
Modeling Potential Income and Welfare – Benefits in Illinois (2014) [pdf] - gasull
https://d2dv7hze646xr.cloudfront.net/wp-content/uploads/2014/12/Welfare_Report_finalfinal.pdf
======
ScottBurson
This is a point I tried to make in conversations I was having back in 1994 or
so about the welfare reform that was then being debated. It's a rather
technical point, though, so it was hard to get it heard in all the shouting
about welfare moms.

 _Step-function subsidies are evil._ (A "step function", in math, is a
function whose value changes sharply at a single point, like a stairstep.)
They're evil for just the reason being discussed here, that they create a
point where a small increase in earnings causes a large decrease in total
income.

When it comes to income taxes, our legislators are smart enough to use
piecewise linear functions, but somehow this very small amount of mathematical
sophistication goes out the window when it comes to subsidies for the poor.

And people's lives are ruined.

~~~
usaar333
> Our legislators are smart enough to use piecewise linear function

Yes, but it's also hard to avoid when you are offering non cash welfare. An
example for middle income people is affordable housing. You get into the unit
(saving you $25k+ over market rate) if income below $X. Otherwise, you don't.

I haven't figured out a way to avoid this cliff that isn't exceedingly
complicated or violates the intention of the program.

~~~
komali2
I'm very interested in solutions to this, as a bay area resident - somehow
separating units into "the poor people houses" and "the rest of the people
houses" doesn't quite seem like the right long term solution to anything.

I don't have a solution, hence why I ask.

~~~
comicjk
You could give poor families a housing subsidy, which drops off smoothy as a
function of income. You can't give a family half a house, but you can easily
give them half as big a subsidy, knowing that they can more than make up the
difference with their higher income.

This also means that the family receiving the subsidy can live wherever they
want. I think some of the smarter housing programs already work this way.

~~~
SilasX
That still has the effect of a (probably high) marginal tax and
disincentivizes increasing one's income just the same. Why take night classes
or work harder at your job if the $100/week raise comes with $80/week less in
rent subsidies + taxes? (Example figures; you can change it around but most
realistic situations are going to look similar.)

~~~
ScottBurson
It's true that the price of receiving a subsidy at all is that any money you
make is going to be effectively taxed at a higher rate than it would have been
otherwise. I think people can live with that as long as the effective tax rate
doesn't get too high. Not sure what "too high" would be for most people, but I
would guess that as long as the total effective incremental tax rate is never
over 60% — meaning that after the reduction of the subsidy plus income tax,
one would never keep less than $.40 of one's next dollar in earned income —
that would probably be good enough. Yes, there will still be people who will
find that a barrier, but at least there won't be this point where your next
dollar of earned income will be effectively taxed at 50,000%.

The extreme version is UBI, where everyone receives the full subsidy
unconditionally, and the effective incremental tax rate is always just the
income tax rate. I'm not sure that's a bad idea, but we could get rid of the
current cliff much more easily than we could institute a full-blown UBI.

~~~
SilasX
>It's true that the price of receiving a subsidy at all is that any money you
make is going to be effectively taxed at a higher rate than it would have been
otherwise.

I wasn't referring to that; I was referring to the decreasing-subsidy-as-
income-goes-up as being effectively a marginal tax. (I think the rest of your
comment is recognizing it as one.)

>I would guess that as long as the total effective incremental tax rate is
never over 60% — meaning that after the reduction of the subsidy plus income
tax, one would never keep less than $.40 of one's next dollar in earned income
— that would probably be good enough. Yes, there will still be people who will
find that a barrier, but at least there won't be this point where your next
dollar of earned income will be effectively taxed at 50,000%.

Even a 60% marginal tax is very strongly disincentivizing and makes it
difficult to justify most any feasible long-term plan for increasing one's
productivity from a poverty level.

>The extreme version is UBI, where everyone receives the full subsidy
unconditionally, and the effective incremental tax rate is always just the
income tax rate. I'm not sure that's a bad idea, but we could get rid of the
current cliff much more easily than we could institute a full-blown UBI.

Right, that's the major upside of UBI. The downside is that it's really
expensive (in terms of tax rate relative to benefits) and can't be
concentrated on people who might need more help (temporary or otherwise) than
others. And if you combine the two, then it's an even more punishing tax with
its own effects.

~~~
ScottBurson
> Even a 60% marginal tax is very strongly disincentivizing and makes it
> difficult to justify most any feasible long-term plan for increasing one's
> productivity from a poverty level.

Are you aware of any research that bears on this question? Right now we just
seem to have dueling intuitions.

Anyway, I already agreed that _some_ people will find it disincentivizing. But
again, the disincentive can't be anything like the massive one we currently
have with the cliff. Do you really not think that what I'm proposing would be
an improvement over the status quo?

