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Welfare Reform - Caspar Weinberger Proposal (2)

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The original documents are located in Box 13, folder "Welfare Reform - Caspar Weinberger Proposal (2)" of the Richard B. Cheney Files at the Gerald R. Ford Presidential Library. Copyright Notice The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United States of America his copyrights in all of his unpublished writings in National Archives collections. Works prepared by U.S. Government employees as part of their official duties are in the public domain. The copyrights to materials written by other individuals or organizations are presumed to remain with them. If you think any of the information displayed in the PDF is subject to a valid copyright claim, please contact the Gerald R. Ford Presidential Library. Digitized from Box 13 of the Richard B. Cheney Files at the Gerald R. Ford Presidential Library TAB C Tab C FEDERAL BENEFIT LEVEL AND FEDERAL-STATE RELATIONS Federal Benefit Level The level of the Federal benefit in the ISP is one of the most visible program components. It will figure heavily in Congressional and public reaction to the plan because it not only affects the perceived adequacy of the program, but has implications for State and Federal expenditures as well. The existing welfare system is made up of many programs: some of them fully Federally-funded, some jointly funded by the Federal and state and local governments, and some having no Federal participation at all. One of the basic goals of the ISP is to replace this system in such a way as to permit us to eliminate the major means-tested programs, especially the ones in which the Federal government participates; reduce substantially the size of the total governmental bureaucracy involved in transfer payments and simplify the administration of what remains; bring about a more appropriate Federal role in income assistance overall and permit the Federal government to exercise strong administrative control over the new transfer system. In order to achieve these goals within a reasonable cost and with regard to other concerns, I have recommended a Federal benefit structure with a $3600 basic benefit level for families of four with no income. (Tab E describes fully the proposed benefit structure. Expressing the benefit structure in terms of a four person household or family has become con- ventional shorthand usage in describing transfer reform proposals.) While this benefit level may appear high to some, it reflects the recent growth in the programs that it would replace. The following considerations dictated our choices about the proposed benefit structure: Benefit levels must be high enough to permit virtually full replacement of the Federal financial share in the existing programs that would be superseded by the ISP. The present Federal participation in SSI and Food Stamps for the aged, blind, and disabled and AFDC and Food Stamps for single parent families set the necessary lower bounds for the Federal basic benefit in ISP. The proposed benefit structure would replace the Federal share of basic benefits in all states for both AFDC and SSI families. (See attached Table 1 for full display of Federal shares of AFDC plus Food Stamp levels in the states.) ISP levels should completely dominate combined AFDC and Food Stamp benefit levels -- including the state contributions -- in as many states as possible. This will enable us to limit to the maximum degree the number of states where state supplementation of ISP benefits would be necessary in order to maintain existing or probable benefit levels. The proposed benefit structure would do this in sixteen states. (See attached Table 2 for a full display of total AFDC plus 2 Food Stamp levels in the states.) The comparable ISP positions with respect to state supplements in SSI plus Food Stamps for the aged, blind and disabled are even more advantageous. The strong program and political reasons for limiting the need for state supplementation are discussed more fully below. Though the basic benefit level would for many units fall below the official poverty standard, we have designed the program so that households with some substantial though inadequate income from either present earnings or transfer programs based on past earnings will have a total income above that standard. Only with respect to households with no sizable source of other income would ISP be inadequate to match the poverty standard, and in many states it is probable that there will be state supplement programs targeted towards such households. The benefit levels that are proposed are the minimum necessary to achieve the above objectives at acceptable net costs to the Federal budget. However, the proposed structure allows you some compromise room later in the likely event that during the Congressional debate some seek to raise the benefit level. We also hope that the proposed ISP benefit levels will provide a sufficient defense against any major new Federal commit- ments in subsidized housing for the poor. Clearly the ISP will strongly blunt pressure for a housing allowance or voucher program, and even any major expansion in the existing housing authorities. Our proposed benefit structure would be expressed in December, 1974 dollars and adjusted upward for inflation thereafter. This should mitigate the political pressures for a more generous benefit structure and insure that the benefits will be high enough to replace the Federal share of existing programs at the time of implementation. State Supplementation Even with the Federal benefit structure that I have recommended, it is clear that as many as half of the states might wish to supplement the Federal benefit for some categories of low-income households so that large numbers of current recipients, especially AFDC type families, will not be made worse off. State supplementation, as noted above, can pose problems of program interaction and administrative complexity. The state supplements in the new Supplemental Security Income (SSI) program, for example, have proved to be especially burdensome, primarily because the Congress chose to mandate grandfathering of former aid to the aged, blind and disabled recipients in the form of state supplements. This seriously compromised the goal of establishing a program that can be easily administered and controlled. 3 These problems have been especially troublesome in the context of Federal (SSA) administration of those supplements, an option which 31 states have exercised. In light of the SSI experience, the possibility of not per- mitting Federal administration of state supplements under any circumstances was considered. This alternative was rejected on the grounds that it could create even greater overall administrative inefficiencies and generate some avoidable political problems. It was therefore decided to offer the states the option of selecting Federal administration of their state supplements under the strict conditions that key program elements, e.g., the eligible filing unit and income, must be identical to or a simple subset of the Federal definitions so that additional data collection needs are avoided, any additional special determinations are minimal, and such exceptions which do exist can be handled in a manner consistent with the objective and automated nature of the Federal program. In effect, optional Federal administration of state supplements under ISP would be analogous to the provision already in the Federal Tax Code for optional Federal administration of state income taxes. Because there are no duplicate Federal and state administrative structures in the states that choose to exercise the option under these restrictions, Federal adminis- tration of state supplements will require significantly fewer total employees than the combined number of Federal and state employees if those states had to administer their own supplements (See Tab G for relevant administrative personnel comparisons.) Thus, offering the option will enable us to more adequately meet our goal of reducing the size of the welfare bureaucracy that remains at the state and local levels. Some states may choose however to reject the option, deciding that their program goals for supplementation dictate retention of the discretionary and subjective rules that characterize the present welfare programs. In those instances the States would continue to bear the costs of maintaining their public assistance bureaucracies. What must be prevented, if we are to avoid repeating the very troublesome SSI precedent in this area, is Congress allowing optional Federal adminis- tration of the latter type of welfare oriented state supplement. Not only would such a result be totally antithetical to the conceptual nature of this welfare replacement plan, but also it is administratively infeasible for a Federal agency to run what would amount to twenty-five or more separate assistance programs. Our position on this matter will have to rest on firm resolve, an emphasis on the SSI experience, and the linkage to the Federal tax system. Regardless of whether a state chooses Federal or state administration, there is one subject in which Federal intervention is necessary unless we are prepared to see the work incentive feature of the ISP proposal diluted. If states were allowed to supplement completely without Federal regulation, the relatively low benefit reduction rate in ISP could be effectively doubled by the structure of the state supplements. For example, a state could decide to impose a benefit reduction rate on state supplements which was 4 about as large as that on the Federal benefit. In order to preserve both equity and work incentives, state supplement benefit reduction rates must be held to 15% or less until the household's earnings exceeds the Federal breakeven level at which point they could impose a rate equal to the Federal 50% rate. While this provision will not be popular with the states, it is absolutely critical to the integrity of our proposal. Despite our decisions to regulate state benefit reduction rates and to permit optional Federal administration of state supplements under controlled conditions, we otherwise decided to adopt a position of Federal neutrality about state decisions in this area as being most consistent with the proposal's underlying philosophy. Hence we rejected either mandating state supplements or directing Federal administration of them. It will be up to each State to decide whether or not it wishes to supplement and, with the exceptions discussed above, under what program and administrative conditions. At the same time, however, we recognize that because of procedural anomalies in existing programs or unforeseen events between now and the time of passage, it may be necessary to offer a hold harmless to the states against cost increases over and above their current system expenditure levels, as was done in H.R. 1. This would permit those states who view it as desirable to supplement the Federal benefit to do so with the knowledge that their costs would not exceed former levels. As a practical matter, the hold harmless would add very slightly to program costs and pose only minor administrative problems. However, it would represent a departure from our basic stance of neutrality in state supplementation. For this reason, we chose not to include a hold harmless provision, although we would be prepared to utilize it as a bargaining chip in negotiations with Congress. Finally, the possibility of grandfathering current recipients was also rejected. SSI has such a provision. The result is to continue the old program rules, rules which have no place in a welfare replacement plan. In keeping with our basic stance, the states may elect to operate their supplemental programs in such a way as to grandfather the eligibility and benefits of current recipients. The Federal government, however, should not be a partner to that effort. Emergency Needs Whatever a state's situation with respect to a supplement, it will have responsibility for administering its own emergency needs program. There will be cases of sudden and severe need which the Income Supplementation Program and many of the state supplement programs will not be able to address. For example, low-income families receiving benefits under both ISP and an ISP-consistent state supplement will encounter sudden losses that are unforseeable and cannot be budgeted for (e.g., the breakdown of a car essen- tial for employment). Since some of these instances are now being handled by the present system, we are vulnerable to the criticism that we are creating an overall income maintenance scheme that is less responsive and less 5 sensitive to the needs of the low-income population than the system which it would replace. Much of such criticism would be disproportionate and inaccurate. However, we can easily counter the objections and help fill the actual gaps by combining a residual emergency assistance authority with our new initiative in social services. The costs to the budget of Federal participation in state-administered emergency needs programs are very modest and will strengthen the chances of the overall ISP proposal in Congress. TABLE 1 Federal Share of Basic AFDC/Food Stamp 2/ Benefits (AFDC- Plus Food Stamps for a Family of Four With No Other Income in Those Jurisdictions 3/ Where the Federal Share is less than $2700 1. Mississippi 2268 2. Ohio 2436 3. Maryland 2448 4. District of Columbia 2556 5. Indiana 2568 6. South Carolina 2568 7. Tennessee 2579 8. Louisiana 2580 9. Alabama 2604 10. Texas 2604 11. Rhode Island 2604 12. California 2604 13. Arkansas 2616 14. Nebraska 2616 15. Massachusetts 2628 16. Florida 2652 17. Connecticut 2652 18. Nevada 2664 19. Washington 2676 is less than $3000 20. Maine 2712 21. Kentucky 2736 22. Wyoming 2748 23. Arizona 2760 24. Colorado 2760 25. Georgia 2772 26. New York 2796 27. New Jersey 2796 Table 1 continued 28. Missouri 2808 29. Delaware 2832 30. Michigan 2832 31. North Carolina 2844 32. Iowa 2868 33. Oklahoma 2880 34. New Mexico 2892 35. Pennsylvania 2976 36. Oregon 2988 is less than $3300 37. Kansas 3012 38. Illinoia 3048 39. Minnesota 3072 40. Montana 3084 41. West Virginia 3096 42. Virginia 3120 43. New Hampshire 3132 44. Wisconsin 3156 45. Utah 3204 46. Alaska 3264 is less than $3600 47. Hawaii 3312 48. Vermont 3348 49. Idaho 3360 50. North Dakota 3432 51. South Dakota 3456 See footnote to Table 1. TABLE 2 The Largest Amount Paid for Basic Needs (AFDC1 / plus Food Stamps 2/ ) for a Family of Four with No Other Income in those Jurisdictions: 37 Where the Benefit is less than $3000 % AFDC 4/ Recipients 1. Mississippi 2364 1.7 2. South Carolina 2868 1.1 3. Louisiana 2892 2.4 4. Alabama 2928 1.5 5. Arkansas 2928 .8 6. Tennessee 2976 1.8 is less than $3300 9.3% 9.3% 7. Texas 3036 4.0 8. Florida 3120 2.9 9. Georgia 3228 3.2 10. Kentucky* 3288 1.5 is less than $3600 11.6% 20.9% 11. Maine 3324 .7 12. Misseuri 3432 2.3 13. Arizona 3444 .7 14. North Carolina 3444 1.4 15. Ohio 3576 4.6 16. Nevada 3576 .1 is less than $3900 9.8% 30.7% 17. New Mexico 3636 .6 18. West Virginia 3696 .7 19. Delaware 3780 .3 20. Maryland 3804 2.1 21. Nebraska* 3804 .4 22. Wyoming 3816 .1 23. Oklahoma 3852 .9 is less than $4200 5.1% 35.8% 24. Indiana 3948 1.6 25. Colorado 4092 :9 26. Montana* 4164 .2 27. Utah 4164 .4 3.1% 38.9 Table 2 Continued % AFDC Recipients 28. District of Columbia 4224 1.0 29. Illinois 4332 7.3 30. Iowa 4356 .8 31. Idaho 4380 .2 32. Massachusetts 4452 2.8 33. Rhode Island 4464 .5 34. Virginia 4464 1.5 35. California 4464 12.7 26.8% 65.7% is less than $4800 36. North Dakota 4512 .1 37. Kansas 4644 .7 38. Connecticut 4644 1.1 39. South Dakota 4668 .2 40. Oregon* 4668 .7 41. Washington 4692 1.4 4.2% 69.9% is less than $5100 42. New Hampshire 4812 .2 43. Pennsylvania 4848 5.8 44. Vermont 4872 .2 45. New York* 4932 11.5 46. New Jersey 4932 3.9 47. Minnesota 4992 1.2 22.8% 92.75 is less than $5700 48. Michigan 5112- 6 5.6 49. Wisconsin 5280 1.3 50. Alaska 5364 .1 51. Hawaii 5664 / .4 7.4% 100.0% *Exact combined benefit. levels for these states are currently uncertain; however, their relative positions are probably as indicated. 1/ For AFDC, the largest amount paid for basic needs for a family of four with no other income is derived by combining information from two sources: 1) preliminary data for NOSS publication D-2 for July 1974, reporting information on the "largest amount paid for basic needs" to an family of four; 2) data from a special SRS/APA survey taken about August 1974, TAB D TAB D BACKGROUND ON TAX RELIEF Structure of Tax Changes In order to bring about the desired relationship between the tax and restructured transfer system it is essential that the exempt income levels for families in the positive tax system be increased to the ISP breakeven levels of income. For example, for a family of four, income tax exempt income would be increased from $4,300 to $7,200. Exempt income can be increased to the desired levels by adjusting the personal exemption and/or the standard deduction. To the extent the personal exemption is increased, taxes are lowered for all tax- payers. On the other hand, increasing the standard deduction benefits only taxpaying units that do not itemize, primarily lower income units. Therefore, raising exempt income by increasing only the standard deduction limits more the amount of tax relief and concentrates it on low and moderate income units. For this reason the decision was made to increase exempt income solely through the upward adjustment of the standard deduction leaving the personal exemption unchanged at $750. Table 1 displays the five basic standard deductions that result from the method of equating the new higher tax exempt levels of income for various family types with their breakeven levels of income under ISP. New Standard Deduction** (for those with incomes less than the breakeven level) Single Person not Aged, Blind, or Disabled (ABD) $2,000 Single ABD 3,100 Two Person Family 3,300 Three Person Family 3,750 Four or more Person Family 4,200 * By income tax exempt income is meant the sum of the value of personal exemptions plus the standard deductions, i.e., the minimum amount of a family's income which is guaranteed to be non-taxable. Under current law the minimum standard deduction or low income allowance is $1300 and each personal exemption is worth $750. Thus, a four person family has exempt income equal to $1300 + 4 X $750 = $4300. ** These new standard deductions are expressed in December 1974 dollars. It is assumed that they would be increased at the rate of inflation between then and the time of full implementation of the proposal in such a way as to preserve the real value of ISP benefits. 2 If these new higher standard deductions were made available to all tax- payers the revenue loss would be considerable, $ 15.0 billion in 1978 (in December 1974 dollars), the first year by which the new schedule would have to be fully in place. This is a larger amount of tax relief than is desired. Therefore, the tax aspects of the plan have been designed so that the standard deductions are phased down above the breakeven level of income at a rate of 50 cents on the dollar. Each dollar of additional income above the breakeven reduces the value of the standard deduction from the maximums in Table 1 (which are, there- fore, applicable only to low-income households) down to the current law level of $2,000 for moderate income units. Distribution of Tax Relief The amount of tax relief that would be extended by the above structure is about $4.1 billion rather than $15 billion if the new standard deductions were not phased down at higher income levels. Of this $1.8 billion would go to families with adjusted gross incomes below the newly established tax exempt levels and the remainder to taxpayers with incomes in excess of these. The distribution of this tax relief is shown in Table 3. An effect of this phase down is that it increases the actual marginal tax rates applicable to families in the phase down range of income. An additional dollar of income increases taxes by one hundred and fifty percent of the nominal tax rate since extra earnings add a dollar to adjusted gross income and reduce exempt income by fifty cents. This results in an effective marginal tax rate structure in which rates first fall and then increase as income increasesabove the breakeven level. Although average tax rates over this range would always be increasing with income, it may be difficult to justify such a marginal tax structure. HEW- Treasury staff are currently examining options which would directly change the explicit tax rates applicable to taxable incomes in such a way as to result in a more optimal tax rate structure while still yielding a roughly equivalent amount of tax relief. 3 Table 2 Adjusted Gross Tax Relief Percentage of Total Income ($ Millions) Relief 0-$1,999 $ 449 10.9 2,000-3,999 748 18.1 4,000-5,999 1024 24.8 6,000-7,999 989 23.9 8,000-9,999 573 13.9 10,000-11,999 332 8.0 12,000-14,999 17 .4 15,000 +* 5 100* Total 4137 Table 3 illustrates the amount of this tax relief that would accrue to a four person family at different adjusted gross income levels. Table 3** Adjusted Gross Figure Amount of Tax Relief below $4,300 0 5,000 $ 98 6,000 $249 7,200 438 10,000 243 12,000 38 over 13,333 0 * The relief to families with income in excess of $15,000 results because of (1) large family sizes, and (2) the fact that some high income tax units continue to profit from use of the standard deduction rather than itemizing. ** All figures in this table are for CY78 and expressed in December 1974 dollars. They assume the standard deductions specified in Table 1 and the 50% phase down. TAB E Tab E DETAILS OF BENEFIT STRUCTURE AND RECIPIENT POPULATION For reasons discussed in the paper at Tab C, I am recommending a benefit structure that would yield an Income Supplement Program (ISP) benefit of $3600 per year in 1974 dollars to a four person family with no other income. However, there would be relatively few such families in the ISP recipient population. This paper will first illustrate the details of the benefit structure across the entire range of family types and their levels of earnings, and then discuss the composition of the recipient population. BENEFIT STRUCTURE The ISP has the basic characteristics common to all negative income tax type proposals: a family with no other income receives a basic benefit which is then reduced as family income increases. As a general rule, ISP benefits would be reduced by 50 cents for each dollar of other family income. This feature insures that a recipient will always be substantially better off for having worked an additional hour or for having received a wage increase. With respect to non-wage or non-salary income, ISP rules would be slightly more complicated. Such income would be treated exactly like current earnings and reduce ISP benefits by 50 cents for each dollar up to certain bench marks; thereafter each dollar of such income would reduce ISP benefits dollar-for-dollar. The bench marks would be equal to the unit's basic benefit level. This pattern reflects a compromise between our policy goals to, on the one hand, introduce greater equity in our treatment under means- tested transfer programs of income from current earnings and income from wage replacement transfer programs (such as Social Security) which are based on contributions from past earnings and, on the other hand, the need to keep the net costs in transfer payments of the ISP proposal within desirable bounds. The attached Table 1 illustrates the full benefit structure, demon- strating for a variety of family types the benefit levels and how they are phased down with other income. A family of four with no other income would receive an annual benefit of $3600. If the earner should work half-time (1000 hours) at $2.00 per hour, the ISP benefit would fall to $2600. Total family income would be $4600. Full-time work at the minimum wage would further reduce the benefit to $1600 and raise total family income to $5600. We estimate that the average ISP benefit for a two-parent family of four would be 2 $1269 per year, suggesting that in most such families at least one member will be working nearly full-time. As earnings continue to rise, the ISP benefit is gradually reduced until, for this type family, it falls to zero at $7200. This is known as the breakeven level of income. If the family head has full-time employment at the minimum wage, his or her earnings when combined with the ISP benefit would remove the family from poverty. This would be true for all recipient units. The effects of conditioning the benefit structure by family size can be seen in the case of a single individual. With no other income, a single person would be eligible for a $1200 benefit. In the *more likely case that he or she is working full- time at the minimum wage (earning approximately $4000 per year) a single person would pay taxes rather than be eligible for a benefit. An aged, blind or disabled couple with no other income would receive a benefit of $3150. A family composed of three children and headed by a disabled parent with no other income would receive $3975 annually. COMPARISON TO EXISTING PROGRAMS Intact Families. If the family of four described above in the dis- cussion of ISP were a two-parent family, it would not currently be eligible for any cash assistance program in which the Federal govern- ment now participates, except in certain limited instances (AFDC-UF, Emergency Assistance and special programs for veterans, Cuban refugees and Indians). However, such a family can presently, regardless of location, purchase Food Stamps with a face value of $1898 per year. If the family has no other income, it receives the stamps for free. The price of the stamps varies according to family income, generally increasing 30 cents for each dollar of additional family income. However, because taxes and large medical and housing expenses are not counted in determining income for the purposes of benefit calculation, the breakeven level for the Food Stamp program is often well above the $7200 breakeven level in the ISP. 3 Single-Parent Families. If the family of four is headed by a single parent, it could receive cash benefits from the state- administered AFDC programs, as well as Food Stamps. Since the amount of benefits differs greatly from state to state, we will consider the states of Georgia and Michigan for purposes of illustration. AFDC and Food Stamp Benefits Payable to Families of Four* Earned Income Breakeven Income 0 2000 4000 Income Georgia 3240 2700 1560 7000 Michigan 5120 4370 2870 11000 Georgia, a state with a relatively low AFDC benefit, provides a combined Food Stamp and AFDC benefit of $3240 to families of four with no*income. Because of generous deductions for such expenses as day care in the calculation of family income, the income level at which eligibility ceases is about the same as that in the ISP. The ISP would completely replace the AFDC program in Georgia. Michigan on the other hand, has a high AFDC basic benefit which, when combined with the generous income disregards for such items as taxes results in a breakeven income of more than $11,000. In addition to the inequitable benefit differentials among the states, the present welfare system is less efficient than ISP would be in focusing Federal transfer dollars to recipients with the lowest incomes (see Table 2). ISP would direct over 90 percent of its monies to persons who would be poor in the absence of ISP. Less than 10 percent of ISP expenditures would go to persons whose non-benefit income is above their appropriate poverty levels (e.g., approxi- mately $5,000 for a family of four in December 1974 terms), but below their breakeven levels (e.g., $7200 for a family of four in December 1974 terms). Though comparable figures for the Federal share in the present system are virtually impossible to derive at this time, other comparisons indicate that the present system focuses * The benefit levels shown here are based on July, 1974 AFDC levels and the July, 1974 Food Stamp bonus schedule. Child càre expenses of $50 per month were deducted in the Georgia example. No child expenses were deducted in Michigan since that state pays for child care expenses through the social services program. These benefit levels should be regarded as approximations since they are based on average work related expenses. Actual benefits will vary depending on the specific circumstances of each recipient household. 