Wednesday, December 19, 2012

A Tale of Two Welfare States

Copyright, The New York Times Company

In “A Tale of Two Cities,” Dickens wrote, “It was the age of wisdom, it was the age of foolishness.” The governments of the United States and Britain are embarking on different approaches to helping their poor and unemployed, and one of them may regret its policy decisions.

As recently as 2010, Britain had a complex system of antipoverty programs including housing benefits, job seekers’ allowances and mortgage-interest assistance. With so many benefits available, many people found they could make almost as much from the combined programs as they could from working, even while any one of the benefits might not have been all that significant by itself. As Britain’s Department for Work and Pensions described, beneficiaries remained “trapped on benefits for many years as a result.”

Beginning next month, Britain will strive to put its welfare system on a different path by unifying many programs under a single “universal credit” system, what the department describes as an “integrated working-age credit that will provide a basic allowance with additional elements for children, disability, housing and caring.” The department forecasts that its “universal credit will improve financial work incentives by ensuring that support is reduced at a consistent and managed rate as people return to work and increase their working hours and earnings.”

In the United States, the welfare system includes dozens of federal programs, enumerated by Robert Rector of the Heritage Foundation as those “providing cash, food, housing, medical care, social services, training and targeted education aid to poor and low-income Americans.” Beginning in 2014, more programs will be added and expanded by the Patient Protection and Affordable Care Act: new health-insurance premium-support programs, new cost-sharing subsidies for out-of-pocket health expenditures, financial hardship relief from the new individual mandate penalties, new subsidies for small businesses employing low-income people and expansion of Medicaid.

The Congressional Budget Office estimates that the Affordable Care Act’s means-tested subsidies and cost-sharing will implicitly add more than 20 percentage points to marginal tax rates on incomes below 400 percent (see Page 27 of the C.B.O. report) of the poverty line (a majority of families fit in this category) by phasing out the assistance as family incomes increase, although a number of families will not receive the subsidies because they already get health insurance from their employer.

These marginal tax-rate additions are on top of the marginal tax rates already in place because of personal income taxes, payroll taxes, unemployment insurance, food stamps and other taxes and means-tested government programs. In 2014, some Americans will be able to make almost as much from combined benefits as they would by working, and sometimes more.

In summary, the United States intends to move in the direction of more assistance programs and higher marginal tax rates, while Britain intends to move in the direction of fewer programs and lower marginal tax rates.

Either country, or both, may ultimately fail to fully carry out the new programs by granting waivers and exceptions, refusing to administer them or by rewriting its new laws. But if both do follow through, perhaps future empirical economic research comparing the United States and Britain will reveal which country is living an age of wisdom and which one in an age of foolishness.


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