~~~
SilasX
Okay, let me give you the details of intuition then: the typical person in
poverty might optimistically hope to go from $30k/year to $60k/year. But the
typical such person has a high time preference and is only able to defer
earning income under very difficult terms (e.g. high interest rates). But at a
60% effective tax on making that transition and given the long time it takes
to bring it about, you need someone with an unusually low time preference and
high luck for that to look worthwhile.

(You would be correct that you could have a poverty program that _directly
targets_ the high impediments that exist in the short term e.g. getting
childcare for when you have the night classes, low-interest loans to cover
short term expenses, etc. But those would also be _different policies_ from
simply giving stuff at a lower-effective-marginal-rate than the step function
does, and it would be adding the kinds of incentive effects that I have been
emphasizing as more important.)

If you model everyone as being the go-getter high-potential individual that
you are, you'll have a different intuition on it; I don't think that model is
accurate on average.

~~~
ScottBurson
Just to be clear, I don't necessarily oppose those other programs, and I never
suggested that getting rid of the step function was the only thing that should
be done, though I continue to believe that that in itself might be a very
substantial improvement. At the very least, any welfare reform bill should
clearly include that as a key component.

------
thermodynthrway
TLDR, in many situations in Illinois you make more money (due to benefits) by
making less, up to a staggering income level of ~$70000 a year in some cases.

I have seen this first hand. When I was broke in community college I became
eligable for $200 month food subsidy which quickly dropped off a cliff if I
worked more than 26 hours a week. So I worked just under that. Any more would
be a net loss until ~35 hours due to my low wage per hour not making up for
benefits lost. I did some more math, and it turned out I would make only ~10%
less money if I could find a job with very high hourly pay and very low hours
per week.

With the incredibly broken way the system was set up, I ended up finding a
website admin job that paid 18 hourly but only 4 hours a week to maximize the
benefit. Some would say I "messed with" the system, but I was going to be
broke either way and it made zero sense to work more for less money when I was
going to school.

I quickly moved out of Illinois from this and a hundred other political
happenings that convinced me the government there was just unfixably corrupt
and broken.

I'm not surprised this is coming from Illinois, at all. Incredibly high taxes
from benefits allocated absurdly. Laughable benefits for students and other
blocs that don't "bring in the vote". The state has a shadow governer Madigan
who has run the state for two decades no matter who was in charge on paper.

Illinois is teetering on bankrupcy and the only state with a shinking
population due to so much out migration. And the average person leaving makes
almost $30,000 more a year than the average person moving in. Because anyone
that can afford to leave is on the way out due to extremely high taxes.
Businesses have been fleeing in droves for over a decade, and it's rated in
many small business polls as one of the top 5 worst states to run a business.

The state has turned to raiding the public universities and local governments
in recent years. Cutting funding so severely that several large public
universities are almost bankrupt. My education grants dropped from 10k a year
from my low income to zero in a single semester because of budget cuts, and I
have about 20k in student loan debt as a result.

Basically, don't move to Illinois, it has easily the crappiest most corrupt
government of any state. The financials are so bad they've narrowly avoided
bankrupcy and have a junk credit rating. If you move there be prepared to pay
down the previous decade of uncontrollable debt to the state in taxes due to
the inability of Madigan and friends to balance a budget while maintaining
their staggering level of corruption

~~~
selimthegrim
You could move to Louisiana where you would have been ineligible as an
enrolled student for your food subsidy unless you worked at least 20 hours a
week or earned $600 a month. Go fish.

------
blfr
One commenter on Reddit notes the "programs provide a necessary relief, but
they definitely aren't built to help people truly improve their circumstances
in sustainable and lasting ways." They're probably not designed at all.

There is no grand plan anywhere. Regulations are a hodgepodge of legislation
and executive decisions made by people with conflicting incentives, little to
no feedback and expertise, limited resources, and very real
abuse/exploitation.

~~~
jnwatson
I’m not completely in the UBI (Universal Basic Income) camp, however your
comment made me realize how much better UBI would work.

There would be no step functions, no mishmash of overlapping agencies, no
complicated eligibility tests, no massive bureaucracy to navigate.

