New Issue Brief: Taxes Exceed Welfare Benefits for Most Poor Workers

Instead of expanding welfare benefits, policymakers could restructure aid for low-income households as tax reductions

NEW YORK, NY — As Congress prepares to negotiate the renewal of the Trump tax cuts, an upcoming legislative battle will likely pit advocates of an expanded, refundable Additional Child Tax Credit (ACTC) against those seeking to reserve funds for more traditional tax cuts. However a new Manhattan Institute issue brief by senior fellow Chris Pope challenges this assumption by finding that most benefits for low-income households, such as the ACTC, go to households that are net taxpayers over a few years. Policies to help these households could therefore potentially be structured simply as tax cuts.

In the issue brief, Pope studied cash benefit programs for able-bodied working age adults. His longitudinal analysis of family finances finds that all but a few low-income working families pay taxes which exceed the cash benefits they receive. For instance, from 2008 to 2018, 99.9% of unemployment insurance benefits, 99.9% of food stamps, and 94.4% of family benefits like refundable Earned Income and Additional Child Tax Credits went to beneficiaries who paid more in federal income and payroll taxes than they received from those benefits.

It’s generally inefficient to tax people only to give them back cash benefits. To avoid redistributive leakage, Pope suggests entitlements could better be structured as reductions to taxes owed over a multi-year horizon – potentially by returning taxes paid in previous years as credits. Such a reform could improve the welfare of those in need without deterring work, the reporting of income, or cohabitation with a spouse because it would reduce the implicit tax on these activities.

Click here to read the full issue brief.