Social Darwinism is enjoying a revival these days under the banner of "supply-side economics."
It has long been recognized that the market mechanism, if it is to function at peak efficiency, must operate on the survival-of-the-fittest principle. To squeeze the last ounce of productivity from society's resources, the market must be ruthless. It cannot show compassion. The winners in the economic game must receive the spoils, or else the incentive to become a winner will be dissipated and the strength of the market mechanism will be sapped.
This much is fact, or about as close to fact as we ever come in social science. What to do about it is another matter entirely.
Supply-siders, like the Social Darwinists before them, seem to revel in it. You must not impede the forces of economic evolution, they warn, lest economic progress be stifled. But over the past half- century, this view has come to be supplanted by a more humane one: that it is a legitimate role of government to shield those least able to fend for themselves from the rigors of the competitive storm.
One does not need either weak knees or a bleeding heart to believe that government should narrow some of the wide income gaps that the market naturally produces. And societies throughout the Western world have done so, generally with far more enthusiasm than we in the United States. If we have lost the competitive edge to West Germany, for example, it is not because we coddle our poor more.
The chief instruments in the effort to redistribute income in favor of the poor have been the progressive income tax and a variety of transfer programs popularly known as "welfare." Both of these pillars of the welfare state were successfully attacked last year.
But why? Why did Reaganomics set out to enrich the rich and impoverish the poor? The putative reason was that marginal tax rates were so high that they were stifling productive activity. This notion was always dubious at best. But let's put aside supply-side illogic for a moment, and grant the premise that marginal tax rates had to be reduced.
A logical place to start a crusade against high marginal rates is with the highest ones. And it has been known for years that the highest marginal rates are paid by low-income people--people who are either receiving or are potentially eligible for means-tested income-support programs such as Aid to Families with Dependent Children, food stamps and Medicaid. If anyone's incentives were stifled by the tax and transfer program in place a year ago, it was theirs.
And this remains true today. What used to be called the "welfare mess" has been trimmed in size a bit, but is no less messy. Our hodgepodge of means-tested programs, some of which have thresholds for qualification, combine to impose astronomical marginal tax rates on some poor people. For example, cases in which working mothers have quit their jobs rather than lose Medicaid benefits have been widely reported in the media in recent months. A system that creates such strong work disincentives for poor people should, but unfortunately does not, make true supply-siders weep.
Is there a better way? Yes. And in the case of welfare reform, good supply-side economics is also good economics. Both call for redistributive mechanisms that transfer income from rich to poor at the lowest possible cost in terms of lost economic efficiency. No policy can eliminate this cost entirely, but a cost-effective welfare policy can reduce it substantially.
The principle of cost-effectiveness suggests two concrete criteria for welfare reform. First, transfers should normally be made in cash rather than in kind because a transfer in kind that costs taxpayers $1 often is worth less than $1 to the beneficiary. Money is therefore wasted. Second, the marginal tax rates implicit in the transfer system should be kept as low as possible in order to preserve incentives to work.
These two criteria, in turn, are best met by some variant of the Negative Income Tax (NIT), a plan under which families below a certain cutoff level receive cash transfers ("negative tax payments") that automatically decline as earnings rise. For example, an NIT plan with a $12,000 cutoff (for a family of four) and a 50 percent marginal tax rate would pay $6,000 in benefits if the family has no earnings. Benefits would then decline by $500 for every $1,000 earned.
The Negative Income Tax is hardly a new idea. Originally advocated 20 years ago by Milton Friedman, it was proposed by President Nixon but rejected by the Senate. A small-scale variant called the Earned Income Tax Credit was enacted during the Ford administration and is still part of the tax code. President Carter made the NIT part of his comprehensive welfare reform package in 1977, but it, too, was rejected.
Any proposal that has been around this long is bound to have attracted some vocal critics, and the NIT is no exception. Some of the criticisms are valid, but they are less than overwhelming once we recall that the NIT is no panacea. Advocates of NIT do not pretend to have found a magic way to redistribute income without efficiency losses, but only to have done about as well in this respect as can be done.
One major criticism of the NIT is that most variants still imply rather high marginal tax rates on earnings. The most seriously discussed plans reduce benefits by 50 cents for each $1 of earnings, and hence imply a marginal tax rate of 50 percent. This is certainly a high tax rate, and consequently a potential work disincentive. But the current system of multi-program categorical assistance implies far higher marginal rates. The criticism is not valid because the NIT, while far from perfect, scores more highly on this criterion than the present system.
A second frequent criticism is that an NIT will pay benefits to many families not now on the welfare rolls. This is true, but the "nonpoor" families that would receive NIT benefits are not exactly rich. Under the plan in my example, a family earning $9,000 a year would receive a $1,500 cash grant. But it would also pay over $800 in payroll and income taxes, making its net transfer from the government about $13 per week. And this munificent sum would go to a family of four that was living lavishly on $173 (before tax) per week. Can anyone construe this as squandering public funds?
A third major objection is an ethical judgment: able-bodied individuals should have to work for a living, rather than receive a dole financed by taxing the earnings of others. Only a utopian would quibble with this principle, but defining "able- bodied" is harder than might be realized. For example, is a mother of small children "able- bodied?" Certainly an NIT might be abused by some who should be working. But the number of dollars these low-income shirkers might extract from the public treasury is surely trivial compared to the vast sums extracted by the high-income shirkers who abuse the personal income tax. However, to meet this objection, an eligibility test for NIT payments might be useful, though proper design of such a test is a tricky matter.
In sum, the Negative Income Tax, while not without blemishes, seems to be a more cost-effective way to redistribute income than most of the alternatives. Until someone devises a perfect system, we should not allow a basically sound idea to be nickel-and-dimed to death.