Welfare and workTaxing hard-up Americans at 95%America’s welfare state is not working nearly as well as it shouldWelfare and work Taxing hard-up Americans at 95%America’s welfare state is not working nearly as well as it shouldSep 7th 2013 | AUSTELL, GEORGIA AND BOSTON, MASSACHUSETTS AFTER her son was born in 2008, Melissa Devilma—homeless, jobless and alone—needed help. The welfare system stepped in: she received $478 in cash and $367 in food stamps each month, along with housing assistance that lowered the rent on her two-bedroom apartment in Boston to $131. Including health care, taxpayers subsidised her to the tune of $33,000 annually. Ms Devilma used the money to go to college and earn a bachelor’s degree. She wants to get off the dole.But she says that many of the other welfare recipients she knows are reluctant to seek work or an education. Life in the system is hardly gold-plated, but it is comfortable enough. Even Ms Devilma admits that, if it were not for her son and the recent expiry of her cash aid, shewould rather live on welfare than take an entry-level job at McDonald’s,which she considers unsuited to her level of education. As it is, she would take any job “just so I have that little money to provide for him”.Policy wonks have long debated the extent to which welfare discourages work. Clearly, it can. In very poor countries, where the choice is either to work or to starve, people work long, back-breaking hours growing food. In rich countries, government safety nets limit howfar anyone can fall. Yet these nets are hard to design. Welfare states must balance the desire to keep people out of penury with the equally humanitarian desire to not let them drift into lives of indolence and despair.America’s last big welfare reform was in 1996, when Bill Clinton and a Republican-led Congress put time limits on cash benefits and tightenedthe requirement that able-bodied claimants must seek work. The results have been impressive. The number of people receiving cash benefits under what is now called the Temporary Assistance for Needy Families (TANF) programme fell from 12.3m people a month in 1996 to 4.1m in 2012. Employment among single mothers rose sharply.But some worry that welfare is once again encouraging idleness. Paul Ryan, the Republicans’ congressional budget guru, frets that America’s safety net could become “a hammock that lulls able-bodied people intolives of dependency and complacency”. A recent study by the Cato Institute, a libertarian think-tank, tried to add up what a jobless single mother with two children might receive in each state from seven types of benefit: TANF, food stamps, Medicaid (health care for the cash-strapped), housing assistance, utilities assistance, emergency food aid and the programme for Women, Infants and Children. There was huge variation between states. Such a mother might receive a whopping $49,175 worth of benefits in Hawaii, the most generous state, but only $16,984 in Mississippi, the least.Michael Tanner and Charles Hughes, the study’s authors, argue that welfare is too generous. In 39 states, their hypothetical single mother would make more from benefits than a secretary does from work. In 11, she would make more than a first-year teacher. For many Americans, says Mr Tanner, not working is a “rational alternative” to working.Critics cite two objections to Cato’s methodology. First, most people on welfare do not receive all the benefits that its hypothetical single mother does. For example, only 15% of those receiving TANF benefits also receive housing benefit, which forms a huge part of the Cato package. (True enough, says Mr Tanner, but since there is usually a waiting list for housing benefit, the long-term unemployed are far morelikely to receive it.)Second, in comparing the rewards of work and welfare, the Cato study fails to take proper account of the fact that many benefits keep flowingeven after the recipient has found work. In 2011 roughly 86% of children receiving Medicaid came from working families, according to the Centre on Budget and Policy Priorities (CBPP), a left-leaning think-tank. Most able-bodied adults in households with children that receive food stamps work.Measuring the benefits that flesh-and-blood Americans actually receiveis difficult because the system is unbelievably complex. Cato counts 126 separate federal anti-poverty programmes, including 72 that provide “cash or in-kind benefits to individuals”. The states have many more. Some parts of the system make little sense. For example, the food-stamps programme is run by the Department of Agriculture; not because it has any logical connection with welfare, but because Congress long ago yoked food stamps to farm subsidies so that urban and rural lawmakers would vote for each other’s pet handouts.The federal government’s main tool for making work pay is the earned-income tax credit (EITC), a negative income tax that tops up the earnings of low-paid workers. For example, a single mother with one child will receive a credit that rises to $3,250 a year as she approaches$9,600 in earnings. This will remain steady until she makes $17,500, atwhich point it starts to be phased out.Embraced by both parties, the EITC is considered a success. The CBPP estimates that, along with a similar child tax credit, it lifted 9.4m people out of poverty in 2011. But it does funny things to marginal tax rates: in the phase-out period relatively low-paid workers keep shockingly little of each extra dollar they earn.Snakes and laddersOther means-tested goodies compound the problem. As a low-paid worker moves up the income scale, benefits are gradually withdrawn. The Congressional Budget Office (CBO), a non-partisan number-cruncher, looked at how this might affect a single mother with one child in a typical state (Pennsylvania) in 2012.When her income exceeded $4,900, she would have lost TANF. At around $23,000, she would have lost food stamps and federal housing assistance. The CBO calculates that her effective marginal tax rate would range from a modest 17% to a jaw-dropping 95% (see chart 1). If the prospect of keeping only five cents of each extra dollar earned does not discourage work, it is hard to imagine what might. And the CBO’s calculation does not include Medicaid and several other means-tested benefits.Since welfare reform made it harder for the able-bodied jobless to claim benefits, the number of Americans claiming to be