~~~
marcell
It’s a terrible way to solve the problem. If someone has $20k/yr of benefits
from Medicaid what are they going to do on $10k/yr of UBI?

~~~
AnthonyMouse
> If someone has $20k/yr of benefits from Medicaid what are they going to do
> on $10k/yr of UBI?

Buy health insurance, which costs less than $20k/year (because the average
person receives less than that amount in benefits).

~~~
marcell
This is dodging the question. For one thing, The price you pay for health
insurance is not the same as it’s cost. The price of insurance is lower than
the price of care because people who are healthy buy insurance.

Moreover, the general point stands: what does UBI do for people who currently
receive more $ benefits than what the UBI level would be?

~~~
AnthonyMouse
> For one thing, The price you pay for health insurance is not the same as
> it’s cost. The price of insurance is lower than the price of care because
> people who are healthy buy insurance.

That's the point. It doesn't cost $20,000/person to provide Medicaid because
healthy people are eligible for Medicaid. If you take average amount of money
and hand it to the same people as cash, it should be the amount needed to buy
the equivalent insurance.

But then people have the option to buy only catastrophic coverage and put the
rest of money in their pocket, if that's what they want to do, which should on
average save money (and in the catastrophe case you still have the
catastrophic coverage).

> Moreover, the general point stands: what does UBI do for people who
> currently receive more $ benefits than what the UBI level would be?

Half the point is to get rid of that sort of thing. Someone who makes $35,000
shouldn't ever be receiving more government assistance than someone who makes
$15,000, because they have $20,000 more of their own money to spend on
whatever it is.

The purpose of a UBI is income redistribution, not insurance against
misfortune. If you want insurance you use your money to buy insurance.

~~~
marcell
> The purpose of a UBI is income redistribution, not insurance against
> misfortune. If you want insurance you take your money and buy insurance with
> it.

While this approach sounds good on paper it wouldn't work in real life.
Another example--what if I'm getting the equivalent of $50k/yr in unemployment
benefits under Social Security? That becomes $10k/yr under UBI. Or someone
getting $60k/yr on Social Security retirement income--again $10k/yr under UBI.

Yes, you can say "Well you should save for retirement." Well, what about all
the people who hit 65, and haven't saved for retirement? Or all the people who
get laid off and don't have more than 2 weeks of savings? Tough luck?

~~~
chii
I can imagine there's some sort of grandfathering rule for existing
pensioners, but there has to be a cut off somehow. For example, those who are
10 yrs away from retirement will be told when UBI starts, so they can prep
ahead of time (assuming 10 yrs is "enough", if not, then make this number
higher).

It's not as if the day UBI starts is also going to be the day everything else
suddenly stops. The transition period can be made longer or more gradual.

~~~
AnthonyMouse
You could also just give people a one-way election to have the UBI.
$10,000/year starting right now has a higher net present value for anyone not
at/near retirement than ~$17,000/year (the average social security benefit)
starting at age 65, especially when opting out of social security means you no
longer have to pay social security tax.

Then make the hard cut off something like age 30, even though most people
under ~50 would still choose the UBI.

And "what if someone was getting $60K" is not a thing that actually happens.
The maximum monthly social security retirement benefit at full retirement age
is $2788, less than $33,500/year.

$10,000 is not much less than what many people live on from their full time
jobs. In combination with even modest retirement savings, it's plenty to live
on in a low cost of living area, and people who desire more can save more or
supplement it by teaching at a community college or local high school.

If you want to live your retirement in Manhattan or San Francisco without
working then you'll need a lot of retirement savings, no different than it is
now.

The existing design of social security is quite ridiculous and _should_ be
changed. A safety net shouldn't be giving more to wealthier people than poorer
people. If the payment is good enough for the poor then it's good enough for
the rich. Anyone who made a lot of money and wants to live a lavish retirement
has every opportunity to have saved up.

------
pedro_hab
When I first heard of Welfare Cliff I was shocked, coming from Brazilian
public schools I realized how much propaganda is spread there.

They teach how the US is imperialist and how they only care about money and
some other soviet stories.

To give out some money is one thing, we have that in Brazil, but to give out
so much money it is better not to work is shocking.

~~~
maym86
> To give out some money is one thing, we have that in Brazil, but to give out
> so much money it is better not to work is shocking.

You miss the point. It's not that welfare is so much, it's that the jobs you
get that knock you off welfare don't pay enough to be able to live. America
has a lot of very low paying jobs where people need to work 70 hour weeks for
multiple employers to get enough to live. In a modern country it is shocking
that basic employment standards are not guaranteed and that when you have a
job it doesn't cover the minimum needed to live.