4 its resources less efficiently. For example, while the present welfare programs lift roughly 16 percent of the pre-transfer poor, or an estimated 4.5 million persons, out of poverty, ISP would reduce the poverty population by some 9-10 million persons, or 30- 40 percent of the pre-transfer poor. The reasons for this greater antipoverty effect in ISP are several: higher levels of assistance to many whose present cash and/or Food Stamp benefits are insufficient to lift them from poverty; a somewhat less stringent assets test than those in current law programs; and a considerably more lenient treatment of non-wage income than now prevails. The last two changes will especially contribute to the virtual elimination of poverty among the aged. The resources that allow this increased aid to the pre-transfer poor derive from the $3.4 billion increase in Federal net expenditures for ISP, and the introduction into the ISP of program design elements (the annual accountable period and a definition of income that permits no exclusions or deductions) which focus transfer dollars more efficiently than does the present welfare system. This greater efficiency, it should be noted, can and probably will lead to the reduction and even elimination of benefits to some who are now eligible and participating in current law programs. ISP RECIPIENT POPULATION Eligibility for ISP benefits would be based primarily upon income and household size. Assuming a family does not have assets in which equity exceeds specified values, and the family's income is below the breakeven level, a family would be eligible to receive benefits. However, not all those eligible will elect to participate in the program, principally because large numbers of households whose incomes are close to their breakeven levels will not perceive the small benefits they could obtain from ISP as worth the effort of application and regular reporting. If transfer costs and the number of recipients are projected solely on the basis of a simple comparison of family income and eligibility levels, each would be overestimated. Therefore, projections have been reduced using specific. assumptions about probable participation by various household types at various income and asset levels. In the display below the effect of these adjustments on projections is indicated. While 35.8 million persons would be eligible for ISP benefits, only 27.2 million are expected to be in households that would apply and receive benefits. Similarly, gross transfer costs are projected to be $17.2 billion, or $3.3 billion less than an unadjusted figure that assumes full participation. 5 ISP Recipients and Transfers: FY 79 Eligible Recipients Number of Units (million) 14.5 10.5 Number of Persons (million) 35.8 27.2 Transfers ($ billion) 20.5 17.2 (1974 dollars) per year Table 3 provides a breakdown of the potential ISP recipient population. For each group the table displays the number of households (generally families), the number of persons, the aggregate transfers to that group, and the average transfer to that household type. The following points emerge from comparing data from existing programs to the data on Table 3: 0 In the absence of the ISP initiative (for FY 79): -- Some 6-7 million persons will be eligible to receive benefits for the newly federalized Supple- mental Security Income (SSI) program for the aged, blind and disabled, and State supplements to that program. One-half of all ISP house- holds (50.0%) would either be composed solely of aged, blind or disabled individuals or would contain such an individual. -- Assuming that the current stability in the AFDC caseload continues, approximately 10 to 12 million persons will be in families receiving AFDC benefits. One quarter of the ISP recipient population would be in households generally comparable to this group of current cash recipients. -- It has been estimated that those eligible for Food Stamps may well number as, many as 50 million persons; a substantially larger number than the 35.8 million ISP eligibles. (However, because it is one of the in- kind programs which historically have had low partici- pation rates, the number of persons participating in the Food Stamp program in FY 79 may be less than the 27.2 million we would expect to participate in the (ISP.) * See column 4 in Table 3. 6 Virtually all of the potential ISP recipients would otherwise be eligible for Food Stamps and most of the families for public housing in the absence of ISP. As noted above, the Food Stamp eligible population is much larger than the ISP eligible population. Most of the growth in the Food Stamp program can be expected in the intact family category, the members of which are approximately 40 percent of ISP recipients. These intact families, often called the "working poor," are typically headed by an employed father whose substantial earnings over the year would typically make the benefit for this group quite modest ($1269 annually on the average), but sufficient to remove them from poverty. This group would therefore receive 14 percent of the benefits though it com- prises almost 30 percent of the recipient population. The average benefits that households would actually receive are well below the basic benefit levels to which they would be entitled if they had no other income, for most will have substantial earnings or other income (see Table 1). Even groups which we generally do not consider as being employed have in fact substantial income which would serve to reduce the benefits they would receive. For example, single-parent families with children would receive, on the average, $1000 below their basic benefit. TABLE 1. ISP BENEFIT STRUCTURE (IN 1974 DOLLARS) Breakeven Benefits at Various Total Income at Level of Earnings Earnings Levels Various Earnings Levels Total Income Average a a $0 $2000 $4000 $6000 0 $2000 $4000 $6000 (Benefit = 0) Benefit Single Individual $1200 $ 200 * * 1200 $2200 * * $2400 $726 Childless Couple $2400 $1400 $ 400 * 2400 $3400 $4400 * $4800 995 Single Parent, One child $2400 $1400 $ 400 * 2400 $3400 $4400 * $4800 1603 $6600 $7200 2593 Single Parent, Three children $3600 $2600 $1600 $600 3600 $4600 $5600 Two Parents, Two Children $3600 $2600 $1600 $600 3600 $4600 $5600 $6600 $7200 1269 $2300 $1300 $ 300 * 2300 $3300 $4300 * $4600 1281 SSI Individual SSI Couple $3150 $2150 $1150 $150 3150 $4150 $5150 $6150 $6300 1293 Disabled Parent, Three Children $3975 $2975 $1975 $975 3975 $4975 $5975 $6975 $7975 3722 a The benefit at zero income is the "basic benefit." When income is zero the total income of a family will equal the benefit. * At this income level the family is above the ISP breakeven income and will therefor receive no ISP benefits and might have a positive tax liability. TABLE 2 COVERAGE AND ANTIPOVERTY EFFECT OF ISP TRANSFER BENEFITS * Number of families receiving a transfer (millions) 10.7 -- As a percent of all families 14 Number of persons receiving a transfer (millions) 27.2 -- As a percent of all persons 12 ** Transfers to families below poverty line 15-16 (Billions of $) 90-95 -- As a percent of total transfers Number of poor families receiving a transfer (millions) 9-11 -- As a percent of all poor families 80-90 Number of persons in families below poverty line and receiving a transfer (millions) 24-26 -- As a percent of persons in poverty 80-90 Number of families escaping poverty (millions) 4-5 -- As a percent of all families in poverty 30-40 Number of persons escaping poverty (millions.) 9-10 -- As a percent of persons in poverty 30-40 * Unrelated individuals are included as families of size one. Since we do not know which poor families will participate and which will not, all poverty figures are expressed as ranges instead of point estimates. A unit is classified as poor if its income before means tested transfers is below the poverty threshold. TABLE 3 ISP RECIPIENTS AND TRANSFERS: ESTIMATES FOR FY 79 No. of No. of Sum of Transfers Sum of Transfers Primary Filing Units Persons (Billions/Year in Unit Characteristics (Billions/Year in (Millions) (Millions) FY 79 dollars) December 1974 dollars 1. Single-parent 2.0 7.5 6.2 4.6 families with (19.2%) (27.6%) (27.0%) (26.7%) children; no ABD's* present 2. Two-parent families 1.5 7.6 3.1 2.3 with children; no (14.4%) (27.9%) (13.5%) ABD's present (13.4%) 3. Families with .6 3.3 2.5 1.9 children; at least ( 5.8%) (12.1%) (10.9%) one ABD (10.9%) 4. Related adults; no .5 1.1 .8 .6 children; no ABD ( 4.8%) ( 4.0%) ( 3.5%) ( 3.5%) present Related adults; no 1.6 3.5 3.3 2.5 children; at least (15.4%) (12.9%) (14.3%) (14.5%) one ABD 6. Single adult; not ABD 1.2 1.2 1:4 1.0 (11.5%) ( 4.4%) ( 6.1%) ( 5.8%) 7. Single ABD adult 3.0 3.0 5.7 4.3 (28.8%) (11.0%) (24.8%) ( 25.0%) Total Population 10.4 27.2 Total Transfer Costs 23.0** 17.2 * ABD means person who is aged, blind, or disabled ** In addition to transfers, ISP costs would include: $1.2 billion for program administration, $0.1 for the work test, and $0.5 billion for emergency assistance. Total costs would be $24.8 billion in FY 1979 as shown in Tab F. H TAB TAB F BACKGROUND ON ISP COSTS There are two independent cost components which must be estimated in order to arrive at the net transfer costs of ISP -- the gross transfer costs of ISP and the expenditures under those programs that will be eliminated or reduced because of ISP. In the latter case estimates are based on the continuation of the present set of income tested programs (except that CHIP would displace Medicaid); it is not assumed that, in the absence of ISP, any new ones would evolve or that existing programs would expand or contract appreciably because of changes in regulation or legislation or increases in participation among the eligible population above that reflected in the official OMB projections. To the extent .any of these would occur, the cost estimates presented here would require adjustment. The gross costs for ISP in FY '79, the first year in which the program would be fully implemented, are estimated to be $24.8 billion. Program offsets are estimated to be $20.2 billion. This yields FY '79 net costs of $4.6 billion which in today's dollars is $3.4 billion. The following sections provide detailed information on the derivation of these figures as well as other possible influences on costs which are not reflected in these estimates. It is reasonable to assume that gross costs will remain relatively constant in real terms for some years after FY '79 then gradually fall. Benefits will be adjusted upward with inflation, but, over time, the average earnings of the eligible population will increase by even more than the amount of inflation, due to the real growth rate of the economy. This is the phenomenon that should cause costs to decline in the long run. However, in the early years of the program, an increase in participation among the eligible population may put upward pressure on costs. The assumption that costs would remain constant in the shorter term rests on the foundation that these two trends (increased participation and growth of income in excess of inflation) will be roughly offsetting. 2 DERIVATION OF PROGRAM OFFSETS ESTIMATE Program offsets of ISP fall into two categories: Programs which would necessarily be eliminated in favor of ISP Estimate of Federal Program Outlays in FY 79 (Billions in FY 79 dollars)* AFDC $6.6 SSI 6.1 Food Stamps 5.5 WIN 0.3 $18.5 Programs not eliminated, but which would have lower outlays as a result of greater cash income among the low-income population. Housing $0.6 School Lunches 0.3 CHIP 0.8 $1.7 DERIVATION OF GROSS TRANSFER COSTS The gross transfer cost estimate for ISP is derived by utilizing the basic output of the computer simulation model known as TRIM (Transfer Income Model). This model can be programmed to estimate the cost of a program very similar to ISP, which then can be adjusted to reflect certain factors which the model cannot take into account. Below is a discussion of the assumptions built into TRIM and of the nature and cost impact of the adjustments made. These are the official OMB "free fall" estimates which reflect no change to current program policies and adjust for both inflation and increases in program participation. A discussion of offsets using OMB "reduction" estimates which assume the implementation of various cost saving changes is contained in the final section of this tab. 3 Assumptions Built Into TRIM The assumptions which were built into TRIM computer runs are listed below. As will be obvious, many of these are not entirely appropri- ate and are the reason for some of the adjustments listed later. The March 1973 Current Population Survey (which provides income data for CY 72) is aged to FY 79 to produce the expected profile of numbers and types of households and their (non-ISP) income; since the unemploy- ment rate was 5.6 percent in 1972, this same rate is carried forward to FY 79 when the CPS is aged. The benefit structure of ISP is specified in December 1974 dollars and adjusted thereafter for inflation. The rates of inflation assumed are the official Troika estimates (1974, 11.2%; 1975, 10.9%; 1976, 7.8%; 1977, 6.6%; and 1978, 4.8%). These same rates of inflation of the CPI are assumed in projecting the levels of other sources of income (although additional assumptions such as for the growth rate of real wages are also necessary). A comprehensive filing unit definition is employed, which means that all related members of a household are assumed to be filing together for ISP eligibility and benefit determinations. All non-wage income up to the amount of the basic benefit for which a filing unit would be eligible is treated the same as earnings -- i.e., a flat 50 percent benefit reduction rate is applied; all non- wage income above this level is used to offset ISP benefits dollar-for-dollar. No ISP income-eligible filing units have assets above the limit permitted for eligibility and all such units participate in ISP. Adjustments to TRIM Output The following adjustments to TRIM output are necessary to arrive at appropriate gross cost estimates for ISP. 4 Upward Adjustments Billions Accounting Period Adjustment - As presently 0.3 formulated, monthly ISP benefits for a filing unit would be based upon the previous twelve months' income, utilizing a system which carries forward for twelve months the amount of monthly income in excess of the breakeven level for the filing unit. This system. is somewhat more responsive to fluctuations in monthly income than is the calendar year accounting period assumption which is built into TRIM. Certification of Separate Economic Status - 1.0 TRIM assumes that all related residents living together will be required to file together. This is the general rule that would be prescribed for ISP; however, ISP rules would permit any subgroup of a house- hold that can prove separate economic status to file separately. It is difficult to assess accurately how many people will be able to satisfy this condition, but many who are able will want to file separately (since they may then receive greater benefits than if they were the additional member of a larger unit where they would not have a separate minimum standard deduction) Labor supply reduction - The evidence from 0.6 income maintenance experiments and studies using Census data suggest quite modest re- ductions in work effort occasioned by a program such as ISP. While very few persons would quit their jobs as a result of ISP eligibility, some marginal hours of work reductions might result among those recipients who would not otherwise be participating in a welfare program eliminated by ISP. As a consequence their earnings would be lower and benefits higher. Emergency needs - The following three cate- 0.5 gories of households may have requirements for a payment outside of the ISP to cover an emergency need: (1) ISP eligible households waiting for their first check (because of payment lag in the system); (2) ISP recipients 5 Billions households who have exhausted their current payment; and (3) households which, because of the accounting period and/or the assets test, have low current income and no liquid assets, but are currently ineligible for ISP. The latter two categories are best dealt with at state/local levels, perhaps with some Federal cost sharing. The first category is more easily seen as a Federal responsibility and could be dealt with by the Federal government or by a state/local entity which represents the Federal government. Work Test - Some Federal funds would have to be 0.1 provided to states for them to administer the work test mandated under ISP. Program administration - The IRS Task Force 1.2 estimates that the annual costs of ISP would run somewhat over one billion dollars. Downward Adjustments to TRIM Output o Assets screen - Estimates based upon studies of 2.2 the Survey of Economic Opportunity which provides data on asset holdings of households cross classified by income levels indicates that fifteen percent or more of the filing units that will be income eligible for the ISP will have other resources sufficient to make them ineligible to receive ISP benefits. o Under reporting of income - There is a substantial 3.0 amount of income that is not reported by respondents to the Current Population Survey (and, therefore, is not in our cost estimating income base), but which would be picked up by ISP reporting, audit and verification procedures. Independent data bases, such as income tax reports, provide information that make it possible to estimate the magnitude of this under reporting. o Demographic Aging - A recent decline in the birth 0.4 rate has resulted in a significant reduction in the average size of U. S. families. Between 1970 and 1974, average family size fell from 3.58 to 3.44. The demographic aging process in TRIM does not adjust for this reduction in the number of young children in families, and as a result, TRIM over- states expected transfers to families with children. 6 Billions Participation Rates - Substantially less than 4.4 all of the eligible households can be expected to participate in ISP. It is estimated that about 90 percent of eligible AFDC families, 90 percent of eligibles for SSI who are disabled and 65 percent of eligibles for SSI who are aged actually apply for cash benefits. The current participation of eligible two-parent families and non-aged, non-disabled adults in Food Stamps is considerably lower, probably averaging closer to 30 percent. Under a com- prehensive nationally uniform cash assistance program which is tied to the income tax system, we can expect these latter two groups to have substantially higher participation rates; there- fore, we have assumed that 70 percent of eligible families of this type will participate. In adjusting for participation rates less than 100 percent, costs were reduced by a sub- stantially smaller percentage (about 30%) than units, since participation rates in ISP are likely to increase with the size of the potential benefit. Total Adjustments Made to TRIM The necessary upward adjustments to the TRIM output total $3.7 billion. The total downward adjustments to TRIM necessary to account for all the factors mentioned above is $10.0 billion. Thus, the net adjust- ment to TRIM necessary to account for all factors mentioned above is $6.3 billion downward. Since before these adjustments are made TRIM indicates a gross cost of $31.1 billion for transfers alone, the final estimate utilized for total ISP program costs is $24.8 billion. Actually far less than 65 percent of those aged eligibles for SSI are presently participating, but the official OMB projections assume that this is the rate which will prevail in equilibrium -- i.e., after the program has been in place for a few years. Ac- cordingly, the assumption of 65 percent participation underlies the SSI offset estimate for FY 79 and we have used it as a base in determining likely participation of the same group under ISP. 7 OTHER FACTORS WHICH MAY INFLUENCE COSTS In addition to the factors detailed above and reflected in the cost estimates provided, there are a number of other possible influences on costs that should be noted. Influences Which Could Go Either Way Many of the adjustments to the TRIM output are based upon estimates that have a fair amount of uncertainty attached to them. Although they are based upon the best available evidence, they could easily be over or under estimates of what would actually occur. In these cases, we have attempted to pick realistic mid-range values. Obviously marked changes from the overall economic or demographic projections which form the basic input to the TRIM model would lead to sizeable shifts in the cost estimates. Here we have simply relied upon official troika and Census projections wherever they are avail- able and made consistent, reasonable projections where not. Upward Influences on Costs The most important of the upward influences fall into two categories -- those that would be caused by regulatory or legislative changes in programs being offset and those that reflect possible structural changes in the ISP, particularly as it becomes the focus of Congressional actions. A series of budget reduction proposals have been adopted by the Adminis- tration which, if all were accepted by Congress, are estimated by OMB to reduce the FY79 outlays for the programs eliminated by ISP by $1.7 billion below the free fall estimates reported earlier in this tab. These have not been assumed in the cost estimating process because, particularly to the extent that recent experience is a guide, it appears more realistic to assume that they will be rejected by Congress. However, if some are adopted, this would have the effect of lowering program offsets and raising ISP net costs. There are potential elements of ISP which are not without merit, but which were rejected for sound policy reasons as the program was developed. It is possible that some of these would be reconsidered and adopted by the Admini- stration at a later date if their inclusion were to advance substantially the possibilities for Congressional passage of ISP and this plus were not outweighed by the negative aspects that intially led to their rejection. The only two such elements that seem at all likely to fulfill these criteria at this time are a standard deduction for work related day care expenses of single parent families and permitting present SSI recipients 8 who are members of larger households to file separately with a one-third grant reduction without having to certify separate economic status. Each of these is estimated to cost on the order of half a billion dollars. Downward Influences on Costs As was mentioned in the beginning of this tab the program offsets are based upon the assumptions of no unplanned increase in participation among the eligible populations, no liberalizations of existing programs and no additional programs being added to the welfare system. The possi- bilities for each of these are discussed briefly below, since the true cost cost ISP should take into account changes that would be made to the wel- fare system in the absence of this proposal. o Increased participation Participation in the Food Stamp program is running low overall (under 50%) and particularly low for the non-cash recipient group. A minor increase in these present rates is assumed in the Food Stamp FY79 estimate. Because of the great potential for increased participation in this program, rapidly rising food prices and the increased publicity of Food Stamps, the participation could easily increase by much more than is expected. Program improvements If ISP is not adopted, there will be considerable interest both within Congress and the Administration in making changes in the present welfare system which further the goals of efficiency, equity, adequacy, etc. such as instituting a national minimum in AFDC and moving to consolidated grants. (See Tab for more information on these). These improve- ments would increase Federal costs for the present system by $1-$2 billion over the program offset estimates used to cost out ISP. Add-ons to the Welfare System In the absence of a comprehensive cash assistance program for the lower income population there will be continued pressure to add on additional categorical programs to fill "gaps" in the present system. Although most of these probably could be resisted, others undoubtedly could not. Foremost among the latter is the "Work Bonus" or some other scheme to aid lower income workers, particularly those paying OASDI payroll taxes. TAB G TAB G ADMINISTRATIVE PERSONNEL COMPARISONS The passage of the Income Supplement Program (ISP) would pro- foundly affect personnel requirements among the various levels of government. This paper estimates probable staffing requirements according to the likely configurations for income support programs. The options shown range from no change in the present system to a major welfare replacement. The first section examines total staffing, the second the ratio of administrative to transfer costs as an indicator of administrative efficiency. Because so much uncertainty exists on these matters, the paper concludes with a section listing some parti- cularly important caveats. Appended is a note on the methodology used. Total Staffing Absent any change the public assistance system would continue to be composed of Food Stamps, Aid to Families with Dependent Children (AFDC), Supplemental Security Income (SSI), Emergency Assistance and General Assistance.* The ISP initiative would completely replace the first three and change significant aspects of the last two. (General Assistance is solely a State program.) Table 1 shows that in FY 77,** with no changes, total personnel needs would be about 137,000, of which about 27,000 would be Federal and 110,000 State/local Table 1 Public Assistance Personnel Needs with No Welfare Replacement and No Major Changes in Present System FY 77 Recipients State & Local Federal Total Employees Employees Employees (million) (thousand) (thousand) (thousand) Food Stamps 25.6 25.6 3.0 28.6 AFDC 12.3 61.2 .8 62.0 SSI 5.9 23.4 23.4 State Administered Supplements to SSI 1.4 14.1 - 14.1 General Assistance 0.9 8.7 - 8.7 109.6 27.2 136.8 * This list ignores other income tested transfers, such as public housing, Medicaid and veterans' assistance. These figures were originally prepared when ISP was costed out to FY 77. When costs were extended to 79, there appeared to be no compelling reason to re-calculate personnel estimates, particularly given the limitations of available data. 2 If we assume no replacement of the basic set of programs, it is probable that one or more programs will be added. The prime candidate is the Assisted Health Insurance Program (AHIP) com- ponent of the Administration's Comprehensive Health Insurance Program (CHIP). It is also possible that a Housing Allowance and a Work Bonus will pass into law absent an ISP which would fore- close their need. The upper panel of Table 2 summarizes these probable situations should there be "No Replacement" of the present programs. It is estimated that AHIP income information collection, a universal Housing Allowance, and a Work Bonus would require 30,000; 40,000; and 3,000 new employees, respectively. It should be noted that AHIP or something like it is likely to become law regardless of whether or not there is a welfare replacement initiative. Thus, either way AHIP will require additional personnel at some level of government, but the amount needed to collect information on income and filing unit characteristics would be very minimal if ISP exists and AHIP conforms its comparable program elements to those in ISP (e.g., income and filing unit definitions). Under these conditions the information generated by ISP would be both available and useable to income test eligibility under AHIP. Total government employment for income support programs given welfare replacement (i.e., ISP) would depend on the manner in which State supplements were handled. The lower panel of Table 2 summarizes employ- ment needs assuming ISP and with three different possible methods of handling State supplements. (See Tab C for a discussion of the issues in- volved in State supplementation.) Public sector payrolls would be the largest if there were no Federal administration of State supplements. This is because there would then be, in effect, two parallel income transfer systems -- the Federal ISP system and the several State systems running autonomous State supplement programs. As Table 2 shows, Federal administration of State supplements, whether for some or all States, involves little added burden for the ISP agency. The ISP caseload would already contain most of those eligible for State supplements, and the extra State supplement computation is a simple matter for the automated Federal system to handle so long as the States rigorously adhere to Federal definitions and categories (the only conditions under which the Federal government would administer State supplements). Thus while 122,000 employees (58,000 Federal and 64,000 State/local) would be needed in the "no Federal administration" case, only 66,000 (60,000 Federal and 6,000 State local) would be needed if the Federal government administered all supplements. In the more likely intermediate case of partial Federal administration of State supplements, total employment would be more in the area of 70,000. The actual figure, of course, depends upon exactly how many States would opt for Federal administration. 