Testimony of Jared Bernstein, Senior Fellow, Before the Subcommittee on Human Resources of the Committee on Ways and Means on Work Disincentives and the Safety Net

PDF of this testimony (10pp.)

June 27, 2012

About the Author

Introduction

Chairmen Davis and Tiberi and ranking members Rep. Doggett and Rep. Neal, I thank you for inviting me to testify on this important question of our safety net and tax benefit programs and their impact on work.

My first point, however, is that I believe it is essential to broaden the question at the heart of this hearing.  For policy makers to gain a full understanding of the impacts of the policies under review, we must investigate not solely any work disincentives they may engender, but also work incentives.  For example, the Earned Income Tax Credit, an important wage subsidy for low-income workers, has been found to have large work incentive effects.

The EITC also lifts millions of working families out of poverty (surely, this was why the EITC was Ronald Reagan’s favorite anti-poverty program) and that raises another necessary dimension along which these programs must be evaluated: to what extent do they achieve their poverty reduction goals?

In other words, while it makes sense to examine the marginal tax rates and work disincentives associated with our anti-poverty programs, to stop there risks an incomplete understanding of the impact of the programs on work, poverty, and well-being.

A review of work disincentives, work incentives, and poverty reduction yields these central findings:

--While benefits of means-tested programs are, by definition, reduced as incomes rise beyond a certain point, their work disincentives differ, and a number of significant programs, including the EITC and SNAP, are found to have either positive or neutral impacts on labor supply. 

--A recent, exhaustive review of the poverty reduction effectiveness of our safety net and social insurance programs found that “…the combination of the means-tested and social insurance transfers in the system have a major impact on poverty, reducing deep poverty, poverty, and near-poverty rates by about 14 percentage points in the U.S. population as a whole in 2004.”

--Importantly, the study concluded that “…this impact is only negligibly affected by work incentives which, in the aggregate, have almost no effect on the pre-transfer rates of poverty in the population as a whole.”

--Recent research also finds positive generational effects of safety net programs on later education and earnings outcomes of children from families that received such benefits.  In the full accounting that I’m advocating, these benefits too must be assessed against any costs of work disincentives.

Finally, to the extent that work disincentives exist, policy makers should consider ways to reduce or eliminate them.  In the final section of my testimony I offer three ways to do so:

--lower marginal tax rates by extending phase out ranges (even though this increases costs);
--provide work supports, such as child care and transportation assistance;
--increase the number of jobs available to low-income workers through demand-side policies.

Given the persistent weakness in the low-wage labor market in recent years, I want to be sure to stress the importance of this last point.  Research over the last few decades has shown that the most effective work incentives for working-age members of low-income families are tight labor markets with rising pre-tax wages.  In this regard, policies such as the job-creation measures in President Obama’s American Jobs Act will prove far more effective in incentivizing work than lowering marginal tax rates on safety net benefits.

Conversely, it would be a significant policy mistake to require recipients of benefits to work without first ensuring adequate job availability.  Even in a climate of strong work incentives, without adequate job availability, this is a policy recipe for rising poverty and the accompanying strain on families and children.

PDF of the full testimony

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