~~~
sjg007
This is sort of a function of nondocumented immigrantion. Those are the folks
working these low wage jobs. If those people leave then the jobs would either
have to raise wages generating inflation, improve productivity or go out of
business. I think this is why we see a big push for kiosks/tablets in causal
restaurants now.

~~~
maym86
It's a function of big industry lobbying to keep wages low and block laws that
protect workers plus the systematic weakening of unions. There is plenty of
money in large corporations to pay workers more but it goes to the executives
and shareholders rather than making employees lives more bearable. Inequity is
increasing and migration is a useful scapegoat. Large companies are making
absurd profits while paying their employees a pittance. Migration isn't
causing this but it useful for rich people with vested interests to make it
seem like it is.

~~~
AnthonyMouse
> There is plenty of money in large corporations to pay workers more but it
> goes to the executives and shareholders rather than making employees lives
> more bearable.

The money comes from the fact that they have one well-paid manager per
thousand employees instead of having one per five employees as a small
business does, which makes getting that opportunity for advancement a one in a
thousand shot for their employees instead of one in five. What you want isn't
for big companies to pay more, it's for small companies to replace them.

If you pass laws like increasing the minimum wage that disproportionately
impact smaller businesses "because big companies can afford it" then you make
that problem worse.

If you really want better wages, make things tougher for bigger companies.
Condition regulatory burdens and taxes on high total revenue. Eliminate
regulations at the federal level that are typically highly complex and whose
uniformity favors large interstate businesses, in favor of simpler local
regulations that benefit local businesses and allow locals to carve out a
profitable niche.

~~~
chii
Large businesses are more efficient because they can hire 1 manager per
thousand employees.

If laws were introduced to artificially stop this sort of efficiency, the
country's productivity drops. Thus will actually cause more harm than good.

A much more sound way of redistribution is to close tax loop holes and
aggressive hunting down of those who evade (piercing the veil and all).
Recover lost tax revenue, and use it to improve social welfare or
infrastructure.

~~~
AnthonyMouse
> Large businesses are more efficient because they can hire 1 manager per
> thousand employees.

> If laws were introduced to artificially stop this sort of efficiency, the
> country's productivity drops. Thus will actually cause more harm than good.

These are basically the talking points of big corporate lobbyists, but they
don't bear out. Efficiency doesn't help real people unless it results in
better products or lower prices. If the surplus is going to executive
salaries, Wall St and foreign investors then it has no value -- or negative
value, if those people then use that money to e.g. bid up real estate prices
so that real people have to spend more of their income on housing.

And having less of something isn't always more efficient to begin with. The
thing may be producing more value than it costs. For example, people love to
go to a store and talk to a knowledgeable person about what they need. A few
minutes can save hours of research or years of using the wrong product. But
what if one store has that and consequently has higher prices, and another
store doesn't have it but has lower prices? Customers go to the store that can
answer their questions, determine what they need to buy and then compare
prices and buy it from Amazon or Walmart. That isn't _more efficient_ , it's
just free riding. And when the smaller stores go out of business, "the
country's productivity drops."

> A much more sound way of redistribution is to close tax loop holes and
> aggressive hunting down of those who evade (piercing the veil and all).
> Recover lost tax revenue, and use it to improve social welfare or
> infrastructure.

But that's just an example of what I'm talking about. The tax code is highly
complex federal regulation that benefits large companies at the expense of
small. Replace the complicated income tax with simple no-exceptions VAT and
they can't do that anymore. If you sell something in the US, VAT is collected
and it doesn't matter where the rest of your operations are. It's basically
corporate income tax where the jurisdiction of "profit" is the location of
final sale rather than a bunch of complex rules that international
corporations can game to pay less tax than local businesses.

But you also have to make sure they don't absorb that revenue on the spending
side. As soon as the feds have money to spend, large corporations devise
corruption schemes like the one where government-funded research is patented
and transferred for pennies on the dollar to big business, so the public is
paying for it twice. Which is why spending should be local -- a billion
dollars of corruption sticks out much more in a city budget than the federal
budget.

------
kolbe
Chicagoan here.

I grew up in Northern California (moved here for college and have stayed for
15 years). I have nothing but the utmost respect for the environment, for
minority rights, and for helping the less fortunate.