3. Table 2 Public Assistance Personnel Needs with and without Welfare Replacement State & Local Federal Program Employees Employees Configuration Total Employees (thousand) (thousand) (thousand) No Replacement 110 27 137 " " a w/CHIP (AHIP) 30 +30 w/Housing Allowance b 40 +40 w/Work Bonus 3 + 3 Replacement (ISP) and No Federal administration of State supplements 64 58 122 Optional Federal administration of State supplementsᶜ 11 59 70 Federal administration of all State supplements d 6 60 66 a. AHIP collection of information on income and other filing unit characteristics only; AHIP will require additional personnel for other functions whether or not ISP exists. b. Distribution of effort between levels of government unclear at present. C. Precise figure depends upon State decisions on administration. The estimate here was derived on the assumption that those States which have opted for Federal administration of State supplements to SSI would also do so for ISP. d. It is extremely unlikely that all States which might choose to supplement ISP would also opt for Federal administration; however, this line is shown for comparison purposes. The residual group of State and local employees is shown on the assumption that there would be a State- administered Emergency Needs Program. 4 Administration Efficiency Staffing figures are only one measure of relative administrative costs. In programs such as Food Stamps, there are significant additional ex- penses involved in the operation of the program. To obtain a more complete indication of total costs and to demonstrate the relative efficiency of different modes of making transfer payments, the total administrative costs of individual assistance programs were divided by their gross transfer costs to determine as a percentage of transfers the amounts additionally required for administration. As can be seen in Table 3, the Income Supplement Program has the smallest ratio of administrative costs to transfer costs of any of the other programs -- approximately half that of present cash programs, and even less than that of Food Stamps. If the Income Supplement Program replaces other transfer programs, its potential for administrative efficiency would allow more benefits to be transferred at a lower relative cost. Table 3 The Percentage of Total Administrative to Gross Transfer Costs Program Percentage AFDC 9.5 SSI 9.1 ISP 4.5 Food Stamps (to non-public 15.0* assistance recipients) Caveats Data limitations, the still changing nature of ISP and CHIP program designs, and the uncertainty surrounding administrative and substantive choices of the States in current law or future programs mean that The figure for Food Stamps is an estimate based on actual program data and limited information which gives a general indication of the magnitude of hidden and unreported costs. Reported costs are close to 10 percent of transfer costs and do not reflect joint program costs which have not been allocated to overhead, indirect expenditures and some administrative costs. State data reported to the Senate Committee on Nutrition and Human needs and a recent study in Los Angeles County indicate that these costs probably add another 40 to 60 percent to total administrative expenditures. 5 estimates presented here can only be general and tentative. These limitations arise from several sources: The lack of reliable information on current State public assistance staffing - The existing data on the number of State and local staff performing cash eligibility de- terminations are unreliable and often officially not available, primarily because of weaknesses in the manner in which States report personnel statistics. One obvious defect is the shift of personnel into the social service category with its higher Federal reimbursement formula, leading to an understatement of the number of staff engaged in cash transfer related duties. The lack of State and local cost information on the Food Stamp Program - The only reliable Food Stamp cost data currently available are those related to Federal program costs and Federally-cost-shared personnel. These costs only cover a portion of total Food Stamp administrative requirements, and most States and localities do not separate out or report their total direct costs and substantial indirect costs. Thus estimates of the total figures can only be approximate. * Uncertainty about developments in present and proposed programs - There are many factors which could materially affect the estimates developed here - If, as some predict, the Food Stamp program experiences very rapid growth over the next few years, the administrative burdens borne by State and local governments could increase to the point where they could no longer be handled as marginal addi- tions to staff and facilities needed for other functions - Passage of the Comprehensive Health Insurance (CHIP) is possible and enactment would require the States to significantly increase staff levels to handle the eligibility functions re- quired for the assisted portion (AHIP) of the program, including the collection of relevant income and asset information. - Similarly, the shape of the State supplemental portion of the ISP is still unknown. The implications for total staffing under a Federally-run supplement are very different from those if the supplements are left as the sole responsibility of the States. In either case, the behavior of States in deciding whether or not *A recent legislative change provides for a 50 percent Federal matching of all Food Stamp administrative costs. When this provision becomes effective more complete administrative cost data should become available, permitting the development of more precise administrative cost estimates. 6 to supplement, and, if given the option, whether or not to administer their own supplemental programs or to transfer responsibility to the Federal agency can only be guessed on the basis of tenuous assumptions. In addition, State staff made superfluous by a Federal program will not always be eliminated immediately but will decrease through attrition over time. Tentative nature of Federal personnel estimates for an ISP - Another, less serious, reason for uncertainty regarding administrative staff comparison is that although the staffing estimates for the ISP were derived in a systematic manner, the number of unknown factors in the early stages of program develop- ment make it more difficult to achieve the degree of precision in these projections which will be possible later in the planning process. Appendix: Technical Notes Personnel needs for FY 1977 were estimated by calculating current ratios of recipients per employee and applying these ratios to expected recipients in FY 1977. Table 4 Recipients per Employee Program State & Local Ratio Federal Ratio Food Stamps 1001 8,630 AFDC 201 15,409 SSI 99 252 GA 104 Recipients per Employee 1. Recipients per employee for state and local government have been calculated by dividing the number of recipients by the number of employees engaged in income maintenance for each program. Employee figures were provided by the National Center for Social Statistics. For state-administered supplementation of SSI, the number of employees and recipients in the adult çategories in FY 1972 was used to calculate the state and local ratio. 2. Federal recipients per employee were calculated in the same way. For Food Stamps, the number of employees as reported in the Federal Budget was used. For AFDC the number of Federal employees was estimated to represent 28 percent of the SRS staff, since this is the percentage of the funds dispensed by SRS that goes to AFDC. For SSI, the number of staff needed in FY 1975 as estimated by SSA was used. Personnel Needs with and without an Income Supplement Program 1. For existing programs, the number of Federal, state and local employees was calculated by taking the estimated recipients and dividing by the number of recipients per employee. This assumes that the relationship between recipients and employees is linear. State and local recipients per employee for AFDC and the adult programs were used for the estimates of state administration of AFDC and SSI supplements. Absent any other change, only those states now administering SSI supplements were assumed to administer them in FY 1977. Employees administering the supplement for those states that have opted for Federal administration are included with Federal employees administering the regular SSI program. 2. FY 1977 recipients for AFDC and SSI were estimated by projecting the caseload estimate shown in the FY 1975 Budget. Food Stamp recipient estimates were developed from the TRIM model using CPS data. State supplements were handled by extrapolating from the current situation in a similar manner. 3. With a reform, 30 states will supplement AFDC and 10 states SSI, containing 64 percent and 32 percent of the caseload respectively. These estimates are based on a comparison of the ISP benefit levels with the sum of AFDC or SSI benefits and the bonus value of Food Stamps. These estimates should be considered an upward bound for reasons discussed in Tab C. The SSI benefit estimate additionally includes any state supplements. Although fewer states would administer a supplement to SSI recipients under a reform program, the percentage of the caseload in those states which are assumed to supplement the ISP could be greater than that in the 18 states currently administering their own SSI supplement. This could occur because some states with large caseloads like New York have chosen Federal administration for their supplement under SSI but might be required to administer their supplement under ISP. These calculations reflect the present levels. The absence of any provisions in the proposed program for Federal cost- sharing or hold harmless guarantees in supplementation, and possibly no participation in administration makes this assumption problematical. These estimates may therefore overstate total state and local personnel needs under ISP. Another factor which may make these estimates too high is that supplementation has been assumed in some states in which the actual state benefit would be very low. Few states are in fact likely to supplement unless the average benefit would be significant. 4. The recipient estimate for ISP is taken from the IRS Task Force Report adjusted to reflect changes in the estimated caseload. TAB H TAB H COMPARISON OF THE INCOME SUPPLEMENT PROGRAM TO PLAN OF SUBCOMMITTEE ON FISCAL POLICY Recently Congresswoman Martha Griffiths introduced a comprehensive welfare reform bill titled "The Tax Credits and Allowances Act of 1974" (H.R. 17574). It provides for major changes in the Federal income tax structure and considerable tax relief; for replacing the Food Stamp program and the Federal portion of AFDC in part with a new, Federally funded and administered means-tested cash transfer program and in part with rebatable tax credits; and for a variety of other changes in related income transfer programs, such as Unemploy- ment Insurance. In significant ways, especially in overall theory, the Griffiths' plan and the Income Supplement Program are quite similar. In equally significant ways they differ. This paper will first outline the major elements of the Griffiths' proposal and then compare and contrast that plan with the Income Supplement Program. THE GRIFFITHS' PROPOSAL: INCOME SECURITY FOR AMERICANS The Grifffths' 1 Income Security for Americans plan would create a new income assistance system by: Eliminating personal exemptions and the low-income allowance (or "minimum standard deduction") in the Federal income tax and replacing them with a $225 refundable tax credit for each individual in the country. Such a tax credit would extend tax relief to all families with income less than about $23,500. Since it is refundable, current non-filers and non-taxpayers would also benefit. Eliminating the AFDC and Food Stamps programs and replacing them with a new Allowance for Basic Living Expenses (ABLE) program for all low-income families and individuals with the exception of those eligible for SSI. Retaining, but restructuring somewhat, the Supplemental Security Income program. Abolishing the itemizable day-care deduction in the Federal Income Tax in favor of a new adjustment to gross income in the tax system and in the ABLE program for work expenses. 2 Rebatable Tax Credits. The current $750 personal exemption and the low-income allowance of $1300 would be replaced by rebatable tax credits of $225 for each individual in the country. The effect of this change, along with complementary measures to integrate the grant programs with the tax system, is to raise the tax exempt income level (i.e., the highest income at which no tax liability is incurred) for a typical four person family from its current level of $4300 to $7200. In addition, the introduction of the tax credit would extend tax relief to all four person taxpaying units with income of less than $23,500. Since the tax credit is rebatable, units that incur no tax liability would have the full credit paid to them in cash. Units that have a- tax liability of less than the tax credit for which they are eligible would receive the difference between the credit and their tax liability. The key point is that the unused tax credits are rebated. The Allowance for Basic Living Expenses Program, ABLE. Federal funding would largely be ended for Aid to Families with Dependent Children (AFDC), and the Food Stamp program would be abolished and be replaced by a new system of allowances operated by the Internal Revenue Service (IRS) in conjunction with the Federal income tax. These Allowances for Basic Living Expenses (referred to as ABLE grants hereafter) would be payable to qualified low-income families and individuals every month. Allowances would be uniform throughout the Nation and available to all the poor, except the aged, blind, and disabled and their dependents who would remain covered by the Federal Supplemental Security Income (SSI) program. The basic structure of the ABLE program is as follows: Benefits: The annual basic benefit for a two-parent, two-child family with no other income would be $2700, while that for a one-parent, three-child family would be $2100. This more generous treatment of married adults is considered to be an important feature of the bill. The following table presents basic benefits for various family types: 3 ABLE Benefit at Family Type Zero Income* Unrelated Individual $ 825 Childless Couple 2050 One Parent, One Child 2050 Two Parents, Two Children 2700 One Parent, Three Children 2100 Benefit to succeeding children through: six 225 seven and above 0 Benefit Reduction Rates: ABLE payments would be reduced as other income accrued to the family and the benefit reduction rate would vary depending on the type of income. The benefit reduction rates are as follows: - Earned income -- 50 percent on earnings less deductions for social security taxes, implying that most earners would face rates no greater than 47 percent. - Public housing subsidies -- 80 percent. - Veterans pensions and farm subsidies -- 100 percent. - All other income (e.g., property income, retirement benefits, child support) -- 67 percent. Breakeven Income. The level of income at which a family would become ineligible for ABLE benefits would, because of the complex schedule of benefit reduction rates and a proportional work expenses deduction, depend on the source of the family's income and the labor force activity of the These benefit levels may seem relatively low to anyone familiar with the present welfare system. It must be remembered that the ABLE benefit must be combined with the value of the tax credit to determine the basic benefits in the ISA plan. This interaction is examined below. 4 adults. However, "normal" breakeven incomes can be determined. For a two-parent, two-child family not entitled to the work expense deduction and with income only from earnings not subject to the social security payroll tax, eligibility would cease at an annual income of $5400. The more typical case, however, is a similar family in which both parents work in covered employment. In that case the breakeven income level would be about $6000 because of the payroll tax deduction and the work expenses deduction. Tax Credit-ABLE Interaction. The benefit levels in the ABLE program may seem low to those familiar with benefits in current welfare programs (e.g., AFDC and Food Stamps). In this regard the interaction between the revised tax system and the ABLE program must be examined. The net disposable income to an ABLE family with no other income is the sum of its ABLE benefit and the amount of its rebated tax credit. Thus, $900 in rebated tax credits (4 times $225) would be added to the ABLE basic benefit of $2700 for a four-person family, yielding to a family with no other income total benefits of $3600 (identical to that proposed for the Income Supplement Program). The effects of the combination of ABLE payments and tax credits may be seen by examining the ABLE and/or tax status of a four person family (with no deductions) at various income levels: ABLE and/or Income Tax Status 0 - $5400 Unit receives an ABLE payment that varies with its income: from a $2700 benefit at zero income to a zero benefit at income of $5400; unit receives a $900 tax credit and pays no taxes. $5400 $7200 Unit has net tax credit which falls from $900 at income of $5400 to zero at income of $7200. Unit receives no ABLE payment. $7200 - $23,500 Unit incurs net tax liability that would be lower than that under current law. In income range of $7200-$7563 unit would use a new, alternative tax computation method. (As indicated above, a more typical case would be for families that have deductions, the consequence of which is that these income limits would be raised somewhat.) 5 Tax credits would be rebated to ABLE and SSI recipients, together with benefit payments under those programs, by the IRS and the SSA respectively. Those families eligible for tax rebates who are not ABLE or SSI participants (e.g., a family of four with earnings of $6600) would apply to the IRS for their rebate, although the ad- ministrative means to do this are not clearly spelled out in the plan. Tax Credit and ABLE Costs. The net cost to the Federal government of the Income Security for Americans program is estimated at $15 billion in 1977 -- $6.8 billion additional in transfers and $8.2 billion in tax relief. In current dollars these costs are $12.9 billion, $5.7 billion, and $7.2 billion, respectively. 6 COMPARISON OF THE INCOME SECURITY FOR AMERICANS AND INCOME SUPPLEMENT PROGRAM PROPOSALS The ISA and ISP proposals each would create a universal means-tested cash transfer system that in significant ways would be tied to the Federal tax system. This section will outline areas where the plans are similar or different. Components of the Income Assistance System. The ISA proposal would retain a somewhat altered SSI program, whereas ISP would fold SSI, AFDC, and Food Stamps into one cash transfer program. The Federal government would therefore, under the ISA approach, maintain two separate income assistance programs, administered by separate agencies (IRS and SSA). Provisions of ISA minimize potential overlaps between SSI and ABLE. Integration with the Tax System. The ISP would have a simpler integration with the tax system than the ISA plan. Under the ISP proposal, a family's cash supplement would gradually diminish from the appropriate basic benefit to its tax liability threshold, an amount equal to its personal exemptions and standard deduction in the tax system. Beyond that tax exempt level, the family would incur a tax liability according to the present tax schedule with one exception. Under current planning, its appropriate standard deduction would be phased down over a range of taxable income until it equals the $2000 standard deduction in current law. The ISA plan requires a more complicated integration, In order to forgive taxes at levels below the points at which families cease to be eligible for a cash transfer (i.e., their breakevens), the ISA would in effect create an alternative tax schedule with standard deductions equal to those breakeven points and marginal tax rates equal to those in the transfer programs (i.e., approximately 50 percent). A family would compute its tax liability under either the regular tax schedule (15 percent standard deduction up to $2000 and the present marginal tax rates) or the alternative tax schedule apply its tax credits against both figures, and pay the lesser of the two amounts. Benefit Structure. The ISA makes a clear distinction between a second parent and an additional child. The former brings to the family an additional $600 relative to the latter. The ISP benefit structure does not make such a distinction. The effect of the ISA treatment is to provide what the ISA report calls a "marriage bonus. Relative to current programs the ISA would make larger families relatively worse off. 7 Except for that distinction, the basic benefit levels of both plans are quite similar. However, the benefit levels of the ISA and ISP plans depart somewhat as income accrues to a family. This is because the benefit reduction rates for different kinds of income in the two plans differ. In addition, though the earned income breakeven levels for transfer payments theoretically are the same those in the ISA would be higher because of deductions for work expenses and payroll taxes. In essence, for those who work, the ISA has a lower benefit reduction rate on earned income and, as a result, a higher breakeven income level. Work Test. The ISP proposes a work registration requirement modeled on that in the Unemployment Insurance system. The ISA proposal "recommend (s) that a work registration requirement and the attendant costly bureaucracy not be attached to a new program." The Griffiths' report notes that "We have found little evidence or experience to support -- and several grounds to oppose -- reliance on administrative pressure and sanctions. " Filing Unit. The two plans depart considerably on filing unit definitions. ISP has a quasi-household definition (all persons related by blood, marriage, or adoption living under one roof) as opposed to the filing unit definitions in ISA which are patterned more on those in the tax system. The distinction in the ISA plan between ABLE units and SSI units enlarges considerably the number of separate filing units. Benefit Reduction Rates. Except for those with considerable amounts of non-wage and salary income, the ISP has one benefit reduction rate, 50 percent, that applies to all income. For those with non-wage and salary income in excess of their basic benefit, the benefit reduction rate is 100 percent on that amount. The ISA has a complicated but sophisticated structure of benefit reduction rates. While the nominal rate on earnings is 50 percent, the effective rate is at most 47 percent for those in social security covered employ- ment and/or those who take advantage of work related expense deductions. The rates on income from other sources, as noted above, vary according to those sources. Treatment of Work Related Expenses. The ISP, as currently designed, makes no provision for the deduction from income of work related expenses. In contrast, the ISA plan in its ABLE component permits single-parent and husband-wife families with children to deduct from income a fraction of gross earnings (10 percent to 20 percent, depending on family type) up to a maximum ($500 to $1500). Similar deductions would also be permitted in the positive tax system. The effect of this treatment of work related expense would be to raise transfers and lower tax revenues. 8 Income Definition and Accounting System. ISP and the ISA's ABLE component generally share common definitions of income and a similar accounting system. The income definition and accounting system in SSI would continue unchanged, at least initially. For purposes of the rebatable tax credit, it appears that either the tax system's income definition or ABLE's income definition would be used whichever yields the greater benefit to the filer. The report does not discuss in detail the accounting system implications of the rebatable tax credit. Assets Test. The ISP plan would exclude from consideration assets which are difficult to value, difficult to liquidate, or are given preferred treatment in the tax system as a reflection of social values (e.g., assets needed for a business or a personal house). This leaves essentially only liquid assets against which the assets test is applied. A unit is categorically excluded from ISP if they are above the appropriate limit. The ISA plan does not have an assets limitation as such. Instead it would include in the income base the yearly income value of all assets and reduce benefits by 67 cents for each dollar of such income value. While the ISA approach is more equitable,it is far more difficult to administer and was explicitly rejected by the IRS Task Force. Protection of Current Recipients. The ISA plan would require that the states make supplemental payments, for two years after its enactment, to families receiving AFDC in a base period in amounts needed to main- tain total family income at base period levels. These state supplements would be additional to the ABLE grant and the rebatable Federal tax credit. The ISP plan opposes any "grandfathering" of current recipients. Under the ISA plan, .it is not clear whether just basic AFDC benefit levels (plus 80 percent of any Food Stamp bonus value), are grandfathered, or whether each state's AFDC computation rules are also brought forward in time. The need for grandfathering in ISA is greater than in ISP because of the former's lower basic benefit levels for single-parent families. States would administer their own state supplements. The ISA provides for the protection of states against any incremental costs resulting from the required grandfathering by holding the states harmless at the calendar 1976 share of AFDC payments. Administration. Under ISP, the entire tax and transfer system would be administered by one agency. The Secretary of Health, Education, and Welfare has stated his view that the IRS is the appropriate administering agency; failing that, he prefers a new agency within Treasury. The tax credit and ABLE components of the ISA would be administered by the IRS, while administration of SSI would remain with the Social Security Administration. It is probable that under ISA, the IRS would have to create two new systems -- one for ABLE and one for the rebatable tax credit -- in addition to its current structure for collecting the 9 Federal income tax. Costs. The ISP and the ISA differ considerably in net cost to the Federal government. The ISP would cost, in today's dollars (December 31, 1974), $3.4 billion in increased transfers and would cause $4.1 billion in reduced taxes. The ISA would cost in today's dollars $5.7 billion in increased transfers and would cause $7.2 in reduced taxes. The reasons for the higher costs and tax relief in ISA are: -- The lower benefit reduction rate in ABLE, because of the payroll tax and work expense deductions. The higher breakeven levels, which extend eligibility to a larger population. -- The retention of the SSI program, leading to a greater number of filing units in the total ISA transfer (ABLE, SSI, rebatable tax credit) population. In addition, the number of ABLE filing units is greater than if ISP filing units rules were used in that program. -- The tax system's narrower definition of income might allow individuals or families who have considerable tax free income or substantial deductions to receive a rebated tax credit. -- The ISA's tax credit and its introduction into the tax code of ABLE rules as an alternative means to calculate tax liability, extend greater tax relief than the approach in ISP. -- The ISA would introduce into the tax system a work expense deduction as an adjustment to gross income. This causes greater aggregate tax reductions than the current itemizable personal child care deduction which ISA would eliminate. I TAB TAB I LABOR SUPPLY AND PROGRAM COSTS INTRODUCTION Static economic theory predicts that taxes and transfers have the potential to reduce work effort: taxes because they reduce the reward from work and transfers because they make work less necessary. That theory, however, gives no clue as to the magnitude nor the significance of any reduction. For many years economists and others have been concerned lest the high marginal tax rates (i.e., taxes on the last dollar earned) in progressive tax systems reduce the incentive to work of earners of high incomes. Nevertheless, investigations into the work effort response of physicians and lawyers have detected no such response to high rates of taxation. In the 1960's comprehensive income-tested cash assistance plans, which provide a basic benefit paid to families with zero income and then reduce that benefit as family earnings increase, began to be discussed. People soon realized two things. First, the amount of the benefit paid and the rate at which it is reduced as earnings increase' could reduce work effort. Second, the welfare system as it then existed (and now exists) was of this same basic structure and could be reducing the work effort of welfare recipients. There are several reasons to be concerned about reductions in work effort caused by a transfer program. Work itself is valued. Moreover, since transfer benefits are financed by taxes levied on those working, it is not fair for transfer recipients who could be working to choose leisure and be supported by taxpayers. If a transfer recipient reduces his/her work effort, family earnings and thus family income falls. Since the amount of transfer varies inversely with income, a reduction in work effort has two undesirable consequences: This is the benefit reduction rate, which is like a tax rate in its effect because it determines how much total income increases with an increase in earnings. 