A Nation of Moochers (25 page)

The Parent (and Student) Tax

The big hammer, however, is the cost of college, an especially tricky and onerous problem for the middle class. To qualify for need-based financial aid, parents have to be careful not to make too much and not to have too much saved. Generally a family with the misfortune to make more than $65,000 a year is expected to pay out 47 percent of their after-tax income and a portion of their savings to the cause of higher education. “A few rich universities cut the poor and even the middle class more slack,” noted
Forbes.
“A family earning $65,000 whose kid gets into Princeton will have to kick in maybe $2,000, and the contribution rate rises gently from there. Still, by $150,000 in income or so, parents are back to that 47% aid tax.”

Which brings us back to the 50-year-old single mom, who found that reaching her full income potential was very likely a sucker’s game.

The tax on success will not stop when her daughter graduates from college. Under the “income-based repayment plan” for federal student loans, the amount her daughter pays back—or whether she pays all of it back at all—could depend on how successful she is at avoiding well-paying jobs.

Think of the system as a crash course on “How to Borrow Money Without Paying It Back.” First, you borrow the money. Then, if you work at jobs that pay low enough, you can make only token payments for ten years. If you have been fortunate enough to avoid the private sector, working instead for a nonprofit or for government, the balance of the loan is canceled. Actually, the debt is not wiped away; it is simply paid for by taxpayers. The loan becomes a gift. Given the generous salaries and lavish benefits of government jobs, it’s not clear how this additional benefit is justified, but it is certainly valuable. Under the income-based plan, a student’s monthly payments would be capped depending on income: A single person making $15,000 would pay nothing on the loan, while a single classmate who made $65,000 a year would pay up to $609 a month on the same loan. Conversely, a student who decides to quit her job to wait tables or sweep streets for the local government could save herself thousands of dollars a year.
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The Mother of All Tax Credits

The incentives for the poor can be even more upside down: A poor individual who marries or takes a better job or gets a raise is at risk of losing food stamps, health care coverage, child care subsidies, and the Earned Income Tax Credit. As the left-leaning National Center for Children in Poverty (NCCP) notes, “The result is that parents can work and earn more without their families moving closer to financial security.”
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The NCCP uses the example of a single mother named Becky who makes $16,000 a year. If she somehow increases her income to $36,000, she will lose her government subsidy for child care. If she continues to improve her lot in life, her children may lose health coverage and she will lose the cash she gets from the Earned Income Credit.

We find a similar effect in the case of the Wisconsin woman cited at the beginning of this chapter. How does a single mother lose $37,000 in benefits simply by getting married? A Wisconsin legislator, Glenn Grothman, crunched the numbers on the state’s programs for low-income families. Start with the Earned Income Credit: Because the mom makes less than $34,458 a year, she is eligible for a check from the government worth about $4,820. If she gets married, he noted, she loses the entire check.

Similarly, when it comes to the state’s low-income health care program, the mom is only eligible as long as her income is less than 185 percent of the federal poverty level; unless she gets married, she qualifies for the program, which has a benefit worth about $3,300 a year. She is also eligible for roughly $9,200 a year in day care benefits as long as her income stays below $33,876. If she marries, the income limit rises to $40,788, but since she and the father make more than that, they would lose the benefit. The mom would also lose low-income housing assistance, food stamps, and energy assistance, and her children would no longer be eligible for Milwaukee’s private school choice program. This doesn’t include other benefits such as subsidized school lunches. With those incentives, who would get married?

“No wonder 41 percent of American births last year were to single women,” wrote Grothman.
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Ironically, advocates for the poor cite an effect similar to high marginal tax rates to explain the disincentives to marriage and work in the current system. “For example,” notes the NCCP, “if three benefits each phase out at a rate of $.30 for each $1 of earnings, the cumulative effect could be that an additional dollar of earnings results in a loss of $.90 in benefits, leaving only a $.10 gain. This is the equivalent of a 90 percent ‘marginal tax rate.’”
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Of course, it is not a tax at all, but the point is provocative: Faced with losing 90 cents of every dollar earned, why would anyone want to get a promotion, work more hours, or get married?

This was not the original idea. The Earned Income Tax Credit was supposed to make work pay and help the working poor rise into the middle class, which perhaps explains its strong bipartisan support. Over time the “credit” has become the country’s second-largest public assistance program behind only Medicaid; and according to government auditors the credit is among the most fraud-ridden program in history.
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It is, first of all, not a credit at all: The EITC can be a straight-out transfer payment. Low-income individuals who otherwise pay no income taxes file tax returns so they can get the government check of up to $5,617. (In 2007 the average benefit for a family with children was $2,488.)
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There is no time limit for participation in the program; recipients can access taxpayer cash year in and year out, world without end. One study found that half of all families with children tap in to the tax credit at one time or another.
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More than 25 million EITC returns are filed every year, costing taxpayers who pay in to the government more than $40 billion in transfer payments.

The scope of the cheating is massive: In 2005, the Government Accountability Office found that “the IRS estimated between 5.5 and 7.3 million fraudulent payments a year at a cost to taxpayers of somewhere between $11 billion and $14.6 billion.”
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But the greatest effect of the tax “credit” and other phased-out benefits is on the incentives.

