by 41.3 million poor persons (including residents in nursing homes), the result is $17,100 in means tested spending for each poor American. However, this simple calculation can be misleading because many persons with incomes above the official poverty levels also receive means-tested aid. Although programs vary, most means tested aid is targeted to persons with incomes below 200 percent of poverty. Thus, a more a accurate sense of average total welfare spending per recipient can be obtained, if total welfare aid is divided among all persons within this larger group. Dividing total means-tested aid by all persons with incomes below 200 percent of poverty results in average welfare spending of $7,700 per person, or around $30,000 for a family of four.

Links, links, links mostly on marginal tax rates for low income people:

http://www.econ.ucdavis.edu/faculty/dsrapson/DIPW_METR_1006.pdf
http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/02/08/8/
http://politicalcalculations.blogspot.com/2009/11/age-and-income-driven-spending.html
ftp://ftp.bls.gov/pub/special.requests/ce/standard/2008/income.txt
http://mises.org/daily/3822
http://gregmankiw.blogspot.com/2009/11/poverty-trap.html
http://sites.google.com/site/jross08/WelfarePunishes.pdf?attredirects=0
http://www.be.wvu.edu/divecon/econ/sobel/UnleashingCapitalism/FinalChapters/Chapter11_booklayout_final.pdf