2 the cost of the program to the Federal treasury is increased; and the efficiency of the program is reduced since it takes more Federal funds to pro- vide a given standard of living after the work effort reduction than before. A: reduction in work effort means a reduction in the potential level of goods and services that can be produced by the nation's work force. That is, if all members of the labor force were employed, voluntary reductions in work effort by some would result in a reduction in the gross national product. To the extent that the economy is operating at less than full employ- ment, any voluntary work effort reductions would cause a reduc- tion in potential GNP, but no change in actual output. Economists call such output reductions a "real" cost to society since society actually (or potentially) loses something -- the goods and services not produced by those who voluntarily reduce their work effort. This is to be distinguished from the cost noted in the above paragraph which involves a redistribution of, rather than a reduction in, society's resources. It should be noted that not all reductions in work effort are un- desirable. Many in society would prefer that mothers of young children be home caring for those children rather than be working out of the home (or at least that they have the option of doing so). Also, a reduction in hours worked, or even a resignation to enable one to search for a better job or to engage in training, can in the long run pay dividends to society as well as to the individual. It should also be noted that labor supply response to a transfer program can take two forms: (1) reducing hours worked, and (2) quitting a job entirely. While both are worri- some, the latter is generally considered the more serious concern since it raises the specter of the able-bodied loafer. SOURCES OF INFORMATION ON LABOR SUPPLY RESPONSE Concern over possible work effort reductions led to the launching of a series of government-sponsored, controlled experiments with income transfer plans which in many ways are quite similar to ISP and to a very large number of statistical studies of existing data. The purpose of these studies was to produce quantitative estimates in the three areas of concern discussed above: work effort reduction, program cost increase, and reduction in the gross national product. There are two basic types of studies that produce estimates of labor supply responses to income-tested transfer programs. 3 Experimental Studies. In the New Jersey Graduated Work Incentive Experiment, the results of which were published by DHEW in December, husband-wife families were actually enrolled in various income-tested cash assistance plans with different levels of basic benefits and benefit reduction rates. Their incomes, work effort, and other characteristics were followed and recorded. Similar data were also gathered over the same three year period from members of a "control group" of quite similar families who re- ceived no benefits from the experiment. The experimental and control families were then compared with the knowledge that differences in behavior were caused primarily by the income transfer plan. Basic benefits in the experiment were 70%, 100% and 125% of the poverty line ($4550 for a family of four in 1974) and benefit reduction rates were 30%, 50% and 70%. Statistical methods were applied to analyze the data in order to estimate the effects of the various plans on measures of work effort. Other experiments are investigating similar concerns, primarily for other target populations. Studies Using Census Cross-Section Data. The purpose of the ex- periments described above was to generate data reflecting the behavior of transfer program participants. In addition, other sources of data exist which contain observations on the income, earnings, and work effort of a wide range of persons (but not the same persons over time, as is the case with the observations in the experiment). These data bases, collected as a matter of course by the Census Bureau and other groups, can also be used to estimate the effect on work effort of a program like ISP, ESTIMATES OF LABOR SUPPLY RESPONSE The range of estimated work effort responses to transfer plans is large and is dependent on the statistical methods used, the data base, the population in question, and a number of other factors. Nevertheless, some generalizations from the data seem permissible and are presented below as the best information available on the subject. These changes in work effort will then be used to derive the consequent changes in program cost and in GNP. The three prin- cipal areas of concern will be discussed in turn. HEW is currently funding three other income maintenance experi- ments. Two, Seattle-Denver and Gary are still in the operating stage. Data from the rural experiment are currently being analyzed. Preliminary results suggest findings consistent with those from New Jersey. 4 Work Effort The results of the New Jersey experiment suggest that very few male family heads, most of whom would be newly covered by ISP, would quit their jobs. Hours reductions, the experiment suggests, would average about six percent. While it is difficult to predict how various workers will react, it is likely that much of this hours reduction would reflect reduced overtime and moonlighting. Among wives with working husbands the reduction would be con- siderably greater, ranging up to 40%, although the base from which this reduction might occur is quite small since very few low-income families have wives working regularly in addition to the husband. Many studies of the work effort response of male family heads using cross-sectional Census data have been undertaken. Among those considered to be the most sound methodologically, the range of work effort reduction for male family heads is predicted to run from a very small percentage to 15-18 percent. The average esti- mate from among these studies, about eight percent, is roughly consistent with that found in the New Jersey experiment. Esti- mates of work effort response for wives from the cross-sectional studies are also quite consistent with the experimental results. There have been no experimental and relatively few cross-sectional studies of the labor supply behavior of unrelated individuals and older persons. Generally, the few existing studies suggest work effort reduction on the order of 15 percent. As is noted in the qualifications section below, much of the ISP recipient population is now covered by transfer programs which expose them to greater potential work disincentives than those to be found in ISP. In addition the entire ISP-eligible popu- lation (including unrelated individuals) is currently eligible for Food Stamp benefits. The estimate of change in program costs has been adjusted to reflect the existence of these current-law transfer programs. Program Costs If hours worked are reduced, income will fall and as a result program costs will rise. It is estimated that the labor supply reduction that is predicted by the existing literature would lead to an increase in ISP program costs of approximately $600 million. This amount is included in the basic program cost estimates as discussed in Tab F. 5 Gross National Product A reduction in the amount of work would reduce society's capacity to produce. Employing reasonable assumptions regarding how such a reduction would affect the economy, it is estimated that as a consequence of ISP, and assuming roughly full employment in FY 79, GNP might fall by about $1.7 billion or less than one-tenth of one percent of FY 79 GNP. CONCLUSION It is unlikely that the ISP would result in much work effort reduction among men that support families. Indeed, popular concerns about such an eventuality seem to have been much exaggerated. The modest labor supply effects we might expect led us to add $ 600 million to program costs which is reflected in the cost data throughout this proposal. This estimate can be considered an upper bound in that it assumes that the work test would have zero impact. In fact, what scant evidence there is on the efficacy of work tests indicates that they can be expected to have little effect. A1 APPENDIX: CAVEATS AND QUALIFICATIONS As noted in the text, estimating labor supply response is a complex undertaking. This appendix will list a number of factors to be borne in mind when using the results of labor supply studies. The New Jersey experiment introduced a temporary change in the lives of participants and for this reason may not be fully re- flective of their true long run behavior in response to a permanent program. Also, during the experiment the state of New Jersey changed the structure of the local welfare system by adding an unemployed fathers component to AFDC. It is unclear how these factors may affect the results, but on balance a modest underestimate is likely to have occurred. Further analyses of the data for New Jersey are underway and it is expected that more information on these issues will be forthcoming. The basic assumption of the cross-sectional studies, that the measured response to wage and income variations in the data accurately reflects the likely behavioral response to an alter- ation in transfer policy, is a tenuous one. In addition, the cross-sectional estimates do not account for the fact that workers in families whose incomes are above, but close to, the breakeven point (income level at which eligibility ceases) might reduce their work effort so as to qualify for benefits. The magnitude of such an effect is difficult to gauge, but to the extent that it occurs the estimated change in labor supply would be too small. Hence the estimates of change in work effort have been adjusted upward to reflect this problem. Another problem in using the results of the labor supply studies to predict behavior is that many participants in any new transfer plan will have been receiving benefits under existing programs, such as AFDC or Food Stamps. For this reason, the existence of the basic benefit and benefit reduction rate in ISP will not be a new event in the lives of participants and ignoring this fact could lead to considerable overestimates of labor supply response. There is no fully satisfactory way to handle this problem. For the pur- poses of producing the estimates presented in the text, the following assumption has been made: the ISP will produce no change in the work effort of AFDC and SSI recipients. This is reasonable since the basic benefit and benefit reduction rates in the three programs are not too dissimilar. A2 All those who would be eligible for ISP benefits are currently eligible for Food Stamp benefits. The Food Stamp basic benefit and benefit reduction rate are one-half and 60 percent of those in ISP, respectively. Thus even for members of intact families, childless couples, and unrelated individuals, the potential work disincentive effect of ISP would not be new. In order to account for this fact, the reduction in earnings for those currently covered by Food Stamps and to be newly covered by ISP has been reduced by 40 percent. TAB J INCOME SUPPLEMENT PROGRAM WORK TEST Available evidence suggests that only in rare instances would the receipt of an Income Supplement Program benefit cause persons to cease working. Nevertheless, in order to insure that none can question the integrity of the program, I am recommending that the ISP legislation mandate the states to operate, for specified categories of recipients, a regis- tration-type work test. This tab briefly discusses the issues involved in the design of a work test and describes the principle elements of the recommended form of work test. Basically there are three issues involved in developing a work test: At what level of government -- Federal or state -- should the work test be administered? How much manpower service delivery should be authorized by the work test? and What administrative mechanism should be used to deliver services? In particular, should existing delivery systems and legal authority (ies) be used or should new mechanisms be developed? I believe that the experience of the Federal government's manpower and social service programs over the last decade has taught us that such services are best administered by state and local government. This view is central to the block-grant approach behind the new Comprehensive Employ- ment and Training Act of 1973. Among other things, this new Act closed down the programs that tried to create a delivery system directed from Washington. Thus, a state-administered work test fully supports the Administration's view of the appropriate distribution of functions across levels of government. In addition, the alternative of a Federally- administered work test can easily become very expensive. It is well to recall that the second version of FAP contained a Federally-administered work test which became so heavily laden with supportive services and the costs of creating a new delivery system that over 30% ($1.7 billion) of H.R. 1's net welfare expenditures would have gone to such ends rather than direct cash assistance. The questions of the level of service delivery and which delivery mechanism are closely related. Experience with the heavily service-oriented work requirement in the Aid to Families with Dependent Children program sug- gests that such work tests are expensive, administratively cumbersome and cost-ineffective. Many evaluations of the manpower programs launched 2 in the 1960's suggest that in the absence of an adequate number of jobs, these programs, too, are not cost-effective. Thus, a work test that both well serves those subjected to it and provides for simple and efficient government would stress job finding as a goal. The discouraging evidence on the likely efficacy of a wide range of manpower and social services suggests that the Federal government should not require their use. Instead, the Federal government should make certain that those ISP recipients who could probably profit from assistance in job finding be required to accept such services. Job finding services will ultimately be provided at a local level since their provision at any other level makes little sense (although, of course, various localities should share information so that regional disparities in labor supply and demand do not persist). Thus, state administration of the work test is indicated with the states developing procedures within Federal guidelines that spell out the Federal govern- ment's overall goals for the ISP work test. It is important to remember that such a Federal-state relationship already exists with respect to the work test in the states' Unemployment Insurance programs, and there- fore the existing Federal-State Employment Service network already is equipped to perform precisely the tasks envisioned here for the ISP work test. Finally, the absence of a work test in ISP could be easily challenged on equity grounds. The Federal government, as already noted, mandates a work test in Unemployment Insurance, a Federal-state program in which the Federal presence is relatively restrained and which is based on "social insurance" principles. It would be inconsistent for the Federal government to impose a less stringent work requirement on recipients of ISP which will be a fully Federal endeavor financed from the general revenue (with the possible exception of state supplementation programs). Description of the Work Test The legislation enacting the ISP would mandate the states to operate a work registration-type work requirement and provide funds for that purpose. The major features of such a work test would be: 0 Federal regulation or legislation would establish two types of recipients. The first type would consist of all those who would be categorically excluded from the work test, such as the aged, blind, and disabled population; minors; those needed to care for members of the two previously mentioned groups; and the already employed. The second type would include the remainder -- those presumptively able bodied persons with no child care or other home responsibilities and who are not already employed. 3 The presumptively able bodied recipients of ISP benefits who are available for job placement would be referred to the State Employment Services for assistance in obtaining an appropriate job or training opportunity. In the event that such persons refused to cooperate with the State Employment Services, their ISP eligibility would cease and the amount of their families' benefit would be reduced accordingly, Funding for the work test, which would include funds currently expended to support the work requirements in the WIN and Food Stamp programs, would be placed in existing authorities. While final decisions await further con- sultation with the Department of Labor, it is likely that funds to support the work test would be delegated to the Secretary of Labor and expended under Comprehensive Employ- ment and Training Act authorities and/or the provisions of the Wagner-Peyser Act (the Federal-State Employment Services system). This would allocate to the States and localities which would administer the work test under ISP the funds to support the services they deem appropriate. Summary I would mislead you if I argued that the work test recommended here is vital to the ISP for programmatic reasons or that it would pay for itself. Indeed, available evidence suggests the opposite. I do feel, however, that a work test based on something like required referral of unemployed ISP applicants to the State Employment Services would answer any concerns regarding the proposal's commitment to work, while minimizing the administrative burden and financial costs associated with such efforts. The alternatives of Federal administration and/or intensive service delivery promise only to build large bureaucracies which would perform functions that are, in significant ways, foreign to the ISP proposal and in which we can have little confidence of high social return. TAB K TAB K ADMINISTRATIVE STRUCTURE OF THE INCOME SUPPLEMENT PROGRAM As part of the interagency planning in support of this proposal's pre- paration, a Task Force, directed by the Internal Revenue Service with members from HEW and Treasury, examined its administrative feasibility and standards of operation. In order to be able to reach a judgment on those issues the Task Force had, in effect, to design an operational system for ISP and determine what the resource needs of such an endeavor would be. The principal findings in the Task Force Report, submitted in late April, may be summarized as follows: o The benefits payments portion of the proposal is adminis- tratively feasible, both in terms of the proposal's goals of objectivity, simplicity and universality, and in terms of the IRS's standards of program integrity -- provided that there is reasonable adherence to the Task Force's recommendations concerning pre-legislation planning, systems testing and implementation, enrollment phase-in and proposed levels of assistance to recipients and enforcement in the ongoing program. Using a set of operating assumptions, the Task Force designed, in broad outline, a structure for ISP and estimated its personnel and other resource needs. These estimates, which relied on both analogous IRS activities and directly relevant experi- ence from the HEW Income Maintenance Experiments, compare favorably to IRS manpower and administrative resources devoted to revenue collection. The ISP has no operational program design feature that would either require or preclude the .selection of one agency rather than another to assume operational responsibility for the program; it could be administered by an existing agency, such as IRS or SSA, or by a newly created special purpose agency. The remaining sections of this tab describe ISP's basic substantive elements and administrative structure, outline its field operations and conclude with some observations on feasibility conditions. PROGRAM ELEMENTS A household's eligibility for benefit payments and the amount of such payments would be determined by the composition of its membership, the amount of its nonbenefit income, and the nature and value of the assets owned by its members. 2. Filing Unit Rules - As a general presumption, all individuals related by blood, marriage or adoption who live in the same household would be regarded as members of a single unit for purposes of ISP benefit determinations. In contrast, the filing unit for tax liability would continue to be defined primarily in terms of individuals because of the limits on the extent to which one individual should be compelled either to compute or pay a tax liability on another's income. This departure from the tax system in the ISP is necessary because it is the income of a family or household that is the single best measure of the need of its individual members. Any alternative which would attempt to measure the actual extent of income pooling and joint consumption among individuals within a household would be administratively infeasible and intrusive. In addition to the general definition of a filing unit, there would be rules to cover the special situations of foster children, nonseparated spouses who are living apart, non- resident children under age 18, and sub-families in a house- hold that can certify themselves as separate and distinct economic units. Income Definition - The definition of income which would be countable in the calculation of benefits would include all gross receipts in cash or in kind from any source, with the exception of a very few types of receipts specifically identi- fied as excludable. Items were excluded only if: they represented income that was not truly available to meet current needs; their inclusion would defeat a program goal; the reporting and compliance consequences would be disproportionately great; an unreasonable economic incentive would otherwise obtain; or their inclusion would grossly violate a generally accepted social viewpoint. Using this approach the definition of income for the ISP would be very broad, including items such as Social Security benefits and gifts which are not treated as income for Federal income tax liability. Few expenditure deductions from income would be permitted in the computation of benefits under the ISP. The only departure from the presumption against deductions would be in the area of those existing "adjustments to income" allowed in the tax system, such as expenses incurred in the production of self- employment income. 3 Assets Test - In addition to having to meet the principal criteria of income eligibility, a filing unit could not own more than a specified dollar amount of certain types of assets. The test would exclude from consideration business related assets, owner occupied dwellings and reasonable amounts of land appurtenant, one automobile, the cash value of life insurance, and furniture and personal effects located in the place of residency. These proposed exclusions from the assets test are based on consider- ations of administrative feasibility and accepted social views regarding housing and essential personal property. The fair market value, net of applicable encumbrances, of the house- hold's nonexcluded assets could not exceed certain benchmarks. Within a range bounded by a minimum for a filing unit of one or two persons and a maximum for a unit of seven or more, the benchmark increases with additional members. This approach is of necessity somewhat arbitrary. However, the alternative of imputing income from nonexcluded assets, while theoretically more equitable, would entail considerable administrative complexity. Accounting System - The program would consider eligibility only on a yearly basis. Unlike the tax system's fixed calendar year, the year for ISP purposes would be defined in terms of a twelve month moving period. In addition all determinations would be retrospective; that is, based only on income for an elapsed period of time. These two features (a moving calendar year and retrospective reporting), in combination with a method of accounting for the income stream called the "carry forward," provide the best possible compromise among the competing policy objectives of equity, responsiveness to change in family income and composition, and administrative efficiency. Alter- natives that would have involved the fixed calendar year or prospective estimates of a unit's future income stream were examined but rejected, for they would have entailed serious over and underpayment problems, collection consequences, and greater opportunities to manipulate the program. In order for the preferred accounting system to function with reasonable responsiveness, the ISP population will be required to report either once every month or once every three months. A unit will be designated as a monthly or quarterly filer depending on the constancy of its income. Units with a history of stable or no income would file quarterly; those with a history of fluctuating income monthly. Self-Employed - The ISP, just as its tax system counterpart, would perforce have some special rules for the unique situations of the self-employed. As noted, the tax system's adjustments to income would generally be allowed as deductions from the income base. Similarly, business related assets, that is, property reasonably related to and needed for the production of income, would be excluded from that eligibility test. While the Internal Revenue Code would offer primary guidance on these two matters, special rules will be needed to prevent the incorporation into the ISP of measures, however desirable in the tax system, which are inappropriate in measuring income need; for example, accelerated depreciation, capital loss carryovers, and the like. The most significant departure from normal practice in the treatment of the self-employed would be in the accounting system. Self-employment net income which is suitable for monthly or quarterly reporting, as in the case of a carpenter, would be thus measured and reported along with all other income in that filing unit. However, much self-employment, as in the case of a farmer, involves irregular income and expense patterns. For these situations, the program would take the previous year's actual 1ump sum self-employment income, divide it into twelve equal segments and impute the average monthly amount into the current year as if it were received in that year. Once imputed this self-employment income would be treated no differently than other income in the operation of the ISP accounting system. ORGANIZATIONAL STRUCTURE The operational base of the agency would be a field structure of approx- imately 1000 field offices supervised by some 40 area offices. The field offices would contain groups of front line personnel primarily concerned with enrollment and assistance to filing units in reporting on changes in income, assets, and household composition. These same people would, however, perform various verification functions which can be done in the office. Each