The Daily Caller is running an endearing story about a 56-year old Philadelphia woman who is on disability and who has been endorsed by the city’s Republican Party in their upcoming primary for mayor. She is disabled, she says, because of anxiety, depression and bipolar disorder. She used to have a full-time job; but, following a series of stressful events, she says she became disabled. Nowadays, she lives on disability payments and keeps herself busy by volunteering in the community.
In a simple world, there would only be people who are fully capable of working and people fully incapable of working. For those holding to traditional values, those fully capable of working should be denied benefits. If, after a period of unemployment, people fully capable of working haven’t found a job, the government or a private charity should help them find a job, or even make a job for them, or in some other way harass them until they get a job. As Paul wrote (Ephesians 4:28), “Let him that stole steal no more; but rather let him labor, working with his hands the thing which is good, that he may have to give to him that needs.” Paul did not have anything good to say about those who should be self-supporting who, instead, relied on the charity of the congregation of believers. As an observant Jew, Paul had a moral duty to give to the poor. But, someone who feigned poverty to receive this support was a “schnorr,” a kind of a thief.
But the world is not simple. There’s a continuum, not a dichotomy, between being fully capable of working and being fully incapable of working. How do you fashion income security for a world where there is this continuum? Milton Friedman developed the basic approach in his 1962 book Capitalism and Freedom. He described his proposed system as the Negative Income Tax. However, we have learned a few things from social experiments and policy changes involving cash grants, and we need to modify what he developed. First, I’ll describe his idea; and, then, I’ll discuss the problem of cash grants.
The idea of the negative income tax is that everybody in theory starts off with a cash grant from the government and faces a modest income tax on any earned income (whether from labor or from financial investments). With a modest income tax, everybody who could work would have plenty of incentive to work. Some people, being totally incapable of working, would subsist on the cash grant. Some would work part-time and live on the combination of the cash grant and their after-tax earnings. Most people wouldn’t even notice that there was Negative Income Tax, but only notice that there was a zero-bracket in the income tax, and that they only paid taxes on their earnings above that initial bracket.
People, in making the choice to work given a Negative Income Tax, would reveal their capability of working, whether full-time or part-time, or in a high-stress or a low-stress job, or in terms of any other dimension involved in working. This approach is certainly more efficient than an all-or-nothing approach to income security in which many people are effectively trapped into lives of dependency. But, we have learned that there is a problem with cash grants.
The problem with cash grants is that many people would choose to subsist on the cash grant. Perhaps they are completing lacking in ambition and desire nothing more than a life of smoking dope and playing video games. But, we can suspect that they are supplementing their cash grant with earnings from the underground economy, from drug dealing and prostitution, and from theft and other so-called property crimes.
The twist on the Negative Income Tax that reflects what we have learned about cash grants is to make the grant consist almost if not entirely of non-cash benefits; e.g., food stamps, housing vouchers and health insurance. We’ll call this package of benefits the “basic grant.” Again, most people wouldn’t even notice the income security program. They’d simply notice that the income tax features a zero-bracket. Some people, totally incapable of working, would subsist of the basic grant (but, really, they should join into a family unit, whose zero-bracket would expand so as to enable the family unit to provide for them). But many more people would work part-time and subsist on a combination of their cash earnings and a somewhat reduced basic grant. The reduction of the basic grant would be small percentage of their earnings, insuring a strong incentive to work.
The reality of our income security system is that many people are caught in the middle. They are capable of working but maybe not full-time. At their present level of productivity, their wage rate is modest. But, with experience, their productivity could increase. If they were determined to be disabled at some time in the past, and if they take a chance on working and fail, who knows if they will again be determined to be disabled. People who are caught in the middle worry about health care for themselves and for their children if they attempt to be independent. They worry about their young adult children losing their Pell Grants. More than trapping people into lives of dependency, our income security system traps people into lives of helplessness and hopelessness. Our income security system is not simply inefficient, it is cruel.
Clifford F. Thies is the Eldon R. Lindsay Professor of Economics and Finance at Shenandoah University. He received his Ph.D. in economics from Boston College.
