The U. S. Government's Largest Means-Tested Anti-Poverty Program Has Severe Problems

During these dire times for millions of people, many of whom have been unemployed for long periods, the nation's safety net is mangled and inefficient.
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During these dire times for millions of people, many of whom have been unemployed for long periods, the nation's safety net is mangled and inefficient.

Many people would be surprised to learn that Milton Friedman, the famous conservative and free market scholar, suggested that the most efficient way to aid low income people is to send them money, a welfare program he called a "negative income tax". Daniel Patrick Moynihan, the famous liberal scholar and Senator (Democrat, New York, 1976 to 2001) wrote an extensive book (579 pages) in 1971 that included praise for Friedman's tax ideas: The Politics of a Guaranteed Income.

The negative income tax would preserve an incentive to work because recipients would lose only fifty cents for each dollar earned. It may save money by replacing many of the existing grab bag of welfare programs with their large bureaucracies across the country.

In some programs the government bureaucrats manage how low income recipients spend their benefits. One example was a book that was handed to me when I applied for welfare during my personal investigation of a government welfare program years ago. It contained the maximum prices a welfare recipient could spend on a proscribed list of items.

Higher income welfare recipients, such as farmers who are paid not to farm and students at public universities, do not suffer this lack of freedom. Friedman asked a question about the subsidy. "Why should the families in Watts pay taxes to subsidize the families in Beverly Hills who send their children to U.C.L.A.?" (The Public Interest, 1968, p. 108)

Friedman and his wife, Rose Friedman, also an economist, wrote: "By dispensing with the vast bureaucracy and integrating the subsidy system with the tax system, the negative income tax would eliminate the present demoralizing situation under which some people --the bureaucrats administering the program --run other people's lives." (Free to Choose, 1980, p. 122)

Moynihan's and Friedman's support for the negative income tax contributed to its popularity in the 1972 presidential election. President Richard Nixon and his opponent, George McGovern, both supported the plan. After he was reelected Nixon tried to pass the plan through the Congress but it failed.

A remnant of Friedman's negative income tax plan, The Earned Income Tax Credit (EITC), was signed into law by Gerald Ford in 1975. EITC is now the U.S. government's largest means-tested anti-poverty program. The IRS states EITC "is a tax credit for people who have low to moderate earned income". One reason EITC falls short of Friedman's negative income tax is that EITC provides zero assistance for people with zero income.

Douglas Schulman, Commissioner of the Internal Revenue Service, called attention to the EITC program in November 2008 during the recent financial crisis.

Annually, it puts more than $43 billion in the hands of more than 22 million low wage workers. The current economic situation makes it even more imperative that we reach out to those people who may be newly eligible for this important tax credit.

President Barack Obama signed legislation that increased the EITC payments for 2011, with the highest income recipients qualifying for assistance earning near $50,000 a year. The maximum tax credit for tax year 2011 is $5,751 (with three or more qualifying children).

Although Friedman and Moynihan were initially strong advocates, both later turned against the negative income tax as implemented. Friedman turned against the remnants of the plan in the EITC because it did not replace existing welfare programs; it just added one more welfare program blotting out the incentives to work built into a negative income tax.

After the results of tests of the negative income in some urban and rural areas were reported, Moynihan turned against the negative income tax for a number of reasons including cheating. Currently, some mistakes made in filling out the IRS forms might incorrectly be called cheating. The IRS does offer assistance but the extensive directions are not easy to understand without some experience with IRS forms.

This was confirmed by Nina Olson, the National Taxpayer Advocate appointed by the Secretary of the Treasury, who testified in Congress on May 25, 2011. She testified that "estimates of improper EITC payments, including the recent $19.6 billion have uncertain statistical basis". Olson said that 40 percent of all taxpayers with "representatives emerged from their audit with their full EITC intact".

The EITC program should be simplified and extended to zero income citizens. It should replace the grab bag of other programs and the large number of government employees administering them. Social workers can play a constructive role in counseling and teaching anyone who desires such service. But every adult citizen receiving government payments or subsidies should be free to lawfully live their lives as they choose.

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