field office would additionally contain a conferee to conduct informal redeterminations of assistors' decisions when questioned by a filing unit, and personnel to keypunch data from applications, income and other periodic reports directly into the national computer system. The area offices would exercise direct management control over the field offices and provide adminis- trative support to them. In addition, the area offices would house education staff to inform the public about ISP benefits and obligations, investigation staff to perform indepth or on-site enforcement activi- ties beyond the capacity of field office personnel, and an adminis- trative law judge to hear formal appeals from contested decisions not settled at the conferee level. Complementing the field structure would be about seven data processing centers which would receive information directly from terminals in the field offices, process it and prepare the payment tapes for use by the 5 Bureau of Accounts. The agency would be centrally directed by a national office supported by staff at the regional level. In keeping with the nondiscretionary and substantively simple nature of the ISP, the number of personnel needed at the national and regional levels would be few, and approximately one-third of them would be assigned to inspection activities in the field. SYSTEMS DESIGN The central concept in the systems design is the placing of decentralized data entry and access in the field offices. To accomplish this, each field office would be provided with one or more terminals that would allow it directly to enter or access data into or from the national computer system by means of a data link to its associated data processing center. In practice, all data communications between a field office and its data processing center would be routed through a mini-computer and communications concentrator located at the appropriate area office. This intermediate link would provide communications traffic control, detection of errors or missing data elements and data formatting. Decentralized data entry implies that all reports from the program's filing units, such as the monthly or quarterly income change reports, must be delivered to the field offices by mail or hand. The laternative of consolidated report collection and data entry in either the area offices or at the data processing centers was considered but rejected. While that alternative might yield economies of scale in data processing, it was determined that the collection, human review and edit, and data conversion of reports at consolidated points would introduce unaccep- table delays in processing and responding to filing errors and omissions. In addition, decentralized data entry is the logical extension of any capacity in the field for immediate query and response. It was the judgment that such a capacity would be essential if the program is to be responsive to recipients, efficient in correcting agency errors, and effective in the prevention of duplicate filing and other improper actions. PROGRAM OPERATIONS Enrollment. Four features of program operations are especially important-- enrollment, periodic reporting, enforcement and sanctions, review and appeal. They are each briefly described below. The agency design provides for a public information or education staff to inform the public of the program, and a system of toll free operators so that people can obtain more detailed descriptions of the program's eligibility require- ments. However, persons who believe that their households might be eligible would have to take the initiative and contact their nearest field office. Manifest ineligibles would be screened out by field office personnel by means of a short questionnaire. These personnel 6 would then assist those who would appear to fall within the program's income and asset criteria in the application and enrollment process. Upon completion and review of supporting documentation, the infor- mation would be entered into the national computer system by field office terminal and automatically compared to a master directory file to prevent any duplicate filing or other improper action. Periodic Reporting. A critical aspect to the program is its periodic reporting requirements. Depending on the constancy of their income, recipient households would have to report on their income either every month or every three months. Each income report updates the households moving twelve-month accountable period, while obsolete information from the year previous is dropped from the base used to calculate benefits. After receipt in the field office, each income report would be reviewed and, if it has no obvious errors or omissions, entered into the national computer system. In the event of an omission or obvious error, the head of the household would be contacted and asked to come to the office to complete or correct the form. Benefit payments would be made monthly. Thus, a typical sequence in the ongoing program would be as follows: A family receives a form to report January income in early February, completes it and sends or carries it to the appropriate field office by mid-February. Personnel in the field office review the report, contact the family if necessary, and enter the information into the national computer system. In early March, the family receives a check based on its income history through January. Coincidently, the family receives a form to report on February's income, and the cycle would then repeat itself. All filing units would also be subject to an annual assets review report which would be handled in exactly the same manner as the periodic income reports. Enforcement. The need for program integrity demands a vigorous enforce- ment program, particularly in the early years of operation. Efforts to encourage accurate reporting would include: 0 mandatory face-to-face assistance on initial enrollment, with a requirement that certain information be documented; educational activities involving the use of news media and direct distribution of information to recipients; audit examinations conducted randomly and as a result of apparent discrepancies detected through the use of third party information obtained through computer infor- mation matching; and periodic face-to-face reviews on a sample basis of reports submitted by filing units not otherwise examined. Some of this activity would happen as a by-product of other program operations. The enforcement activity as such would be divided into two levels: verification, which is a set of activities that can be done by normal field office personnel in the office; and investigation, which requires specialized personnel to conduct in-depth office reviews or on-site visits. Sanctions, Review and Appeal. A variety of sanctions would be available to the agency to assure its enforcement activities: o In cases of willful fraud, criminal prosecution would be available, though limited in practice to either flagrant first offenses or a second willful offense after previous warning. In cases of knowing fraud that, on balance, do not warrant criminal prosecution, or in cases of inexcusable neligence, a flexible civil monetary penalty would be available, not to exceed 100 percent of the over-payment in question. Cases that involve either noncompliance with a work require- ment, should there be one, or a household member misleading the unit's head in reporting on the household's income or assets, would result in the elimination of the offending party from the unit for purposes of setting its basic benefit level. Such a person would, in the latter instance, also be barred for a year from filing for benefits as a new and separate unit. In addition, if a filing unit continued to. keep inadequate records after warning and instruction in bookkeeping, the agency could, in cases of notorious noncompliance, reduce the unit's guarantee level until compliance was obtained. Any sanction would be applied only after a determination by a front line employee, review by his supervisor, and notice and opportunity for a hearing to the affected filing unit. After an informal discussion with the employee and his supervisor, the first recourse to the affected party would be to request an informal administrative review by a field office conferee. The next level would be to an administrative law judge at the area office level. However, for the convenience of appellants, many of the judges would travel a circuit among the field offices in their areas. Decisions of an administrative law judge would be reviewable in a de novo proceeding in the U.S. District Courts. 8 The same review and appeal process would be available in instances where a party feels aggrieved over a routine agency determination; for example, rejection of an enrollment application, amount of a given monthly check, or refusal to certify separate economic status from a larger household. FEASIBILITY CONDITIONS The Task Force concluded that certain conditions should be adhered to in order for ISP to be administered at reasonable cost and in an efficient and effective manner. A brief overview of those conditions follows: Compliance - As noted, persons on the program would be required to submit monthly, quarterly or annual reports on income, assets and household composition. Widespread noncompliance in the form of late or incomplete reports could seriously undermine the administrative feasibility of the program. The Income Maintenance Experiments have shown, however, that the incidence of such deficiencies is well within accep- table levels if the system is properly structured. IRS planning for its new National Tax Administration offers assurance that the computer hardware and procedures exist to handle large and complex reporting volumes. Enforcement - The program is equally dependent on reporting accuracy. Understatement of income or assets, oversiatement of household size, or duplicate filing in more than one household could, if on a large scale, have severe fiscal consequences and undermine public confidence. The Task Force thus concluded that a sizable and visible enforcement effort should be built into the program. The Task Force set an initial annual coverage of twenty percent of the caseload for verification or examination. After the first three years, the coverage could be reduced to around ten percent. Implementation Schedule - The Task Force concluded that the time required to place in position the manpower, facilities and equipment necessary to effectively enroll and administer ISP was approximately four years. The principal constraint is that twenty months must be allowed subsequent to enact- ment for data processing equipment procurement, installation and operational testing. When combined with the need for a phase-in of initial enrollment, thereby preventing an expensive workload peak, the first payment under ISP could not be made before the twenty-fifth month after enactment. Fortunately, the two years of systems design, contract bidding, office site selection, and personnel training can take place between the time the legislation is introduced and its enactment. TAB L WEALTH Sprication ATION TAB L THE SECRETARY OF HEALTH, EDUCATION, AND WELFARE WASHINGTON, D. C. 20201 November 6, 1973 MEMORANDUM FOR THE PRESIDENT Subject: Major Domestic Program and Tax Reform My staff and I have been struggling over the past eight months with the reform of our social programs, including specifically the welfare system. The problems we confront are complex and difficult -- some say intractable. While there is much in the diagnosis of these issues to warrant pessimism about whether there is any solution, I have been exploring one concept which in its elegant simplicity, boldness and scope offers a way out of the mess. I advance it in this memo now, because if you find it attractive and acceptable, we could: develop the proposal quietly with a very small group as the domestic centerpiece of your State of the Union Message; provide a surprise initiative which in its boldness and balance could capture the imagination of the American people, if not the Congress; and reassert your leadership in the domestic field in a very strong and affirmative way. BACKGROUND When I step back from the details of the problems which your major reforms have encountered, I find a common set of issues and obstacles which have impeded them. Although the approach to broad social problems which relies on a multiplicity of narrow categorical assistance programs has been widely recognized as a failure, or at least not effective, recommendations to eliminate these assistance programs in favor of direct assistance to individuals, or revenue sharing, is usually not well received. Without a broad based understanding and support, we have been left to do battle one at a time with particular recipients, 2 interest groups and Congressional committees with a strong stake in the existing structure of such categorical programs. This posture is not a winner. The interrelationships of the domestic assistance programs have become as important as the content of each one. To ignore these interrelationships is to pile one program on top of another with undesirable, unintended and costly results. Congresswoman Griffiths' ongoing studies have been documenting this fact in excruciating detail in the public welfare area. The involvement of 19 different Congressional committees in various income security programs does not help. In retrospect, your Family Assistance Plan probably ran into as much trouble for what it did not address as for what it contained. There has been no assured means of linking domestic assistance programs--reformed or otherwise--with fiscal sanity. The piece- meal approach to expenditures and taxes in the Congress, and the schizophrenic public attitudes of support for specific programs and distaste for the total bill must be addressed with some specific linkages. Your 1974 budget engendered a growing con- cern with this issue in the Congress, and attempted to deal with it by means of a ceiling. Governor Reagan, with the same consideration in mind, has proposed a specific Constitutional ceiling in California. We have not really come to grips with public frustration and dissatisfaction with the performance and size of the Federal bureaucracy and a related, growing dissatisfaction with the equity of the tax system. Much of the latter stems, I believe, from disillusionment about results achieved for taxes paid. While you have made consistent efforts to reduce the Federal payroll, improved efficiency is swamped by program additions and changes. Only major structural reforms are likely to make more than a marginal difference. If I were persuaded that the disorder and costs of the present programs could be contained or somewhat improved, I might be tempted to recom- mend a series of modest improvements in welfare for you to present the Congress and the country. My assessment is to the contrary. A more modest approach just does not address the fundamental issues, and does not provide promise of success. Time is not on our side. Left alone or altered modestly, the present situation will inexorably get worse, making fundamental reform even more difficult later. 3 A few examples in the welfare system may undergird this assessment. Food stamps costing about $2.2 billion in FY 1974 are now projected to cost about $6 billion--perhaps more--by FY 1976. Our efforts to cash them out for a part of the low income population--the aged, blind and disabled--is rapidly eroding to nothing. Senator Long is gaining support for his work bonus which would pay a modest benefit to low income workers covered by the payroll tax. Appropriate in purpose, the Long proposal trivializes a good idea in a way that is likely to create more problems than it solves, since it adds yet another means-tested transfer program to the existing system. The drumbeat of social security increases, which puts you in an im- possible position, continues apace. The list could go on and on. You are slowly but surely being pushed into a corner of choosing between tax increases and an economically sane budget without attaining reform. Minor tinkering or sequential changes do not seem to work with the Congress and, in any event, do not deal with fundamental structural problems and program interrelationships. Only a major reform initiative seems to offer a way out. MAJOR TAX REFORM The reform proposal which I have in mind is based on Milton Friedman's concepts. It is fundamentally tax reform, but deals simultaneously with the tax, welfare and domestic assistance systems. Through such an approach, we could: Tie virtually all of our income support programs for the low income population to the positive tax system and the IRS in such a way that these separate programs and many related service activities would no longer be required: The Federal bureaucracy could be significantly simplified and reduced. Construct a system that requires benefit increases and tax increases to be considered simultaneously. By locking tax and benefit structures together, it would be virtually im- possible to adjust one without adjusting the other. Indeed, this action could perhaps be coupled with a constitutional amendment which would limit the maximum percent of income that could be taken in Federal taxes unless voters agreed to a higher level. Remand to the States most of the individualized services and any cash supplementation which they might desire to make as a proper State and local role. 4 Adjust the personal exemption levels and tax brackets in a way that will greatly improve the equity of the positive tax system. As I noted at the outset, this concept is the only one which embodies features designed to meet all of the major issues and obstacles which I have described. Specifically, this system would be designed along the following lines: All individuals or families would file an income tax return. Those above a set amount would pay taxes; those below it would be eligible to receive cash benefits (some below the set amount who have non-taxable income would not receive benefits). The benefit schedule would be based upon the level of personal exemptions and standard deduction that the income tax system prescribes for the taxpayer or his family. For example, a family might receive a cash benefit equal to one-half of the difference between its income and the sum of its personal ex- emptions and standard deduction. Such a schedule would provide for a gradual phasing down of the cash benefit as family income increases, thus: - paying greater benefits to those with greater need; - preserving work incentives; and - insuring that no one who is eligible for benefits would also have a tax liability; and conversely, that no one with a tax liability would receive benefits. Benefits would be set initially at levels that would permit at least the elimination of the Federal role in AFDC and cashing out of Food Stamps. The new Supplemental Security Program (SSI) for the aged, blind and disabled would also be superseded by this program. Such benefit levels would require that the level of personal exemptions and possibly the standard deduction in the tax system be raised. Any future increase in benefit levels would require concomitant changes in taxes. Consideration could also be given to some device--perhaps a Constitutional amendment to require a referendum-to make tax increases above some level subject to the vote of the public. It would be possible to eliminate or sharply curtail Federal programs in social services, manpower, housing and other anti- poverty activities, leaving such activities to the States. I would expect that we could make very large reductions in Federal employees in this Department and other agencies as well. 5 Subsequently, should inflation occur, we could widen the tax brackets to which given tax rates apply, thus preventing both decreases in the real value of the benefits transferred and increases in the real tax burden on taxpayers. DISCUSSION We have done some initial exploration of several important questions about this reform proposal: how would the benefit structure work and what would it cost us? what problems would it raise? Our estimates at this point are necessarily preliminary, but inter- esting enough to warrant some optimism. The basic structure we have used for estimating purposes is a $3,000 benefit for a family of four without other income and a benefit structure for the aged, blind and disabled which is the same as they are receiving under the SSI program. A benefit reduction rate as earned income rises of 50% is assumed so that there are no payments above $6,000 made to a family of four. This benefit schedule would provide $2,000 to a two person family or $3,900 to a six person family if they had no other income. Since most individuals and families have some income, a more typical case would be a family of four with a $4,000 income who would receive $1,000 or the same family earning $5,000 who would receive $500. At today's minimum wage, a father heading a family of four earns about $3,200. Under the benefit schedule, his family would receive $1,400 in cash benefits, just enough to raise the family above the 1974 poverty threshold. The total benefits to low income persons would run about $17-19 billion in FY 1976. Over 90% of these benefits would go to those below. the poverty level, which would cut the dollar poverty gap approximately in half. These costs would be automatically offset through the elimina- tion of the AFDC, Food Stamp, and SSI programs which we esti- mate will cost the Federal government $14-15 billion in FY 1976. This would leave an initial gap of $3-5 billion. A preliminary list of programs which would be eliminated or sharply curtailed as a result of the general plan would include social services, manpower programs, low-incore housing sub- sidies and miscellaneous anti-poverty programs. A conservative estimate of the FY 1976 cost offsets in this category would be $2.5 to $3.5 billion, thus offsetting much of the potential net cost. Potential personnel savings might add another $500 million to $1 billion savings. 6 We estimate that the benefit program would provide $1.5 to $2.5 billion in fiscal relief to the states. If we turn social service programs largely back to the states, such relief could provide a potential source of financing either services or supplements, if the states so choose. Raising the exemption levels will result in reduced total Federal receipts which we have not yet priced out with Treasury. This loss either could be partly or completely offset with rate adjust- ments, or it could be accepted. The decision would depend on how much tax relief we could and wished to provide. The net costs, if any, would be highest in the first and second year. This comprehensive concept would, I am confident, be a smaller burden on the taxpayers than the present system in the long run. When I consider the major problems which this reform proposal raises, I find two: the potential difficulties with the Congress, and concern with the work requirement. The difficulties with the Congress come in two forms. First, the proposal cuts across many committees and thus is threatening to them and their categorical programs. I see no way to avoid this problem; indeed we should seek it out since it is necessary to any significant program reform and implies Congressional reform as well. Second, the Congress will be sorely tempted to add the benefit program without eliminating other programs such as food stamps. This difficulty is clearly most serious and, like the first, cannot be avoided. If we Judge this problem overwhelming, we simply 'give up any hope of major reform. I do not understand you to be willing to admit defeat on this issue, and I share that view. The only way to deal with this issue is to put the proposal forward strongly and insist on comprehensive reform. It strikes me as an impeccable position. Some will no doubt attack this reform as not containing a strong work requirement. It would be possible to put one in for able-bodied adults, but I would strongly counsel against such a course. It seems to me that a work requirement properly belongs and can be effectively adminis- tered only at the state and local level. With whatever funds the state chooses to use for supplementation or social services, they should be empowered to impose such work tests or requirements that are appro- priate and favored in their particular setting. If we attempt to impose work requirements from the Federal level, we face the following problems: 7 Logically, we incur an obligation to provide jobs in the public sector if all else fails. In the past, we have settled for weak work registration requirements which have little impact. We are forced to maintain confusing, large and expensive bureau- cratic structures independent of IRS to categorize the population and to provide manpower training and other support services which have not proved very effective. We begin to unravel the basic simplicity of the system and fall back toward the FAP proposal. The incentives to work built into the reform proposal are strong rela- tive to our present system, and there is reason to believe that they will work for most low income persons. Recent studies show a strong work ethic among the poor, and experimental evidence demonstrates that work effort among male heads of families would not be affected signi- ficantly by such a program. In summary, the Congressional and work requirement problems have satis- factory answers and, in any event, are far outweighed by the advantages and opportunities of this reform: Programmatic, tax and Congressional reform. A certain means to link expenditures and taxes. A strong measure to reduce the size of the Federal government. A bold, comprehensive approach which would virtually wipe out the old Federal welfare system in favor of a unified and simpli- fied approach. The use of the IRS system as a single efficient administrative device in which the public has confidence and all participate. This action would also have by-product benefits in tax collection. American citizens, particularly those of low income, would be treated equitably across the country under a set of objective criteria which would reduce the amount of subjective govern- mental intervention in their personal affairs. The anti-poverty effects would be much better than current programs which now transfer funds to individuals well above the poverty line. 8 RECOMMENDATION I recommend that you adopt the Friedman concept in principle and direct a small group from HEW, Treasury, OMB and the Domestic Council to develop fully a specific proposal for inclusion in the State of the Union message. Approve Disapprove See Me Secretary