“Don’t think the American public is stupid,”
Forbes
magazine quoted a tax practitioner saying of the credits. “People call me and say, ‘What’s the most I can earn before I lose the earned income tax credit?’ [They] may not understand marginal rates, but they’re shocked when they lose the college or child credits. You hear all the time, ‘The harder I work, the more they take away from me.’”
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The Health Care Cliff

The new health care reform bill will also dramatically change the financial landscape for the middle class. Long before Obamacare was a gleam in Congress’s eye, the habit of individuals paying for their own medical care had virtually disappeared from the American economy. Even otherwise responsible adults came to regard the notion of actually paying out of pocket for routine health maintenance as anathema. The result has been the separation of the medical consumer from the actual cost of his or her treatment, a significant contributor to the rise in health care costs. Car insurance, for instance, does not cover changing the windshield wiper blade, or the oil; it is reserved for more catastrophic injuries or damages. The average car owner assumes that he will bear the cost of buying windshield wiper fluid or replacing a burnt-out taillight. Not so with health insurance.

The “reform” bill passed in 2010 created a new system in which taxpayers get to subsidize hundreds of billions of dollars of other people’s health care—other people who are by definition neither elderly nor poor, since they were already covered by taxpayer-funded health programs like Medicare and Medicaid. Apart from its effect on the nation’s health care system (which is beyond the scope of this book), the legislation extends government subsidies and incentives deep into the middle class, with results that may only be realized in the coming years.

Because the new health care law includes powerful incentives for employers to drop their health coverage, many employees may find themselves pushed into the new insurance exchanges. And for many of them, the initial shift may seem like a good deal. Starting in 2014, a 46-year-old head of a family of four who makes $40,000 a year, for example, will get a government (read taxpayer) subsidy of $16,032 a year to buy a government-approved policy. But, like other credits, the health insurance subsidy phases out as income rises, then drops off a cliff.

This is how it will work for the family of four headed by a 46-year-old policy holder, according to the Kaiser Family Foundation’s subsidy calculator:
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Family One

Annual income (in 2014 dollars): $30,000

Unsubsidized health insurance premium: $0 (covered under Medicaid)

Actual out-of-pocket premium: $0 (Medicaid)

Government tax credit: Medicaid

Family Two

Annual income (in 2014 dollars): $44,000

Unsubsidized health insurance premium: $17,766

Actual out-of-pocket premium: $2,526

Government tax credit: $15,240

Family Three

Annual income (in 2014 dollars): $64,000

Unsubsidized health insurance premium: $17,766

Actual out-of-pocket premium: $5,583

Government tax credit: $12,183

Family Four

Annual income (in 2014 dollars): $84,000

Unsubsidized health insurance premium: $17,766

Actual out-of-pocket premium: $7,980

Government tax credit: $9,786

Now we approach the cliff.

Family Five
has an annual 2014 income of $93,000—397 percent of the poverty line—and this is the way it looks:

Unsubsidized health insurance premium: $17,766

Actual out-of-pocket premium: $8,835

Government tax credit: $8,931

If that family increases its annual income by just $1,000—to 401 percent of poverty—this is how the numbers change:

Annual income (in 2014 dollars): $94,000

Unsubsidized health insurance premium: $17,766

Actual out-of-pocket premium: $17,766

Government tax credit: $0

In other words, that additional $1,000 in income costs the family more than $8,900 in after-tax income
 … a marginal tax of more than 890 percent.
Instead of paying $8,800 or so for their health insurance premium, the tab becomes $17,766. (Actually, the dividing line is hit precisely at $93,700, which is 400 percent of poverty. In other words, a $100 raise is enough to trigger the loss of the $89,800 subsidy … a marginal rate of 8,900 percent.
*

As the American Enterprise Institute’s Scott Gottlieb points out, the new system will mean that after taxes, a family making $100,000 a year will be “spending almost a quarter of their net income for health insurance.”
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They will not be able to refuse to buy the policy, nor will substantially cheaper policies be available. (Some may choose to go without insurance at all, opting to pay Obamacare’s fine instead.) Meanwhile, many of their neighbors will be paying little or nothing, because the “richer” families will be paying for them as well.

How will this change the middle class, besides imposing vast new costs on them? It hardly seems far-fetched to suggest that many families will choose to forgo, even actively avoid, extra income, the better to get in on the growing largesse of the taxpayers. In order to not give up government aid, more Americans may avoid marriage, second jobs, even promotions and overtime, thus dampening the creation and expansion of small business. For many members of the middle class, the sucker’s principle comes into play: Why make more money when the government is handing out even more?

But perhaps the most important effect will be to extend dependence on government aid deep into the middle class (which was perhaps the point all along). As the middle class begins to realize that its pursuit of happiness in the traditional American sense merely turns them into piggy banks, Moocher Nation will have reached yet another tipping point.

Chapter 16

WHY GET A JOB?

Politicians are continuously surprised to learn that many people prefer to get something for free rather than having to work for it. Faced with persistent unemployment, their first reaction has been to extend unemployment benefits, despite warnings from economists that the subsidies may actually prolong joblessness. In July 2010, Congress ventured into previously uncharted waters by extending unemployment insurance for the fourth time, to up to ninety-nine weeks in some high-unemployment states, including Michigan, where employers had already noticed something peculiar: Despite double-digit unemployment, jobless men were turning down perfectly good jobs so that they could continue collecting unemployment checks.

Reported
The Detroit News
: “In a state with the nation’s highest jobless rate, landscaping companies are finding some job applicants are rejecting work offers so they can continue collecting unemployment benefits.” The paper suggested that the number of seasonal workers avoiding jobs “raises questions about whether extended unemployment benefits give the jobless an incentive to avoid work.”
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