But here in Shitcago, I get shouted down as a traitorous, MAGA-loving nazi
because I criticize the very obvious flaws that we have in our welfare
programs, pensions and unions. Welfare cliffs like these ones are borderline
inhumane, robbing people of their ability to improve themselves as human
beings and to have the self-respect of being a great as they would like to be.
We arguably hurt people with these programs, and we PAY TO HURT them.

Now this isn't to say that there aren't great programs that we can undertake
to help those in need by redistributing wealth in productive ways, but it is
not at all clear to me that supporting our current welfare and educational
system is at all synonymous with supporting the idea of helping and educating
people.

------
mancerayder
It's hard to stomach the commentary on Reddit. I glanced at that thread and
could post examples of this; in short you have a lot of speculative, off-the-
cuff, freeform-braindump-type advice giving and opinions. I have a lot of
trouble with Reddit although HN folks have mentioned certain subreddits have
articulate people in them with interesting back and forths.

Yes, though, the spirit of the thread is correct: the health care costs and
insurance mechanisms are absurd and hit the lower-middle class the hardest.

~~~
freehunter
>certain subreddits have articulate people in them with interesting back and
forths

Very, very few. Even on some of the "deep" subreddits, they went off the rails
years ago and are now echo chambers where the most insightful comments are
just re-statements of the article's main point. The closest thing you get is
the heavily moderated subreddits like askscience or history or space, etc. But
even then, good luck navigating any discussion, because 9 out of 10 comments
will be "this comment was deleted by a moderator", with a few now-contextless
comments thrown in here and there.

------
sctb
We've updated the link from
[https://www.reddit.com/r/povertyfinance/comments/87or18/the_...](https://www.reddit.com/r/povertyfinance/comments/87or18/the_welfare_cliff/).

------
linkmotif
I haven’t had income in a few years because I’ve been working on a personal
project that has yet to materialize. I am on Obamacare and it’s really good.
It’s free, better than anything on the market you can buy with money. $1 rx
copay, no copay for visits, no referrals to specialists, and the network seems
to have all the highly rated specialists in the area. When you see a doctor
there are no unexpected, unintelligible bills months later that you have to
argue endlessly.

It keeps me from taking side jobs because I’d immediately have too much money
and would have to buy inferior insurance. I know this is very different from
the much more difficult and real circumstance in the OP but having heard of
welfare entrapment for a long time it was odd for me to realize that it had
sort of happened to me too. Welfare, man.

~~~
selimthegrim
You mean Medicaid, not Obamacare (a policy purchased on the exchange)

~~~
linkmotif
Correct. In Maryland and probably other states it’s Medicaid that pays MCOs.
“Obamacare” seems to be a colloquialism for all programs that resulted from
the ACA. I believe MCOs paid by Medicaid are from the ACA. Certainly the ACA
mandated I had to enroll, buy a plan or pay the penalty.

------
cozzyd
Just in case people don't know, the Illinois Policy Institute is an antitax
lobbying group.

------
angel_j
Too bad there isn't money to be made "disrupting" poverty.

~~~
thaumasiotes
Wal-Mart is one of the most successful businesses of all time. What would
"disrupting" poverty be, if not enabling the poor to afford things they
couldn't before?

~~~
topspin
> Wal-Mart is one of the most successful businesses of all time.

Why? I'll offer a reason; unlike many of their competitors they've deftly
avoided unionization. I offer no proof that this is the reason, and you offer
no reason at all. Only "they're successful so they're right." What do you hope
to achieve with this simple minded assertion?

> What would "disrupting" poverty be, if not enabling the poor to afford
> things they couldn't before?

Walmart isn't magical; equivalent goods are not an order of magnitude lower in
price then elsewhere, and the benefit of the small difference in cost applies
only to consumer goods Walmart sells; not housing, utilities, vehicles, taxes,
healthcare, etc. These represent a vastly greater burden than the marginal
savings obtained shopping at Walmart. At best Walmart is minor mitigation.

This sophistry appears in every discussion of poverty, welfare, etc.

~~~
dang
> Only "they're successful so they're right."

You have some good points, but please don't use quotes to make it look like
you're quoting someone when you're not. That's an internet trope that makes it
hard to continue serious conversation. Attributing it to them explicitly as a
"simple minded assertion" is even worse, and also breaks the site rule which
asks you to "respond to the strongest plausible interpretation of what someone
says, not a weaker one that's easier to criticize."

[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)