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    "ocrText": "The original documents are located in Box 13, folder \"Welfare Reform - Caspar\nWeinberger Proposal (2)\" of the Richard B. Cheney Files at the Gerald R. Ford\nPresidential Library.\nCopyright Notice\nThe copyright law of the United States (Title 17, United States Code) governs the making of\nphotocopies or other reproductions of copyrighted material. Gerald Ford donated to the United\nStates of America his copyrights in all of his unpublished writings in National Archives collections.\nWorks prepared by U.S. Government employees as part of their official duties are in the public\ndomain. The copyrights to materials written by other individuals or organizations are presumed to\nremain with them. If you think any of the information displayed in the PDF is subject to a valid\ncopyright claim, please contact the Gerald R. Ford Presidential Library.\nDigitized from Box 13 of the Richard B. Cheney Files at the Gerald R. Ford Presidential Library\nTAB C\nTab C\nFEDERAL BENEFIT LEVEL AND FEDERAL-STATE RELATIONS\nFederal Benefit Level\nThe level of the Federal benefit in the ISP is one of the most visible\nprogram components. It will figure heavily in Congressional and public\nreaction to the plan because it not only affects the perceived adequacy\nof the program, but has implications for State and Federal expenditures\nas well.\nThe existing welfare system is made up of many programs: some of them\nfully Federally-funded, some jointly funded by the Federal and state\nand local governments, and some having no Federal participation at all.\nOne of the basic goals of the ISP is to replace this system in such a\nway as to permit us to eliminate the major means-tested programs,\nespecially the ones in which the Federal government participates; reduce\nsubstantially the size of the total governmental bureaucracy involved\nin transfer payments and simplify the administration of what remains;\nbring about a more appropriate Federal role in income assistance overall\nand permit the Federal government to exercise strong administrative control\nover the new transfer system.\nIn order to achieve these goals within a reasonable cost and with regard\nto other concerns, I have recommended a Federal benefit structure with\na $3600 basic benefit level for families of four with no income. (Tab E\ndescribes fully the proposed benefit structure. Expressing the benefit\nstructure in terms of a four person household or family has become con-\nventional shorthand usage in describing transfer reform proposals.) While\nthis benefit level may appear high to some, it reflects the recent growth\nin the programs that it would replace. The following considerations\ndictated our choices about the proposed benefit structure:\nBenefit levels must be high enough to permit virtually\nfull replacement of the Federal financial share in the\nexisting programs that would be superseded by the ISP.\nThe present Federal participation in SSI and Food Stamps\nfor the aged, blind, and disabled and AFDC and Food Stamps\nfor single parent families set the necessary lower bounds\nfor the Federal basic benefit in ISP. The proposed benefit\nstructure would replace the Federal share of basic benefits\nin all states for both AFDC and SSI families. (See attached\nTable 1 for full display of Federal shares of AFDC plus Food\nStamp levels in the states.)\nISP levels should completely dominate combined AFDC and\nFood Stamp benefit levels -- including the state contributions\n-- in as many states as possible. This will enable us to\nlimit to the maximum degree the number of states where\nstate supplementation of ISP benefits would be necessary\nin order to maintain existing or probable benefit levels.\nThe proposed benefit structure would do this in sixteen\nstates. (See attached Table 2 for a full display of total AFDC plus\n2\nFood Stamp levels in the states.) The comparable ISP\npositions with respect to state supplements in SSI\nplus Food Stamps for the aged, blind and disabled\nare even more advantageous. The strong program\nand political reasons for limiting the need for state\nsupplementation are discussed more fully below.\nThough the basic benefit level would for many units\nfall below the official poverty standard, we have\ndesigned the program so that households with some\nsubstantial though inadequate income from either\npresent earnings or transfer programs based on past\nearnings will have a total income above that standard.\nOnly with respect to households with no sizable source\nof other income would ISP be inadequate to match the\npoverty standard, and in many states it is probable that\nthere will be state supplement programs targeted towards\nsuch households.\nThe benefit levels that are proposed are the minimum necessary to achieve\nthe above objectives at acceptable net costs to the Federal budget.\nHowever, the proposed structure allows you some compromise room later in\nthe likely event that during the Congressional debate some seek to raise\nthe benefit level. We also hope that the proposed ISP benefit levels\nwill provide a sufficient defense against any major new Federal commit-\nments in subsidized housing for the poor. Clearly the ISP will strongly\nblunt pressure for a housing allowance or voucher program, and even any\nmajor expansion in the existing housing authorities.\nOur proposed benefit structure would be expressed in December, 1974 dollars\nand adjusted upward for inflation thereafter. This should mitigate the\npolitical pressures for a more generous benefit structure and insure that\nthe benefits will be high enough to replace the Federal share of existing\nprograms at the time of implementation.\nState Supplementation\nEven with the Federal benefit structure that I have recommended, it is clear\nthat as many as half of the states might wish to supplement the Federal\nbenefit for some categories of low-income households so that large numbers\nof current recipients, especially AFDC type families, will not be made\nworse off. State supplementation, as noted above, can pose problems of\nprogram interaction and administrative complexity. The state supplements\nin the new Supplemental Security Income (SSI) program, for example, have\nproved to be especially burdensome, primarily because the Congress chose\nto mandate grandfathering of former aid to the aged, blind and disabled\nrecipients in the form of state supplements. This seriously compromised\nthe goal of establishing a program that can be easily administered and\ncontrolled.\n3\nThese problems have been especially troublesome in the context of Federal\n(SSA) administration of those supplements, an option which 31 states have\nexercised. In light of the SSI experience, the possibility of not per-\nmitting Federal administration of state supplements under any circumstances\nwas considered. This alternative was rejected on the grounds that it could\ncreate even greater overall administrative inefficiencies and generate some\navoidable political problems.\nIt was therefore decided to offer the states the option of selecting Federal\nadministration of their state supplements under the strict conditions that\nkey program elements, e.g., the eligible filing unit and income, must be\nidentical to or a simple subset of the Federal definitions so that additional\ndata collection needs are avoided, any additional special determinations are\nminimal, and such exceptions which do exist can be handled in a manner\nconsistent with the objective and automated nature of the Federal program.\nIn effect, optional Federal administration of state supplements under ISP\nwould be analogous to the provision already in the Federal Tax Code for\noptional Federal administration of state income taxes. Because there are\nno duplicate Federal and state administrative structures in the states\nthat choose to exercise the option under these restrictions, Federal adminis-\ntration of state supplements will require significantly fewer total employees\nthan the combined number of Federal and state employees if those states\nhad to administer their own supplements (See Tab G for relevant administrative\npersonnel comparisons.) Thus, offering the option will enable us to more\nadequately meet our goal of reducing the size of the welfare bureaucracy\nthat remains at the state and local levels.\nSome states may choose however to reject the option, deciding that their\nprogram goals for supplementation dictate retention of the discretionary\nand subjective rules that characterize the present welfare programs. In\nthose instances the States would continue to bear the costs of maintaining\ntheir public assistance bureaucracies.\nWhat must be prevented, if we are to avoid repeating the very troublesome\nSSI precedent in this area, is Congress allowing optional Federal adminis-\ntration of the latter type of welfare oriented state supplement. Not only\nwould such a result be totally antithetical to the conceptual nature of\nthis welfare replacement plan, but also it is administratively infeasible\nfor a Federal agency to run what would amount to twenty-five or more separate\nassistance programs. Our position on this matter will have to rest on firm\nresolve, an emphasis on the SSI experience, and the linkage to the Federal\ntax system.\nRegardless of whether a state chooses Federal or state administration, there\nis one subject in which Federal intervention is necessary unless we are\nprepared to see the work incentive feature of the ISP proposal diluted.\nIf states were allowed to supplement completely without Federal regulation,\nthe relatively low benefit reduction rate in ISP could be effectively doubled\nby the structure of the state supplements. For example, a state could\ndecide to impose a benefit reduction rate on state supplements which was\n4\nabout as large as that on the Federal benefit. In order to preserve both\nequity and work incentives, state supplement benefit reduction rates must\nbe held to 15% or less until the household's earnings exceeds the Federal\nbreakeven level at which point they could impose a rate equal to the\nFederal 50% rate. While this provision will not be popular with the\nstates, it is absolutely critical to the integrity of our proposal.\nDespite our decisions to regulate state benefit reduction rates and to\npermit optional Federal administration of state supplements under controlled\nconditions, we otherwise decided to adopt a position of Federal neutrality\nabout state decisions in this area as being most consistent with the\nproposal's underlying philosophy. Hence we rejected either mandating state\nsupplements or directing Federal administration of them. It will be up to\neach State to decide whether or not it wishes to supplement and, with the\nexceptions discussed above, under what program and administrative conditions.\nAt the same time, however, we recognize that because of procedural anomalies\nin existing programs or unforeseen events between now and the time of passage,\nit may be necessary to offer a hold harmless to the states against cost\nincreases over and above their current system expenditure levels, as was\ndone in H.R. 1. This would permit those states who view it as desirable\nto supplement the Federal benefit to do so with the knowledge that their\ncosts would not exceed former levels. As a practical matter, the hold\nharmless would add very slightly to program costs and pose only minor\nadministrative problems. However, it would represent a departure from\nour basic stance of neutrality in state supplementation. For this reason,\nwe chose not to include a hold harmless provision, although we would be\nprepared to utilize it as a bargaining chip in negotiations with Congress.\nFinally, the possibility of grandfathering current recipients was also\nrejected. SSI has such a provision. The result is to continue the old\nprogram rules, rules which have no place in a welfare replacement plan.\nIn keeping with our basic stance, the states may elect to operate their\nsupplemental programs in such a way as to grandfather the eligibility and\nbenefits of current recipients. The Federal government, however, should not\nbe a partner to that effort.\nEmergency Needs\nWhatever a state's situation with respect to a supplement, it will have\nresponsibility for administering its own emergency needs program. There\nwill be cases of sudden and severe need which the Income Supplementation\nProgram and many of the state supplement programs will not be able to address.\nFor example, low-income families receiving benefits under both ISP and an\nISP-consistent state supplement will encounter sudden losses that are\nunforseeable and cannot be budgeted for (e.g., the breakdown of a car essen-\ntial for employment). Since some of these instances are now being handled\nby the present system, we are vulnerable to the criticism that we are\ncreating an overall income maintenance scheme that is less responsive and less\n5\nsensitive to the needs of the low-income population than the system which\nit would replace. Much of such criticism would be disproportionate and\ninaccurate. However, we can easily counter the objections and help fill\nthe actual gaps by combining a residual emergency assistance authority\nwith our new initiative in social services. The costs to the budget of\nFederal participation in state-administered emergency needs programs are\nvery modest and will strengthen the chances of the overall ISP proposal\nin Congress.\nTABLE 1\nFederal Share of Basic AFDC/Food Stamp 2/ Benefits\n(AFDC- Plus Food Stamps\nfor a Family of Four With No Other Income\nin Those Jurisdictions 3/ Where the Federal Share\nis less than $2700\n1. Mississippi\n2268\n2. Ohio\n2436\n3. Maryland\n2448\n4. District of Columbia\n2556\n5. Indiana\n2568\n6. South Carolina\n2568\n7. Tennessee\n2579\n8. Louisiana\n2580\n9. Alabama\n2604\n10. Texas\n2604\n11. Rhode Island\n2604\n12. California\n2604\n13. Arkansas\n2616\n14. Nebraska\n2616\n15. Massachusetts\n2628\n16. Florida\n2652\n17. Connecticut\n2652\n18. Nevada\n2664\n19. Washington\n2676\nis less than $3000\n20. Maine\n2712\n21. Kentucky\n2736\n22. Wyoming\n2748\n23. Arizona\n2760\n24. Colorado\n2760\n25. Georgia\n2772\n26. New York\n2796\n27. New Jersey\n2796\nTable 1 continued\n28. Missouri\n2808\n29. Delaware\n2832\n30. Michigan\n2832\n31. North Carolina\n2844\n32. Iowa\n2868\n33. Oklahoma\n2880\n34. New Mexico\n2892\n35. Pennsylvania\n2976\n36. Oregon\n2988\nis less than $3300\n37. Kansas\n3012\n38. Illinoia\n3048\n39. Minnesota\n3072\n40. Montana\n3084\n41. West Virginia\n3096\n42. Virginia\n3120\n43. New Hampshire\n3132\n44. Wisconsin\n3156\n45. Utah\n3204\n46. Alaska\n3264\nis less than $3600\n47. Hawaii\n3312\n48. Vermont\n3348\n49. Idaho\n3360\n50. North Dakota\n3432\n51. South Dakota\n3456\nSee footnote to Table 1.\nTABLE 2\nThe Largest Amount Paid for Basic Needs\n(AFDC1 / plus Food Stamps 2/ )\nfor a Family of Four with No Other Income\nin those Jurisdictions: 37 Where the Benefit\nis less than $3000\n% AFDC\n4/\nRecipients\n1. Mississippi\n2364\n1.7\n2. South Carolina\n2868\n1.1\n3. Louisiana\n2892\n2.4\n4. Alabama\n2928\n1.5\n5. Arkansas\n2928\n.8\n6. Tennessee\n2976\n1.8\nis less than $3300\n9.3%\n9.3%\n7. Texas\n3036\n4.0\n8. Florida\n3120\n2.9\n9. Georgia\n3228\n3.2\n10. Kentucky*\n3288\n1.5\nis less than $3600\n11.6%\n20.9%\n11. Maine\n3324\n.7\n12. Misseuri\n3432\n2.3\n13. Arizona\n3444\n.7\n14. North Carolina\n3444\n1.4\n15. Ohio\n3576\n4.6\n16. Nevada\n3576\n.1\nis less than $3900\n9.8%\n30.7%\n17. New Mexico\n3636\n.6\n18. West Virginia\n3696\n.7\n19. Delaware\n3780\n.3\n20. Maryland\n3804\n2.1\n21. Nebraska*\n3804\n.4\n22. Wyoming\n3816\n.1\n23. Oklahoma\n3852\n.9\nis less than $4200\n5.1%\n35.8%\n24. Indiana\n3948\n1.6\n25. Colorado\n4092\n:9\n26. Montana*\n4164\n.2\n27. Utah\n4164\n.4\n3.1%\n38.9\nTable 2 Continued\n% AFDC\nRecipients\n28. District of Columbia\n4224\n1.0\n29. Illinois\n4332\n7.3\n30. Iowa\n4356\n.8\n31. Idaho\n4380\n.2\n32. Massachusetts\n4452\n2.8\n33. Rhode Island\n4464\n.5\n34. Virginia\n4464\n1.5\n35. California\n4464\n12.7\n26.8%\n65.7%\nis less than $4800\n36. North Dakota\n4512\n.1\n37. Kansas\n4644\n.7\n38. Connecticut\n4644\n1.1\n39. South Dakota\n4668\n.2\n40. Oregon*\n4668\n.7\n41. Washington\n4692\n1.4\n4.2%\n69.9%\nis less than $5100\n42. New Hampshire\n4812\n.2\n43. Pennsylvania\n4848\n5.8\n44. Vermont\n4872\n.2\n45. New York*\n4932\n11.5\n46. New Jersey\n4932\n3.9\n47. Minnesota\n4992\n1.2\n22.8%\n92.75\nis less than $5700\n48. Michigan\n5112-\n6\n5.6\n49. Wisconsin\n5280\n1.3\n50. Alaska\n5364\n.1\n51. Hawaii\n5664\n/\n.4\n7.4%\n100.0%\n*Exact combined benefit. levels for these states are currently uncertain;\nhowever, their relative positions are probably as indicated.\n1/ For AFDC, the largest amount paid for basic needs for a family of four\nwith no other income is derived by combining information from two sources:\n1) preliminary data for NOSS publication D-2 for July 1974, reporting\ninformation on the \"largest amount paid for basic needs\" to an\nfamily\nof four; 2) data from a special SRS/APA survey taken about August 1974,\nTAB D\nTAB D\nBACKGROUND ON TAX RELIEF\nStructure of Tax Changes\nIn order to bring about the desired relationship between the tax\nand restructured transfer system it is essential that the exempt\nincome levels for families in the positive tax system be increased\nto the ISP breakeven levels of income. For example, for a family\nof four, income tax exempt income would be increased from $4,300\nto $7,200.\nExempt income can be increased to the desired levels by adjusting\nthe personal exemption and/or the standard deduction. To the extent\nthe personal exemption is increased, taxes are lowered for all tax-\npayers. On the other hand, increasing the standard deduction benefits\nonly taxpaying units that do not itemize, primarily lower income units.\nTherefore, raising exempt income by increasing only the standard deduction\nlimits more the amount of tax relief and concentrates it on low and\nmoderate income units. For this reason the decision was made to\nincrease exempt income solely through the upward adjustment of the\nstandard deduction leaving the personal exemption unchanged at $750.\nTable 1 displays the five basic standard deductions that result from\nthe method of equating the new higher tax exempt levels of income for\nvarious family types with their breakeven levels of income under ISP.\nNew Standard Deduction**\n(for those with incomes\nless than the breakeven\nlevel)\nSingle Person not Aged, Blind, or\nDisabled (ABD)\n$2,000\nSingle ABD\n3,100\nTwo Person Family\n3,300\nThree Person Family\n3,750\nFour or more Person Family\n4,200\n* By income tax exempt income is meant the sum of the value of personal\nexemptions plus the standard deductions, i.e., the minimum amount of\na family's income which is guaranteed to be non-taxable. Under current\nlaw the minimum standard deduction or low income allowance is $1300 and\neach personal exemption is worth $750. Thus, a four person family has\nexempt income equal to $1300 + 4 X $750 = $4300.\n**\nThese new standard deductions are expressed in December 1974 dollars.\nIt is assumed that they would be increased at the rate of inflation\nbetween then and the time of full implementation of the proposal in\nsuch a way as to preserve the real value of ISP benefits.\n2\nIf these new higher standard deductions were made available to all tax-\npayers the revenue loss would be considerable, $ 15.0 billion in 1978\n(in December 1974 dollars), the first year by which the new schedule\nwould have to be fully in place. This is a larger amount of tax relief\nthan is desired. Therefore, the tax aspects of the plan have been\ndesigned so that the standard deductions are phased down above the\nbreakeven level of income at a rate of 50 cents on the dollar. Each\ndollar of additional income above the breakeven reduces the value of\nthe standard deduction from the maximums in Table 1 (which are, there-\nfore, applicable only to low-income households) down to the current\nlaw level of $2,000 for moderate income units.\nDistribution of Tax Relief\nThe amount of tax relief that would be extended by the above structure\nis about $4.1 billion rather than $15 billion if the new standard\ndeductions were not phased down at higher income levels. Of this\n$1.8 billion would go to families with adjusted gross incomes below\nthe newly established tax exempt levels and the remainder to taxpayers\nwith incomes in excess of these. The distribution of this tax relief\nis shown in Table 3.\nAn effect of this phase down is that it increases the actual marginal\ntax rates applicable to families in the phase down range of income.\nAn additional dollar of income increases taxes by one hundred and fifty\npercent of the nominal tax rate since extra earnings add a dollar to adjusted\ngross income and reduce exempt income by fifty cents. This results\nin an effective marginal tax rate structure in which rates first fall\nand then increase as income increasesabove the breakeven level. Although\naverage tax rates over this range would always be increasing with income,\nit may be difficult to justify such a marginal tax structure. HEW-\nTreasury staff are currently examining options which would directly\nchange the explicit tax rates applicable to taxable incomes in such\na way as to result in a more optimal tax rate structure while still\nyielding a roughly equivalent amount of tax relief.\n3\nTable 2\nAdjusted Gross\nTax Relief\nPercentage of Total\nIncome\n($ Millions)\nRelief\n0-$1,999\n$ 449\n10.9\n2,000-3,999\n748\n18.1\n4,000-5,999\n1024\n24.8\n6,000-7,999\n989\n23.9\n8,000-9,999\n573\n13.9\n10,000-11,999\n332\n8.0\n12,000-14,999\n17\n.4\n15,000 +*\n5\n100*\nTotal\n4137\nTable 3 illustrates the amount of this tax relief that would accrue to a\nfour person family at different adjusted gross income levels.\nTable 3**\nAdjusted Gross Figure\nAmount of Tax Relief\nbelow $4,300\n0\n5,000\n$ 98\n6,000\n$249\n7,200\n438\n10,000\n243\n12,000\n38\nover 13,333\n0\n*\nThe relief to families with income in excess of $15,000 results because\nof (1) large family sizes, and (2) the fact that some high income\ntax units continue to profit from use of the standard deduction\nrather than itemizing.\n** All figures in this table are for CY78 and expressed in December 1974\ndollars. They assume the standard deductions specified in Table 1\nand the 50% phase down.\nTAB E\nTab E\nDETAILS OF BENEFIT STRUCTURE AND RECIPIENT POPULATION\nFor reasons discussed in the paper at Tab C, I am recommending a\nbenefit structure that would yield an Income Supplement Program\n(ISP) benefit of $3600 per year in 1974 dollars to a four person\nfamily with no other income. However, there would be relatively\nfew such families in the ISP recipient population. This paper\nwill first illustrate the details of the benefit structure across\nthe entire range of family types and their levels of earnings, and\nthen discuss the composition of the recipient population.\nBENEFIT STRUCTURE\nThe ISP has the basic characteristics common to all negative\nincome tax type proposals: a family with no other income receives\na basic benefit which is then reduced as family income increases.\nAs a general rule, ISP benefits would be reduced by 50 cents for\neach dollar of other family income. This feature insures that a\nrecipient will always be substantially better off for having worked\nan additional hour or for having received a wage increase.\nWith respect to non-wage or non-salary income, ISP rules would be\nslightly more complicated. Such income would be treated exactly\nlike current earnings and reduce ISP benefits by 50 cents for each\ndollar up to certain bench marks; thereafter each dollar of such\nincome would reduce ISP benefits dollar-for-dollar. The bench\nmarks would be equal to the unit's basic benefit level. This\npattern reflects a compromise between our policy goals to, on the\none hand, introduce greater equity in our treatment under means-\ntested transfer programs of income from current earnings and income\nfrom wage replacement transfer programs (such as Social Security)\nwhich are based on contributions from past earnings and, on the other\nhand, the need to keep the net costs in transfer payments of the ISP\nproposal within desirable bounds.\nThe attached Table 1 illustrates the full benefit structure, demon-\nstrating for a variety of family types the benefit levels and how\nthey are phased down with other income.\nA family of four with no other income would receive\nan annual benefit of $3600. If the earner should\nwork half-time (1000 hours) at $2.00 per hour, the\nISP benefit would fall to $2600. Total family income\nwould be $4600.\nFull-time work at the minimum wage would further\nreduce the benefit to $1600 and raise total family\nincome to $5600. We estimate that the average ISP\nbenefit for a two-parent family of four would be\n2\n$1269 per year, suggesting that in most such\nfamilies at least one member will be working\nnearly full-time.\nAs earnings continue to rise, the ISP benefit is\ngradually reduced until, for this type family, it\nfalls to zero at $7200. This is known as the\nbreakeven level of income.\nIf the family head has full-time employment at the\nminimum wage, his or her earnings when combined\nwith the ISP benefit would remove the family from\npoverty. This would be true for all recipient units.\nThe effects of conditioning the benefit structure\nby family size can be seen in the case of a single\nindividual. With no other income, a single person\nwould be eligible for a $1200 benefit. In the\n*more likely case that he or she is working full-\ntime at the minimum wage (earning approximately\n$4000 per year) a single person would pay taxes\nrather than be eligible for a benefit.\nAn aged, blind or disabled couple with no other\nincome would receive a benefit of $3150. A family\ncomposed of three children and headed by a disabled\nparent with no other income would receive $3975\nannually.\nCOMPARISON TO EXISTING PROGRAMS\nIntact Families. If the family of four described above in the dis-\ncussion of ISP were a two-parent family, it would not currently be\neligible for any cash assistance program in which the Federal govern-\nment now participates, except in certain limited instances (AFDC-UF,\nEmergency Assistance and special programs for veterans, Cuban\nrefugees and Indians). However, such a family can presently,\nregardless of location, purchase Food Stamps with a face value of\n$1898 per year. If the family has no other income, it receives the\nstamps for free. The price of the stamps varies according to family\nincome, generally increasing 30 cents for each dollar of additional\nfamily income. However, because taxes and large medical and housing\nexpenses are not counted in determining income for the purposes of\nbenefit calculation, the breakeven level for the Food Stamp program\nis often well above the $7200 breakeven level in the ISP.\n3\nSingle-Parent Families. If the family of four is headed by a\nsingle parent, it could receive cash benefits from the state-\nadministered AFDC programs, as well as Food Stamps. Since the\namount of benefits differs greatly from state to state, we will\nconsider the states of Georgia and Michigan for purposes of\nillustration.\nAFDC and Food Stamp Benefits Payable to Families of Four*\nEarned Income\nBreakeven Income\n0\n2000\n4000\nIncome\nGeorgia\n3240\n2700\n1560\n7000\nMichigan\n5120\n4370\n2870\n11000\nGeorgia, a state with a relatively low AFDC benefit, provides a\ncombined Food Stamp and AFDC benefit of $3240 to families of four\nwith no*income. Because of generous deductions for such expenses\nas day care in the calculation of family income, the income level\nat which eligibility ceases is about the same as that in the ISP.\nThe ISP would completely replace the AFDC program in Georgia.\nMichigan on the other hand, has a high AFDC basic benefit which,\nwhen combined with the generous income disregards for such items\nas taxes results in a breakeven income of more than $11,000.\nIn addition to the inequitable benefit differentials among the\nstates, the present welfare system is less efficient than ISP would\nbe in focusing Federal transfer dollars to recipients with the\nlowest incomes (see Table 2). ISP would direct over 90 percent of its\nmonies to persons who would be poor in the absence of ISP. Less than 10\npercent of ISP expenditures would go to persons whose non-benefit\nincome is above their appropriate poverty levels (e.g., approxi-\nmately $5,000 for a family of four in December 1974 terms), but\nbelow their breakeven levels (e.g., $7200 for a family of four in\nDecember 1974 terms). Though comparable figures for the Federal\nshare in the present system are virtually impossible to derive at\nthis time, other comparisons indicate that the present system focuses\n*\nThe benefit levels shown here are based on July, 1974 AFDC levels\nand the July, 1974 Food Stamp bonus schedule. Child càre expenses\nof $50 per month were deducted in the Georgia example. No child\nexpenses were deducted in Michigan since that state pays for child\ncare expenses through the social services program. These benefit\nlevels should be regarded as approximations since they are based\non average work related expenses. Actual benefits will vary depending\non the specific circumstances of each recipient household.\n4\nits resources less efficiently. For example, while the present\nwelfare programs lift roughly 16 percent of the pre-transfer poor,\nor an estimated 4.5 million persons, out of poverty, ISP would\nreduce the poverty population by some 9-10 million persons, or 30-\n40 percent of the pre-transfer poor. The reasons for this greater\nantipoverty effect in ISP are several: higher levels of assistance\nto many whose present cash and/or Food Stamp benefits are insufficient\nto lift them from poverty; a somewhat less stringent assets test\nthan those in current law programs; and a considerably more lenient\ntreatment of non-wage income than now prevails. The last two\nchanges will especially contribute to the virtual elimination of\npoverty among the aged. The resources that allow this increased\naid to the pre-transfer poor derive from the $3.4 billion increase\nin Federal net expenditures for ISP, and the introduction into the\nISP of program design elements (the annual accountable period and\na definition of income that permits no exclusions or deductions)\nwhich focus transfer dollars more efficiently than does the present\nwelfare system. This greater efficiency, it should be noted, can\nand probably will lead to the reduction and even elimination of\nbenefits to some who are now eligible and participating in current\nlaw programs.