MAKING AMERICA WORK
B. Making Welfare Work
Second, we should reform the welfare system. Right now, eighty-five separate federal programs provide income-tested welfare benefits. To keep costs manageable, virtually all of these programs phase out benefits as family income increases. Unfortunately, these phase-outs often combine with income and payroll taxes to subject beneficiaries to confiscatory tax rates, especially on low-income workers. For example, Figure 11 shows the average tax rates confronting low and moderate income families. At some points between $10,000 and $25,000 of income, the cumulative tax rate on a single parent can even exceed 100%. Needless to say, such high tax rates discourage low- income Americans from working or from improving their work skills.
I believe that we should replace most of the current welfare system with a system of refundable tax credits. The general idea is to “cash out” as many welfare programs as possible and use that money to pay for refundable personal tax credits, earned-income credits, child care credits, and health care credits.
For example, we could replace the current tax system and most of the current welfare system with a comprehensive tax and transfer system. Instead of the current jumble of income and Social Security tax rates, that system could have just two tax rates, say, 20% of the first $50,000 of income and 35% on income above $50,000.