The America Rescue Plan Act was passed and signed into law earlier this month. Another bad short-term response to long-term issues.
The two lead items in most reports are a $1,400 per person payment and continuing the temporary increase in unemployment benefits – both requiring people to be unproductive in order to obtain the money. The means testing of benefits has got to go to incentivize productivity. Furthermore, the unemployment benefits were made more valuable since they are no longer taxable income, further reducing the incentive to be employed. I presume that is why so many businesses are having trouble finding employees; it pays so much better to not work.
It is sad that this $1,400 per person payment is just temporary support offered the citizens of this country, when this current situation is a chance to meaningfully reform government benefits. How long will $1,400 last? Then what? We need to decide as a country that no citizen is to go without certain basic resources — food, housing, medicine for examples. To do that, let’s provide benefits to every citizen. No waiting for some bureaucrat to decide you are worthy. No insecurity that you might do some otherwise reasonable activity that terminates the benefits.
A third flaw is found in the size of the bill. The $1,400 payment that gets the most press is less than a quarter of the amount appropriated. Generally, a temporary relief bill to get past a temporary disaster should not be larger than the lost economic activity. That tends to be quite inflationary, and shows that the bill is not really about relief. Even Larry Summers, a very liberal economist who was the Secretary of the Treasury under Clinton, uses this criteria to say that the bill is way too big. He suggest a maximum of $380 billion, or a little less than the direct payments to the citizens. See https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/.
Fourth, this bill includes so many things not related to COVID. Examples:
- Reduce flexibility of GI Bill education benefits.
- Aid to state and local governments when their revenues are only down .4% (Wall Street Journal, 3/13/2021) — certainly an amount that any budget should be able to handle as out of contingency funds.
- Doubling down on Obamacare, trying to rescue that failed program.
- $270 million to the National Endowment for the Arts and National Endowment for the Humanities.
- $50 million to the Environmental Protection Agency while lower economic activity has reduced pollution.
- $50 million to family planning services as outlined in Title X.
Fifth, we see that this bill shows that our representatives value teacher unions over the actual education of our children. This bill only supports government-run schools at a time when the pandemic has revealed the flaws of those schools to so many parents. Further evidence that this is not about the pandemic is that the aid to schools can run through 2024 — long after the pandemic is expected to be over. Note that schools have not yet spent all the money from pervious stimulus bills (Kiplinger Letter 2/26/2021).
This bill also increases the child tax credit. Again, this benefit is means tested, temporary, and there is no requirement to spend it on basic needs. We also would prefer to see an agency other than the IRS distributing benefits. They are not known as compassionate or timely — both important characteristics of agencies distributing benefits. (Note Romney’s recent proposal for child benefits would fix this last issue.)
Support for Ending Means Testing
Tuesday, June 13th, 2023One of the main points in the ComingTogether Plan is that means testing of benefits reduces the incentive for productive work, and therefore should be eliminated. Recently, two nationally known think tanks have joined us in expressing this concern. Hoover Institution fellow John Cochrane published a blog post making this very point on May 25, 2023. The Goodman Institute published an editorial in Forbes on June 1, 2023. It is publicly available on the Goodman Institute website here.
The Goodman piece makes reference to a paper by David Altig, Alan J. Auerbach, Laurence J. Kotlikoff, Elias Ilin, and Victor Ye that is similar to the “disincentive” analysis on our website, but is newer and much more comprehensive: Marginal Net Taxation of Americans’ Labor Supply. The authors use our methodology of treating loss of benefits the same as a tax and calculating a marginal tax rate based upon the combination of actual taxes and lost benefits associated with increased income. This new paper takes the analysis much further to look at long term effects. The paper gets rather technical, but read at least the Abstract, the Introduction, and the Conclusion. These sections particularly make clear the excessive complexity in our system of government benefits and taxation.
In the current situation with so many able-bodied, working-aged adults not participating in the work force, we really need to understand why that is the case and change the incentives so that more people are productive.
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