\nISP RECIPIENT POPULATION\nEligibility for ISP benefits would be based primarily upon income\nand household size. Assuming a family does not have assets in which\nequity exceeds specified values, and the family's income is below the\nbreakeven level, a family would be eligible to receive benefits.\nHowever, not all those eligible will elect to participate in the\nprogram, principally because large numbers of households whose\nincomes are close to their breakeven levels will not perceive\nthe small benefits they could obtain from ISP as worth the effort\nof application and regular reporting. If transfer costs and the\nnumber of recipients are projected solely on the basis of a simple\ncomparison of family income and eligibility levels, each would be\noverestimated. Therefore, projections have been reduced using specific.\nassumptions about probable participation by various household types\nat various income and asset levels.\nIn the display below the effect of these adjustments on projections\nis indicated. While 35.8 million persons would be eligible\nfor ISP benefits, only 27.2 million are expected to be in households\nthat would apply and receive benefits. Similarly, gross transfer\ncosts are projected to be $17.2 billion, or $3.3 billion less than an\nunadjusted figure that assumes full participation.\n5\nISP Recipients and Transfers: FY 79\nEligible\nRecipients\nNumber of Units\n(million)\n14.5\n10.5\nNumber of Persons\n(million)\n35.8\n27.2\nTransfers\n($ billion)\n20.5\n17.2\n(1974 dollars)\nper year\nTable 3 provides a breakdown of the potential ISP recipient population.\nFor each group the table displays the number of households (generally\nfamilies), the number of persons, the aggregate transfers to that\ngroup, and the average transfer to that household type. The following\npoints emerge from comparing data from existing programs to the data\non Table 3:\n0 In the absence of the ISP initiative (for FY 79):\n-- Some 6-7 million persons will be eligible to\nreceive benefits for the newly federalized Supple-\nmental Security Income (SSI) program for the aged,\nblind and disabled, and State supplements to that\nprogram. One-half of all ISP house-\nholds (50.0%) would either be composed solely of\naged, blind or disabled individuals or would\ncontain such an individual.\n-- Assuming that the current stability in the AFDC\ncaseload continues, approximately 10 to 12 million\npersons will be in families receiving AFDC benefits.\nOne quarter of the ISP recipient population would\nbe in households generally comparable to this\ngroup of current cash recipients.\n--\nIt has been estimated that those eligible for Food\nStamps may well number as, many as 50 million persons;\na substantially larger number than the 35.8 million\nISP eligibles. (However, because it is one of the in-\nkind programs which historically have had low partici-\npation rates, the number of persons participating in\nthe Food Stamp program in FY 79 may be less than the\n27.2 million we would expect to participate in the\n(ISP.)\n*\nSee column 4 in Table 3.\n6\nVirtually all of the potential ISP recipients would otherwise\nbe eligible for Food Stamps and most of the families for\npublic housing in the absence of ISP. As noted above, the\nFood Stamp eligible population is much larger than the\nISP eligible population. Most of the growth in the\nFood Stamp program can be expected in the intact family\ncategory, the members of which are approximately 40\npercent of ISP recipients.\nThese intact families, often called the \"working poor,\"\nare typically headed by an employed father whose substantial\nearnings over the year would typically make the benefit for\nthis group quite modest ($1269 annually on the average), but\nsufficient to remove them from poverty. This group would\ntherefore receive 14 percent of the benefits though it com-\nprises almost 30 percent of the recipient population.\nThe average benefits that households would actually receive\nare well below the basic benefit levels to which they would\nbe entitled if they had no other income, for most will have\nsubstantial earnings or other income (see Table 1). Even groups\nwhich we generally do not consider as being employed have in fact\nsubstantial income which would serve to reduce the benefits\nthey would receive. For example, single-parent families\nwith children would receive, on the average, $1000 below\ntheir basic benefit.\nTABLE 1.\nISP BENEFIT STRUCTURE (IN 1974 DOLLARS)\nBreakeven\nBenefits at Various\nTotal Income at\nLevel of Earnings\nEarnings Levels\nVarious Earnings Levels\nTotal Income Average\na\na\n$0\n$2000\n$4000\n$6000\n0\n$2000\n$4000\n$6000\n(Benefit = 0)\nBenefit\nSingle Individual\n$1200\n$ 200\n*\n*\n1200\n$2200\n*\n*\n$2400\n$726\nChildless Couple\n$2400\n$1400\n$ 400\n*\n2400\n$3400\n$4400\n*\n$4800\n995\nSingle Parent, One child\n$2400\n$1400\n$ 400\n*\n2400\n$3400\n$4400\n*\n$4800\n1603\n$6600\n$7200\n2593\nSingle Parent, Three children\n$3600\n$2600\n$1600\n$600\n3600\n$4600\n$5600\nTwo Parents, Two Children\n$3600\n$2600\n$1600\n$600\n3600\n$4600\n$5600\n$6600\n$7200\n1269\n$2300\n$1300\n$ 300\n*\n2300\n$3300\n$4300\n*\n$4600\n1281\nSSI Individual\nSSI Couple\n$3150\n$2150\n$1150\n$150\n3150\n$4150\n$5150\n$6150\n$6300\n1293\nDisabled Parent, Three Children $3975\n$2975\n$1975\n$975\n3975\n$4975\n$5975\n$6975\n$7975\n3722\na\nThe benefit at zero income is the \"basic benefit.\" When income is zero the total income of a family\nwill equal the benefit.\n*\nAt this income level the family is above the ISP breakeven income and will therefor receive no ISP\nbenefits and might have a positive tax liability.\nTABLE 2\nCOVERAGE AND ANTIPOVERTY EFFECT OF ISP TRANSFER BENEFITS\n*\nNumber of families receiving a transfer (millions)\n10.7\n-- As a percent of all families\n14\nNumber of persons receiving a transfer (millions)\n27.2\n-- As a percent of all persons\n12\n**\nTransfers to families below poverty line\n15-16\n(Billions of $)\n90-95\n-- As a percent of total transfers\nNumber of poor families receiving a transfer\n(millions)\n9-11\n-- As a percent of all poor families\n80-90\nNumber of persons in families below poverty line\nand receiving a transfer (millions)\n24-26\n-- As a percent of persons in poverty\n80-90\nNumber of families escaping poverty (millions)\n4-5\n-- As a percent of all families in poverty\n30-40\nNumber of persons escaping poverty (millions.)\n9-10\n-- As a percent of persons in poverty\n30-40\n*\nUnrelated individuals are included as families of size one.\nSince we do not know which poor families will participate and\nwhich will not, all poverty figures are expressed as ranges\ninstead of point estimates. A unit is classified as poor if\nits income before means tested transfers is below the poverty\nthreshold.\nTABLE 3\nISP RECIPIENTS AND TRANSFERS: ESTIMATES FOR FY 79\nNo. of\nNo. of\nSum of Transfers Sum of Transfers\nPrimary Filing\nUnits\nPersons\n(Billions/Year in\nUnit Characteristics\n(Billions/Year in\n(Millions)\n(Millions)\nFY 79 dollars)\nDecember 1974 dollars\n1. Single-parent\n2.0\n7.5\n6.2\n4.6\nfamilies with\n(19.2%)\n(27.6%)\n(27.0%)\n(26.7%)\nchildren; no\nABD's* present\n2. Two-parent families\n1.5\n7.6\n3.1\n2.3\nwith children; no\n(14.4%)\n(27.9%)\n(13.5%)\nABD's present\n(13.4%)\n3. Families with\n.6\n3.3\n2.5\n1.9\nchildren; at least\n( 5.8%)\n(12.1%)\n(10.9%)\none ABD\n(10.9%)\n4. Related adults; no\n.5\n1.1\n.8\n.6\nchildren; no ABD\n( 4.8%)\n( 4.0%)\n( 3.5%)\n( 3.5%)\npresent\nRelated adults; no\n1.6\n3.5\n3.3\n2.5\nchildren; at least\n(15.4%)\n(12.9%)\n(14.3%)\n(14.5%)\none ABD\n6. Single adult; not ABD\n1.2\n1.2\n1:4\n1.0\n(11.5%)\n( 4.4%)\n( 6.1%)\n( 5.8%)\n7. Single ABD adult\n3.0\n3.0\n5.7\n4.3\n(28.8%)\n(11.0%)\n(24.8%)\n( 25.0%)\nTotal Population\n10.4\n27.2\nTotal Transfer Costs\n23.0**\n17.2\n*\nABD means person who is aged, blind, or disabled\n**\nIn addition to transfers, ISP costs would include: $1.2 billion for program\nadministration, $0.1 for the work test, and $0.5 billion for emergency\nassistance. Total costs would be $24.8 billion in FY 1979 as shown\nin Tab F.\nH TAB\nTAB F\nBACKGROUND ON ISP COSTS\nThere are two independent cost components which must be estimated\nin order to arrive at the net transfer costs of ISP -- the gross\ntransfer costs of ISP and the expenditures under those programs that\nwill be eliminated or reduced because of ISP. In the latter case\nestimates are based on the continuation of the present set of income\ntested programs (except that CHIP would displace Medicaid); it is\nnot assumed that, in the absence of ISP, any new ones would evolve\nor that existing programs would expand or contract appreciably\nbecause of changes in regulation or legislation or increases in\nparticipation among the eligible population above that reflected in\nthe official OMB projections. To the extent .any of these would\noccur, the cost estimates presented here would require adjustment.\nThe gross costs for ISP in FY '79, the first year in which the\nprogram would be fully implemented, are estimated to be $24.8 billion.\nProgram offsets are estimated to be $20.2 billion. This yields FY '79\nnet costs of $4.6 billion which in today's dollars is $3.4 billion.\nThe following sections provide detailed information on the derivation\nof these figures as well as other possible influences on costs which\nare not reflected in these estimates.\nIt is reasonable to assume that gross costs will remain relatively\nconstant in real terms for some years after FY '79 then gradually\nfall. Benefits will be adjusted upward with inflation, but, over\ntime, the average earnings of the eligible population will increase\nby even more than the amount of inflation, due to the real growth\nrate of the economy. This is the phenomenon that should cause costs\nto decline in the long run. However, in the early years of the\nprogram, an increase in participation among the eligible population\nmay put upward pressure on costs. The assumption that costs would\nremain constant in the shorter term rests on the foundation that\nthese two trends (increased participation and growth of income in\nexcess of inflation) will be roughly offsetting.\n2\nDERIVATION OF PROGRAM OFFSETS ESTIMATE\nProgram offsets of ISP fall into two categories:\nPrograms which would necessarily be\neliminated in favor of ISP\nEstimate of Federal Program\nOutlays in FY 79 (Billions\nin FY 79 dollars)*\nAFDC\n$6.6\nSSI\n6.1\nFood Stamps\n5.5\nWIN\n0.3\n$18.5\nPrograms not eliminated, but which would have lower\noutlays as a result of greater cash income among the\nlow-income population.\nHousing\n$0.6\nSchool Lunches\n0.3\nCHIP\n0.8\n$1.7\nDERIVATION OF GROSS TRANSFER COSTS\nThe gross transfer cost estimate for ISP is derived by utilizing the\nbasic output of the computer simulation model known as TRIM (Transfer\nIncome Model). This model can be programmed to estimate the cost\nof a program very similar to ISP, which then can be adjusted to\nreflect certain factors which the model cannot take into account.\nBelow is a discussion of the assumptions built into TRIM and of the\nnature and cost impact of the adjustments made.\nThese are the official OMB \"free fall\" estimates which reflect\nno change to current program policies and adjust for both\ninflation and increases in program participation. A discussion\nof offsets using OMB \"reduction\" estimates which assume the\nimplementation of various cost saving changes is contained in\nthe final section of this tab.\n3\nAssumptions Built Into TRIM\nThe assumptions which were built into TRIM computer runs are listed\nbelow. As will be obvious, many of these are not entirely appropri-\nate and are the reason for some of the adjustments listed later.\nThe March 1973 Current Population Survey (which provides\nincome data for CY 72) is aged to FY 79 to produce the\nexpected profile of numbers and types of households\nand their (non-ISP) income; since the unemploy-\nment rate was 5.6 percent in 1972, this same rate is\ncarried forward to FY 79 when the CPS is aged.\nThe benefit structure of ISP is specified in December 1974\ndollars and adjusted thereafter for inflation. The rates of\ninflation assumed are the official Troika estimates (1974, 11.2%;\n1975, 10.9%; 1976, 7.8%; 1977, 6.6%; and 1978, 4.8%).\nThese same rates of inflation of the CPI are assumed\nin projecting the levels of other sources of income\n(although additional assumptions such as for the\ngrowth rate of real wages are also necessary).\nA comprehensive filing unit definition is employed,\nwhich means that all related members of a household\nare assumed to be filing together for ISP eligibility\nand benefit determinations.\nAll non-wage income up to the amount of the basic\nbenefit for which a filing unit would be eligible\nis treated the same as earnings -- i.e., a flat 50\npercent benefit reduction rate is applied; all non-\nwage income above this level is used to offset ISP\nbenefits dollar-for-dollar.\nNo ISP income-eligible filing units have assets above\nthe limit permitted for eligibility and all such units\nparticipate in ISP.\nAdjustments to TRIM Output\nThe following adjustments to TRIM output are necessary to arrive\nat appropriate gross cost estimates for ISP.\n4\nUpward Adjustments\nBillions\nAccounting Period Adjustment - As presently\n0.3\nformulated, monthly ISP benefits for a filing\nunit would be based upon the previous twelve\nmonths' income, utilizing a system which carries\nforward for twelve months the amount of monthly\nincome in excess of the breakeven level for\nthe filing unit. This system. is somewhat more\nresponsive to fluctuations in monthly income\nthan is the calendar year accounting period\nassumption which is built into TRIM.\nCertification of Separate Economic Status -\n1.0\nTRIM assumes that all related residents\nliving together will be required to file\ntogether. This is the general rule that\nwould be prescribed for ISP; however, ISP\nrules would permit any subgroup of a house-\nhold that can prove separate economic status\nto file separately. It is difficult to assess\naccurately how many people will be able to\nsatisfy this condition, but many who are able\nwill want to file separately (since they may\nthen receive greater benefits than if they\nwere the additional member of a larger unit\nwhere they would not have a separate minimum\nstandard deduction)\nLabor supply reduction - The evidence from\n0.6\nincome maintenance experiments and studies\nusing Census data suggest quite modest re-\nductions in work effort occasioned by a\nprogram such as ISP. While very few persons\nwould quit their jobs as a result of ISP\neligibility, some marginal hours of work\nreductions might result among those recipients\nwho would not otherwise be participating in\na welfare program eliminated by ISP. As a\nconsequence their earnings would be lower and\nbenefits higher.\nEmergency needs - The following three cate-\n0.5\ngories of households may have requirements\nfor a payment outside of the ISP to cover an\nemergency need: (1) ISP eligible households\nwaiting for their first check (because of\npayment lag in the system); (2) ISP recipients\n5\nBillions\nhouseholds who have exhausted their current\npayment; and (3) households which, because of\nthe accounting period and/or the assets test,\nhave low current income and no liquid assets,\nbut are currently ineligible for ISP. The\nlatter two categories are best dealt with at\nstate/local levels, perhaps with some Federal\ncost sharing. The first category is more\neasily seen as a Federal responsibility and\ncould be dealt with by the Federal government\nor by a state/local entity which represents the\nFederal government.\nWork Test - Some Federal funds would have to be\n0.1\nprovided to states for them to administer the\nwork test mandated under ISP.\nProgram administration - The IRS Task Force\n1.2\nestimates that the annual costs of ISP would\nrun somewhat over one billion dollars.\nDownward Adjustments to TRIM Output\no\nAssets screen - Estimates based upon studies of\n2.2\nthe Survey of Economic Opportunity which provides\ndata on asset holdings of households cross\nclassified by income levels indicates that\nfifteen percent or more of the filing units\nthat will be income eligible for the ISP will\nhave other resources sufficient to make them\nineligible to receive ISP benefits.\no\nUnder reporting of income - There is a substantial\n3.0\namount of income that is not reported by respondents\nto the Current Population Survey (and, therefore, is\nnot in our cost estimating income base), but which\nwould be picked up by ISP reporting, audit and\nverification procedures. Independent data bases,\nsuch as income tax reports, provide information\nthat make it possible to estimate the magnitude\nof this under reporting.\no\nDemographic Aging - A recent decline in the birth\n0.4\nrate has resulted in a significant reduction in\nthe average size of U. S. families. Between 1970\nand 1974, average family size fell from 3.58 to\n3.44. The demographic aging process in TRIM does\nnot adjust for this reduction in the number of young\nchildren in families, and as a result, TRIM over-\nstates expected transfers to families with children.\n6\nBillions\nParticipation Rates - Substantially less than\n4.4\nall of the eligible households can be expected\nto participate in ISP. It is estimated that\nabout 90 percent of eligible AFDC families,\n90 percent of eligibles for SSI who are disabled\nand 65 percent of eligibles for SSI who are\naged actually apply for cash benefits. The\ncurrent participation of eligible two-parent\nfamilies and non-aged, non-disabled adults in\nFood Stamps is considerably lower, probably\naveraging closer to 30 percent. Under a com-\nprehensive nationally uniform cash assistance\nprogram which is tied to the income tax system,\nwe can expect these latter two groups to have\nsubstantially higher participation rates; there-\nfore, we have assumed that 70 percent of eligible\nfamilies of this type will participate.\nIn adjusting for participation rates less\nthan 100 percent, costs were reduced by a sub-\nstantially smaller percentage (about 30%) than units,\nsince participation rates in ISP are likely to\nincrease with the size of the potential benefit.\nTotal Adjustments Made to TRIM\nThe necessary upward adjustments to the TRIM output total $3.7 billion.\nThe total downward adjustments to TRIM necessary to account for all\nthe factors mentioned above is $10.0 billion. Thus, the net adjust-\nment to TRIM necessary to account for all factors mentioned above\nis $6.3 billion downward. Since before these adjustments are made\nTRIM indicates a gross cost of $31.1 billion for transfers alone,\nthe final estimate utilized for total ISP program costs is $24.8\nbillion.\nActually far less than 65 percent of those aged eligibles for\nSSI are presently participating, but the official OMB projections\nassume that this is the rate which will prevail in equilibrium --\ni.e., after the program has been in place for a few years. Ac-\ncordingly, the assumption of 65 percent participation underlies\nthe SSI offset estimate for FY 79 and we have used it as a base\nin determining likely participation of the same group under ISP.\n7\nOTHER FACTORS WHICH MAY INFLUENCE COSTS\nIn addition to the factors detailed above and reflected in the cost\nestimates provided, there are a number of other possible influences\non costs that should be noted.\nInfluences Which Could Go Either Way\nMany of the adjustments to the TRIM output are based upon estimates that\nhave a fair amount of uncertainty attached to them. Although they are\nbased upon the best available evidence, they could easily be over or\nunder estimates of what would actually occur. In these cases, we have\nattempted to pick realistic mid-range values.\nObviously marked changes from the overall economic or demographic\nprojections which form the basic input to the TRIM model would lead\nto sizeable shifts in the cost estimates. Here we have simply relied\nupon official troika and Census projections wherever they are avail-\nable and made consistent, reasonable projections where not.\nUpward Influences on Costs\nThe most important of the upward influences fall into two categories --\nthose that would be caused by regulatory or legislative changes in\nprograms being offset and those that reflect possible structural changes in\nthe ISP, particularly as it becomes the focus of Congressional actions.\nA series of budget reduction proposals have been adopted by the Adminis-\ntration which, if all were accepted by Congress, are estimated by OMB\nto reduce the FY79 outlays for the programs eliminated by ISP by\n$1.7 billion below the free fall estimates reported earlier in this\ntab. These have not been assumed in the cost estimating process because,\nparticularly to the extent that recent experience is a guide, it appears\nmore realistic to assume that they will be rejected by Congress. However,\nif some are adopted, this would have the effect of lowering program\noffsets and raising ISP net costs.\nThere are potential elements of ISP which are not without merit, but which\nwere rejected for sound policy reasons as the program was developed. It is\npossible that some of these would be reconsidered and adopted by the Admini-\nstration at a later date if their inclusion were to advance substantially the\npossibilities for Congressional passage of ISP and this plus were not\noutweighed by the negative aspects that intially led to their rejection.\nThe only two such elements that seem at all likely to fulfill these\ncriteria at this time are a standard deduction for work related day care\nexpenses of single parent families and permitting present SSI recipients\n8\nwho are members of larger households to file separately with a one-third\ngrant reduction without having to certify separate economic status. Each\nof these is estimated to cost on the order of half a billion dollars.\nDownward Influences on Costs\nAs was mentioned in the beginning of this tab the program offsets are\nbased upon the assumptions of no unplanned increase in participation\namong the eligible populations, no liberalizations of existing programs\nand no additional programs being added to the welfare system. The possi-\nbilities for each of these are discussed briefly below, since the true cost\ncost ISP should take into account changes that would be made to the wel-\nfare system in the absence of this proposal.\no Increased participation\nParticipation in the Food Stamp program is running low overall\n(under 50%) and particularly low for the non-cash recipient\ngroup. A minor increase in these present rates is assumed\nin the Food Stamp FY79 estimate. Because of the great\npotential for increased participation in this program,\nrapidly rising food prices and the increased publicity of\nFood Stamps, the participation could easily increase by\nmuch more than is expected.\nProgram improvements\nIf ISP is not adopted, there will be considerable interest\nboth within Congress and the Administration in making changes\nin the present welfare system which further the goals of\nefficiency, equity, adequacy, etc. such as instituting a\nnational minimum in AFDC and moving to consolidated grants.\n(See Tab\nfor more information on these). These improve-\nments would increase Federal costs for the present system\nby $1-$2 billion over the program offset estimates used\nto cost out ISP.\nAdd-ons to the Welfare System\nIn the absence of a comprehensive cash assistance program\nfor the lower income population there will be continued\npressure to add on additional categorical programs to\nfill \"gaps\" in the present system. Although most of\nthese probably could be resisted, others undoubtedly could not.\nForemost among the latter is the \"Work Bonus\" or some\nother scheme to aid lower income workers, particularly\nthose paying OASDI payroll taxes.\nTAB G\nTAB G\nADMINISTRATIVE PERSONNEL COMPARISONS\nThe passage of the Income Supplement Program (ISP) would pro-\nfoundly affect personnel requirements among the various levels of\ngovernment. This paper estimates probable staffing requirements\naccording to the likely configurations for income support programs.\nThe options shown range from no change in the present system to a\nmajor welfare replacement. The first section examines total staffing,\nthe second the ratio of administrative to transfer costs as an indicator\nof administrative efficiency. Because so much uncertainty exists on\nthese matters, the paper concludes with a section listing some parti-\ncularly important caveats. Appended is a note on the methodology used.\nTotal Staffing\nAbsent any change the public assistance system would continue to be\ncomposed of Food Stamps, Aid to Families with Dependent Children (AFDC),\nSupplemental Security Income (SSI), Emergency Assistance and General\nAssistance.* The ISP initiative would completely replace the first\nthree and change significant aspects of the last two. (General Assistance\nis solely a State program.) Table 1 shows that in FY 77,** with no changes,\ntotal personnel needs would be about 137,000, of which about 27,000 would\nbe Federal and 110,000 State/local\nTable 1\nPublic Assistance Personnel Needs with No Welfare Replacement and\nNo Major Changes in Present System\nFY 77\nRecipients\nState & Local\nFederal\nTotal\nEmployees\nEmployees\nEmployees\n(million)\n(thousand)\n(thousand)\n(thousand)\nFood Stamps\n25.6\n25.6\n3.0\n28.6\nAFDC\n12.3\n61.2\n.8\n62.0\nSSI\n5.9\n23.4\n23.4\nState Administered\nSupplements to SSI\n1.4\n14.1\n-\n14.1\nGeneral Assistance\n0.9\n8.7\n-\n8.7\n109.6\n27.2\n136.8\n*\nThis list ignores other income tested transfers, such as public housing,\nMedicaid and veterans' assistance.\nThese figures were originally prepared when ISP was costed out to FY 77.\nWhen costs were extended to 79, there appeared to be no compelling\nreason to re-calculate personnel estimates, particularly given the\nlimitations of available data.\n2\nIf we assume no replacement of the basic set of programs, it is\nprobable that one or more programs will be added. The prime\ncandidate is the Assisted Health Insurance Program (AHIP) com-\nponent of the Administration's Comprehensive Health Insurance\nProgram (CHIP). It is also possible that a Housing Allowance and\na Work Bonus will pass into law absent an ISP which would fore-\nclose their need. The upper panel of Table 2 summarizes these probable\nsituations should there be \"No Replacement\" of the present programs.\nIt is estimated that AHIP income information collection, a universal\nHousing Allowance, and a Work Bonus would require 30,000; 40,000; and\n3,000 new employees, respectively. It should be noted that AHIP or\nsomething like it is likely to become law regardless of whether or\nnot there is a welfare replacement initiative. Thus, either way\nAHIP will require additional personnel at some level of government,\nbut the amount needed to collect information on income and filing unit\ncharacteristics would be very minimal if ISP exists and AHIP conforms\nits comparable program elements to those in ISP (e.g., income and\nfiling unit definitions). Under these conditions the information\ngenerated by ISP would be both available and useable to income test\neligibility under AHIP.\nTotal government employment for income support programs given welfare\nreplacement (i.e., ISP) would depend on the manner in which State\nsupplements were handled. The lower panel of Table 2 summarizes employ-\nment needs assuming ISP and with three different possible methods of\nhandling State supplements. (See Tab C for a discussion of the issues in-\nvolved in State supplementation.)\nPublic sector payrolls would be the largest if there were no Federal\nadministration of State supplements. This is because there would then\nbe, in effect, two parallel income transfer systems -- the Federal ISP\nsystem and the several State systems running autonomous State supplement\nprograms. As Table 2 shows, Federal administration of State supplements,\nwhether for some or all States, involves little added burden for the ISP\nagency. The ISP caseload would already contain most of those eligible\nfor State supplements, and the extra State supplement computation is a\nsimple matter for the automated Federal system to handle so long as the\nStates rigorously adhere to Federal definitions and categories (the only\nconditions under which the Federal government would administer State\nsupplements). Thus while 122,000 employees (58,000 Federal and 64,000\nState/local) would be needed in the \"no Federal administration\" case, only\n66,000 (60,000 Federal and 6,000 State local) would be needed if the\nFederal government administered all supplements. In the more likely\nintermediate case of partial Federal administration of State supplements,\ntotal employment would be more in the area of 70,000. The actual figure,\nof course, depends upon exactly how many States would opt for Federal\nadministration.