The working poor are being doubly victimized by the administration's paradoxical policies on work incentives. On the one hand, excessive faith in the power of work incentives to spur economic growth led to tax cuts for middle- and upper-income Americans--tax cuts that were too large given the administration's ambitious defense spending plans and the difficulty of achieving cuts in nondefense spending. The massive federal deficits, high interest rates and deep recession that resulted hurt the working poor by shutting off the spigot from which their share of the "trickle" was to flow.
On the other hand, insufficient faith in the power of work incentives to motivate lower income people led the administration to favor (and Congress to adopt) welfare policy changes that discourage work and self-sufficiency. Ironically, while the Reagan administration rails against welfare dependency, its policies make welfare an attractive option for the working poor.
A generation ago, welfare recipients who took a job lost their benefits on a dollar-for-dollar basis. In effect, the "tax rate" on earned income was 100 percent. In the late 1960s, Congress put into effect a new rule called "$30-plus-a-third," which lowered this effective tax rate to about two-thirds for recipients of Aid to Families With Dependent Children. In addition, AFDC beneficiaries were allowed to deduct a certain amount of work expenses from earned income. This deduction further lowered the effective tax rate on earnings.
The $30-plus-a-third incentive was effectively repealed in 1981. At the urging of the administration, Congress placed a time limit on the work incentive bonus and a dollar limit on the work expense deduction. The $30-plus-a-third rule may now be applied to only the first four months of employment. After four months, every penny of net earnings is subtracted from welfare benefits. The work expense deduction was limited to $160 per month per child for day-care expenses and $75 per month for other work-related expenses.
Eligibility standards were also tightened, denying AFDC assistance (and thereby Medicaid benefits) to many working poor families. States were authorized to institute workfare programs requiring welfare recipients to take jobs in order to "pay for" their benefits. The message seemed to be "no help for the working and make-work for the nonworking."
A similar trend is evident in the food stamp program, where the earnings disregard was lowered from 20 percent to 18 percent in 1981 and would be eliminated entirely in 1983 under President Reagan's proposed budget.
The administration's Comprehensive Employment and Training Act (CETA) proposal overdoes the necessary targeting of federal job training funds. It would focus job training primarily on AFDC recipients and very poor youth. Again, the working poor would be left out in the cold. The ongoing freeze on the dollar value of the Earned Income Tax Credit points in the same direction.
Many working poor families may have reluctantly concluded from all this that the only way to obtain any help is to act helpless. By quitting their jobs and becoming "truly needy," they can get the bonanza of overlapping benefits that await the dependent but elude the working-poor family. There is now little motivation to get off welfare and a growing attraction to go on welfare.
The evidence suggests that lower effective tax rates stimulate more work effort by AFDC recipients. It also points to offsetting effects on families with slightly higher incomes who would newly qualify for benefits under a plan with lower effective tax rates. But even if such effects cancel the positive stimulus to work among recipients, society should experience a net gain because of a possible break in the cycle of dependency plaguing the welfare class. Moreover, basic fairness should be taken into consideration here. Our society should assure people that when they work they will have higher incomes than when they do not.
The workfare approach to AFDC treats welfare benefits as a stigma or punishment that must be "worked off." The administration and Congress now seem to place more faith in requiring low-income female heads of households to work than in motivating them to work. This approach denies women on welfare the option of staying home with their children. For an administration that stresses both the power of work incentives and the positive value of family, this is a strange set of priorities.
Ironically, workfare also conflicts with the administration's prudent preference for incentives approaches over complex regulatory schemes. We have had plenty of failures trying to develop effective work tests in social programs. We should be just as wary of intrusive, elaborate regulation in job placement for welfare recipients as in the regulation of business.
It is time to stop treating the poor as two distinct classes of people--a nonworking group that receives benefits and should be made to work to save federal outlays and a working group that deserves no assistance. A superior--and more humane--approach substitutes graduated assistance for the all-or-nothing approach and views marginal assistance to the working poor as a prudent social investment in their future self-sufficiency.