\n3.\nTable 2\nPublic Assistance Personnel Needs with and\nwithout Welfare Replacement\nState & Local\nFederal\nProgram\nEmployees\nEmployees\nConfiguration\nTotal Employees\n(thousand)\n(thousand)\n(thousand)\nNo Replacement\n110\n27\n137\n\" \"\na\nw/CHIP (AHIP)\n30\n+30\nw/Housing Allowance\nb\n40\n+40\nw/Work Bonus\n3\n+ 3\nReplacement (ISP) and\nNo Federal administration of\nState supplements\n64\n58\n122\nOptional Federal administration\nof State supplementsᶜ\n11\n59\n70\nFederal administration of all\nState supplements\nd\n6\n60\n66\na. AHIP collection of information on income and other filing unit\ncharacteristics only; AHIP will require additional personnel for\nother functions whether or not ISP exists.\nb. Distribution of effort between levels of government unclear at present.\nC. Precise figure depends upon State decisions on administration. The\nestimate here was derived on the assumption that those States which have\nopted for Federal administration of State supplements to SSI would also\ndo so for ISP.\nd. It is extremely unlikely that all States which might choose to supplement\nISP would also opt for Federal administration; however, this line is\nshown for comparison purposes. The residual group of State and local\nemployees is shown on the assumption that there would be a State-\nadministered Emergency Needs Program.\n4\nAdministration Efficiency\nStaffing figures are only one measure of relative administrative costs.\nIn programs such as Food Stamps, there are significant additional ex-\npenses involved in the operation of the program. To obtain a more\ncomplete indication of total costs and to demonstrate the relative\nefficiency of different modes of making transfer payments, the total\nadministrative costs of individual assistance programs were divided by\ntheir gross transfer costs to determine as a percentage of transfers\nthe amounts additionally required for administration.\nAs can be seen in Table 3, the Income Supplement Program has the\nsmallest ratio of administrative costs to transfer costs of any of the\nother programs -- approximately half that of present cash programs, and\neven less than that of Food Stamps. If the Income Supplement Program\nreplaces other transfer programs, its potential for administrative\nefficiency would allow more benefits to be transferred at a lower relative\ncost.\nTable 3\nThe Percentage of Total Administrative\nto Gross Transfer Costs\nProgram\nPercentage\nAFDC\n9.5\nSSI\n9.1\nISP\n4.5\nFood Stamps (to non-public\n15.0*\nassistance recipients)\nCaveats\nData limitations, the still changing nature of ISP and CHIP program\ndesigns, and the uncertainty surrounding administrative and substantive\nchoices of the States in current law or future programs mean that\nThe figure for Food Stamps is an estimate based on actual program data\nand limited information which gives a general indication of the magnitude\nof hidden and unreported costs. Reported costs are close to 10 percent\nof transfer costs and do not reflect joint program costs which have not\nbeen allocated to overhead, indirect expenditures and some administrative\ncosts. State data reported to the Senate Committee on Nutrition and Human\nneeds and a recent study in Los Angeles County indicate that these costs\nprobably add another 40 to 60 percent to total administrative expenditures.\n5\nestimates presented here can only be general and tentative. These\nlimitations arise from several sources:\nThe lack of reliable information on current State public\nassistance staffing - The existing data on the number of\nState and local staff performing cash eligibility de-\nterminations are unreliable and often officially not\navailable, primarily because of weaknesses in the manner\nin which States report personnel statistics. One obvious\ndefect is the shift of personnel into the social service\ncategory with its higher Federal reimbursement formula,\nleading to an understatement of the number of staff engaged\nin cash transfer related duties.\nThe lack of State and local cost information on the Food Stamp\nProgram - The only reliable Food Stamp cost data currently\navailable are those related to Federal program costs and\nFederally-cost-shared personnel. These costs only cover a\nportion of total Food Stamp administrative requirements, and\nmost States and localities do not separate out or report\ntheir total direct costs and substantial indirect costs. Thus\nestimates of the total figures can only be approximate.\n*\nUncertainty about developments in present and proposed programs -\nThere are many factors which could materially affect the estimates\ndeveloped here\n- If, as some predict, the Food Stamp program experiences very\nrapid growth over the next few years, the administrative burdens\nborne by State and local governments could increase to the\npoint where they could no longer be handled as marginal addi-\ntions to staff and facilities needed for other functions\n- Passage of the Comprehensive Health Insurance (CHIP) is\npossible and enactment would require the States to significantly\nincrease staff levels to handle the eligibility functions re-\nquired for the assisted portion (AHIP) of the program, including\nthe collection of relevant income and asset information.\n-\nSimilarly, the shape of the State supplemental portion of the\nISP is still unknown. The implications for total staffing under\na Federally-run supplement are very different from those if\nthe supplements are left as the sole responsibility of the States.\nIn either case, the behavior of States in deciding whether or not\n*A recent legislative change provides for a 50 percent Federal matching\nof all Food Stamp administrative costs. When this provision becomes\neffective more complete administrative cost data should become available,\npermitting the development of more precise administrative cost estimates.\n6\nto supplement, and, if given the option, whether or not to\nadminister their own supplemental programs or to transfer\nresponsibility to the Federal agency can only be guessed on\nthe basis of tenuous assumptions. In addition, State staff\nmade superfluous by a Federal program will not always be\neliminated immediately but will decrease through attrition\nover time.\nTentative nature of Federal personnel estimates for an\nISP - Another, less serious, reason for uncertainty regarding\nadministrative staff comparison is that although the staffing\nestimates for the ISP were derived in a systematic manner, the\nnumber of unknown factors in the early stages of program develop-\nment make it more difficult to achieve the degree of precision\nin these projections which will be possible later in the planning\nprocess.\nAppendix: Technical Notes\nPersonnel needs for FY 1977 were estimated by calculating current\nratios of recipients per employee and applying these ratios to expected\nrecipients in FY 1977.\nTable 4\nRecipients per Employee\nProgram\nState & Local Ratio\nFederal Ratio\nFood Stamps\n1001\n8,630\nAFDC\n201\n15,409\nSSI\n99\n252\nGA\n104\nRecipients per Employee\n1. Recipients per employee for state and local government have\nbeen calculated by dividing the number of recipients by the\nnumber of employees engaged in income maintenance for each\nprogram. Employee figures were provided by the National\nCenter for Social Statistics. For state-administered\nsupplementation of SSI, the number of employees and recipients\nin the adult çategories in FY 1972 was used to calculate the state\nand local ratio.\n2. Federal recipients per employee were calculated in the same\nway. For Food Stamps, the number of employees as reported\nin the Federal Budget was used. For AFDC the number of\nFederal employees was estimated to represent 28 percent of\nthe SRS staff, since this is the percentage of the funds\ndispensed by SRS that goes to AFDC. For SSI, the number of\nstaff needed in FY 1975 as estimated by SSA was used.\nPersonnel Needs with and without an Income Supplement Program\n1. For existing programs, the number of Federal, state and local\nemployees was calculated by taking the estimated recipients\nand dividing by the number of recipients per employee. This\nassumes that the relationship between recipients and employees\nis linear. State and local recipients per employee for AFDC\nand the adult programs were used for the estimates of state\nadministration of AFDC and SSI supplements. Absent any other\nchange, only those states now administering SSI supplements\nwere assumed to administer them in FY 1977. Employees\nadministering the supplement for those states that have\nopted for Federal administration are included with Federal\nemployees administering the regular SSI program.\n2. FY 1977 recipients for AFDC and SSI were estimated by\nprojecting the caseload estimate shown in the FY 1975 Budget.\nFood Stamp recipient estimates were developed from the TRIM\nmodel using CPS data. State supplements were handled by\nextrapolating from the current situation in a similar manner.\n3. With a reform, 30 states will supplement AFDC and 10 states\nSSI, containing 64 percent and 32 percent of the caseload\nrespectively. These estimates are based on a comparison of\nthe ISP benefit levels with the sum of AFDC or SSI benefits\nand the bonus value of Food Stamps. These estimates should be\nconsidered an upward bound for reasons discussed in Tab C.\nThe SSI benefit estimate additionally includes any state\nsupplements. Although fewer states would administer a supplement\nto SSI recipients under a reform program, the percentage of\nthe caseload in those states which are assumed to supplement\nthe ISP could be greater than that in the 18 states currently\nadministering their own SSI supplement. This could occur\nbecause some states with large caseloads like New York\nhave chosen Federal administration for their supplement\nunder SSI but might be required to administer their\nsupplement under ISP.\nThese calculations reflect the present levels. The absence\nof any provisions in the proposed program for Federal cost-\nsharing or hold harmless guarantees in supplementation, and\npossibly no participation in administration makes this\nassumption problematical. These estimates may therefore\noverstate total state and local personnel needs under ISP.\nAnother factor which may make these estimates too high is\nthat supplementation has been assumed in some states in\nwhich the actual state benefit would be very low. Few\nstates are in fact likely to supplement unless the average\nbenefit would be significant.\n4. The recipient estimate for ISP is taken from the IRS Task\nForce Report adjusted to reflect changes in the estimated caseload.\nTAB H\nTAB H\nCOMPARISON OF THE INCOME SUPPLEMENT PROGRAM\nTO PLAN OF SUBCOMMITTEE ON FISCAL POLICY\nRecently Congresswoman Martha Griffiths introduced a comprehensive\nwelfare reform bill titled \"The Tax Credits and Allowances Act of\n1974\" (H.R. 17574). It provides for major changes in the Federal\nincome tax structure and considerable tax relief; for replacing\nthe Food Stamp program and the Federal portion of AFDC in part with\na new, Federally funded and administered means-tested cash transfer\nprogram and in part with rebatable tax credits; and for a variety of\nother changes in related income transfer programs, such as Unemploy-\nment Insurance.\nIn significant ways, especially in overall theory, the Griffiths' plan\nand the Income Supplement Program are quite similar. In equally\nsignificant ways they differ. This paper will first outline the major\nelements of the Griffiths' proposal and then compare and contrast\nthat plan with the Income Supplement Program.\nTHE GRIFFITHS' PROPOSAL: INCOME SECURITY FOR AMERICANS\nThe Grifffths' 1 Income Security for Americans plan would create a new\nincome assistance system by:\nEliminating personal exemptions and the low-income allowance\n(or \"minimum standard deduction\") in the Federal income tax\nand replacing them with a $225 refundable tax credit for each\nindividual in the country. Such a tax credit would extend\ntax relief to all families with income less than about $23,500.\nSince it is refundable, current non-filers and non-taxpayers\nwould also benefit.\nEliminating the AFDC and Food Stamps programs and replacing\nthem with a new Allowance for Basic Living Expenses (ABLE)\nprogram for all low-income families and individuals with the\nexception of those eligible for SSI.\nRetaining, but restructuring somewhat, the Supplemental\nSecurity Income program.\nAbolishing the itemizable day-care deduction in the Federal\nIncome Tax in favor of a new adjustment to gross income in\nthe tax system and in the ABLE program for work expenses.\n2\nRebatable Tax Credits. The current $750 personal exemption and the\nlow-income allowance of $1300 would be replaced by rebatable tax\ncredits of $225 for each individual in the country. The effect of\nthis change, along with complementary measures to integrate the\ngrant programs with the tax system, is to raise the tax exempt\nincome level (i.e., the highest income at which no tax liability\nis incurred) for a typical four person family from its current level\nof $4300 to $7200. In addition, the introduction of the tax credit would\nextend tax relief to all four person taxpaying units with income of\nless than $23,500.\nSince the tax credit is rebatable, units that incur no tax liability\nwould have the full credit paid to them in cash. Units that have a-\ntax liability of less than the tax credit for which they are eligible\nwould receive the difference between the credit and their tax liability.\nThe key point is that the unused tax credits are rebated.\nThe Allowance for Basic Living Expenses Program, ABLE. Federal funding\nwould largely be ended for Aid to Families with Dependent Children\n(AFDC), and the Food Stamp program would be abolished and be replaced\nby a new system of allowances operated by the Internal Revenue Service\n(IRS) in conjunction with the Federal income tax. These Allowances\nfor Basic Living Expenses (referred to as ABLE grants hereafter)\nwould be payable to qualified low-income families and individuals\nevery month. Allowances would be uniform throughout the Nation and\navailable to all the poor, except the aged, blind, and disabled and\ntheir dependents who would remain covered by the Federal Supplemental\nSecurity Income (SSI) program. The basic structure of the ABLE program\nis as follows:\nBenefits: The annual basic benefit for a two-parent,\ntwo-child family with no other income would be $2700,\nwhile that for a one-parent, three-child family would\nbe $2100. This more generous treatment of married\nadults is considered to be an important feature of the\nbill. The following table presents basic benefits for\nvarious family types:\n3\nABLE Benefit at\nFamily Type\nZero Income*\nUnrelated Individual\n$ 825\nChildless Couple\n2050\nOne Parent, One Child\n2050\nTwo Parents, Two Children\n2700\nOne Parent, Three Children\n2100\nBenefit to succeeding children\nthrough:\nsix\n225\nseven and above\n0\nBenefit Reduction Rates: ABLE payments would be reduced\nas other income accrued to the family and the benefit\nreduction rate would vary depending on the type of income.\nThe benefit reduction rates are as follows:\n- Earned income -- 50 percent on earnings less deductions\nfor social security taxes, implying that most earners\nwould face rates no greater than 47 percent.\n- Public housing subsidies -- 80 percent.\n- Veterans pensions and farm subsidies -- 100 percent.\n- All other income (e.g., property income, retirement\nbenefits, child support) -- 67 percent.\nBreakeven Income. The level of income at which a family\nwould become ineligible for ABLE benefits would, because\nof the complex schedule of benefit reduction rates and a\nproportional work expenses deduction, depend on the source\nof the family's income and the labor force activity of the\nThese benefit levels may seem relatively low to anyone familiar\nwith the present welfare system. It must be remembered that the\nABLE benefit must be combined with the value of the tax credit to\ndetermine the basic benefits in the ISA plan. This interaction\nis examined below.\n4\nadults. However, \"normal\" breakeven incomes can be\ndetermined. For a two-parent, two-child family not\nentitled to the work expense deduction and with income\nonly from earnings not subject to the social security\npayroll tax, eligibility would cease at an annual income\nof $5400. The more typical case, however, is a similar\nfamily in which both parents work in covered employment.\nIn that case the breakeven income level would be about\n$6000 because of the payroll tax deduction and the work\nexpenses deduction.\nTax Credit-ABLE Interaction. The benefit levels in the ABLE program\nmay seem low to those familiar with benefits in current welfare\nprograms (e.g., AFDC and Food Stamps). In this regard the interaction\nbetween the revised tax system and the ABLE program must be examined.\nThe net disposable income to an ABLE family with no other income is\nthe sum of its ABLE benefit and the amount of its rebated tax credit.\nThus, $900 in rebated tax credits (4 times $225) would be added to\nthe ABLE basic benefit of $2700 for a four-person family, yielding\nto a family with no other income total benefits of $3600 (identical\nto that proposed for the Income Supplement Program).\nThe effects of the combination of ABLE payments and tax credits may\nbe seen by examining the ABLE and/or tax status of a four person\nfamily (with no deductions) at various income levels:\nABLE and/or\nIncome\nTax Status\n0 - $5400\nUnit receives an ABLE payment that varies\nwith its income: from a $2700 benefit at\nzero income to a zero benefit at income of\n$5400; unit receives a $900 tax credit and\npays no taxes.\n$5400 $7200\nUnit has net tax credit which falls from\n$900 at income of $5400 to zero at income\nof $7200. Unit receives no ABLE payment.\n$7200 - $23,500\nUnit incurs net tax liability that would\nbe lower than that under current law. In\nincome range of $7200-$7563 unit would use\na new, alternative tax computation method.\n(As indicated above, a more typical case would be for families that\nhave deductions, the consequence of which is that these income limits\nwould be raised somewhat.)\n5\nTax credits would be rebated to ABLE and SSI recipients, together\nwith benefit payments under those programs, by the IRS and the SSA\nrespectively. Those families eligible for tax rebates who are not\nABLE or SSI participants (e.g., a family of four with earnings of\n$6600) would apply to the IRS for their rebate, although the ad-\nministrative means to do this are not clearly spelled out in the plan.\nTax Credit and ABLE Costs. The net cost to the Federal government\nof the Income Security for Americans program is estimated at $15\nbillion in 1977 -- $6.8 billion additional in transfers and $8.2\nbillion in tax relief. In current dollars these costs are $12.9\nbillion, $5.7 billion, and $7.2 billion, respectively.\n6\nCOMPARISON OF THE INCOME SECURITY FOR AMERICANS\nAND INCOME SUPPLEMENT PROGRAM PROPOSALS\nThe ISA and ISP proposals each would create a universal means-tested\ncash transfer system that in significant ways would be tied to the\nFederal tax system. This section will outline areas where the plans\nare similar or different.\nComponents of the Income Assistance System. The ISA proposal would\nretain a somewhat altered SSI program, whereas ISP would fold SSI,\nAFDC, and Food Stamps into one cash transfer program. The Federal\ngovernment would therefore, under the ISA approach, maintain two\nseparate income assistance programs, administered by separate agencies\n(IRS and SSA). Provisions of ISA minimize potential overlaps between\nSSI and ABLE.\nIntegration with the Tax System. The ISP would have a simpler integration\nwith the tax system than the ISA plan. Under the ISP proposal, a\nfamily's cash supplement would gradually diminish from the appropriate\nbasic benefit to its tax liability threshold, an amount equal to its\npersonal exemptions and standard deduction in the tax system. Beyond\nthat tax exempt level, the family would incur a tax liability according\nto the present tax schedule with one exception. Under current planning,\nits appropriate standard deduction would be phased down over a range\nof taxable income until it equals the $2000 standard deduction in\ncurrent law.\nThe ISA plan requires a more complicated integration, In order to\nforgive taxes at levels below the points at which families cease to\nbe eligible for a cash transfer (i.e., their breakevens), the ISA\nwould in effect create an alternative tax schedule with standard\ndeductions equal to those breakeven points and marginal tax rates\nequal to those in the transfer programs (i.e., approximately 50 percent).\nA family would compute its tax liability under either the regular\ntax schedule (15 percent standard deduction up to $2000 and the present\nmarginal tax rates) or the alternative tax schedule apply its tax\ncredits against both figures, and pay the lesser of the two amounts.\nBenefit Structure. The ISA makes a clear distinction between a second\nparent and an additional child. The former brings to the family an\nadditional $600 relative to the latter. The ISP benefit structure\ndoes not make such a distinction. The effect of the ISA treatment is\nto provide what the ISA report calls a \"marriage bonus. Relative\nto current programs the ISA would make larger families relatively\nworse off.\n7\nExcept for that distinction, the basic benefit levels of both plans are\nquite similar. However, the benefit levels of the ISA and ISP plans\ndepart somewhat as income accrues to a family. This is because the\nbenefit reduction rates for different kinds of income in the two plans\ndiffer. In addition, though the earned income breakeven levels for\ntransfer payments theoretically are the same those in the ISA would be\nhigher because of deductions for work expenses and payroll taxes. In\nessence, for those who work, the ISA has a lower benefit reduction rate\non earned income and, as a result, a higher breakeven income level.\nWork Test. The ISP proposes a work registration requirement modeled\non that in the Unemployment Insurance system. The ISA proposal\n\"recommend (s) that a work registration requirement and the attendant\ncostly bureaucracy not be attached to a new program.\" The Griffiths'\nreport notes that \"We have found little evidence or experience to\nsupport -- and several grounds to oppose -- reliance on administrative\npressure and sanctions. \"\nFiling Unit. The two plans depart considerably on filing unit definitions.\nISP has a quasi-household definition (all persons related by blood,\nmarriage, or adoption living under one roof) as opposed to the filing\nunit definitions in ISA which are patterned more on those in the tax\nsystem. The distinction in the ISA plan between ABLE units and SSI\nunits enlarges considerably the number of separate filing units.\nBenefit Reduction Rates. Except for those with considerable amounts of\nnon-wage and salary income, the ISP has one benefit reduction rate,\n50 percent, that applies to all income. For those with non-wage and\nsalary income in excess of their basic benefit, the benefit reduction\nrate is 100 percent on that amount.\nThe ISA has a complicated but sophisticated structure of benefit reduction\nrates. While the nominal rate on earnings is 50 percent, the effective\nrate is at most 47 percent for those in social security covered employ-\nment and/or those who take advantage of work related expense deductions.\nThe rates on income from other sources, as noted above, vary according\nto those sources.\nTreatment of Work Related Expenses. The ISP, as currently designed,\nmakes no provision for the deduction from income of work related expenses.\nIn contrast, the ISA plan in its ABLE component permits single-parent\nand husband-wife families with children to deduct from income a fraction\nof gross earnings (10 percent to 20 percent, depending on family type)\nup to a maximum ($500 to $1500). Similar deductions would also be\npermitted in the positive tax system. The effect of this treatment of\nwork related expense would be to raise transfers and lower tax revenues.\n8\nIncome Definition and Accounting System. ISP and the ISA's ABLE component\ngenerally share common definitions of income and a similar accounting\nsystem. The income definition and accounting system in SSI would\ncontinue unchanged, at least initially. For purposes of the rebatable\ntax credit, it appears that either the tax system's income definition\nor ABLE's income definition would be used whichever yields the greater\nbenefit to the filer. The report does not discuss in detail the\naccounting system implications of the rebatable tax credit.\nAssets Test. The ISP plan would exclude from consideration assets which\nare difficult to value, difficult to liquidate, or are given preferred\ntreatment in the tax system as a reflection of social values (e.g., assets\nneeded for a business or a personal house). This leaves essentially\nonly liquid assets against which the assets test is applied. A unit\nis categorically excluded from ISP if they are above the appropriate\nlimit. The ISA plan does not have an assets limitation as such.\nInstead it would include in the income base the yearly income value\nof all assets and reduce benefits by 67 cents for each dollar of such\nincome value. While the ISA approach is more equitable,it is far more\ndifficult to administer and was explicitly rejected by the IRS Task\nForce.\nProtection of Current Recipients. The ISA plan would require that the\nstates make supplemental payments, for two years after its enactment,\nto families receiving AFDC in a base period in amounts needed to main-\ntain total family income at base period levels. These state supplements\nwould be additional to the ABLE grant and the rebatable Federal tax\ncredit. The ISP plan opposes any \"grandfathering\" of current recipients.\nUnder the ISA plan, .it is not clear whether just basic AFDC benefit\nlevels (plus 80 percent of any Food Stamp bonus value), are grandfathered,\nor whether each state's AFDC computation rules are also brought forward\nin time. The need for grandfathering in ISA is greater than in ISP\nbecause of the former's lower basic benefit levels for single-parent\nfamilies. States would administer their own state supplements.\nThe ISA provides for the protection of states against any incremental\ncosts resulting from the required grandfathering by holding the states\nharmless at the calendar 1976 share of AFDC payments.\nAdministration. Under ISP, the entire tax and transfer system would be\nadministered by one agency. The Secretary of Health, Education, and\nWelfare has stated his view that the IRS is the appropriate administering\nagency; failing that, he prefers a new agency within Treasury. The\ntax credit and ABLE components of the ISA would be administered by\nthe IRS, while administration of SSI would remain with the Social Security\nAdministration. It is probable that under ISA, the IRS would have to\ncreate two new systems -- one for ABLE and one for the rebatable tax\ncredit -- in addition to its current structure for collecting the\n9\nFederal income tax.\nCosts. The ISP and the ISA differ considerably in net cost to the Federal\ngovernment. The ISP would cost, in today's dollars (December 31, 1974),\n$3.4 billion in increased transfers and would cause $4.1 billion in\nreduced taxes. The ISA would cost in today's dollars $5.7 billion in\nincreased transfers and would cause $7.2 in reduced taxes. The reasons\nfor the higher costs and tax relief in ISA are:\n-- The lower benefit reduction rate in ABLE, because of\nthe payroll tax and work expense deductions.\nThe higher breakeven levels, which extend eligibility\nto a larger population.\n-- The retention of the SSI program, leading to a greater\nnumber of filing units in the total ISA transfer (ABLE,\nSSI, rebatable tax credit) population. In addition,\nthe number of ABLE filing units is greater than if ISP\nfiling units rules were used in that program.\n-- The tax system's narrower definition of income might\nallow individuals or families who have considerable\ntax free income or substantial deductions to receive\na rebated tax credit.\n-- The ISA's tax credit and its introduction into the tax\ncode of ABLE rules as an alternative means to calculate\ntax liability, extend greater tax relief than the approach\nin ISP.\n-- The ISA would introduce into the tax system a work\nexpense deduction as an adjustment to gross income.\nThis causes greater aggregate tax reductions than the\ncurrent itemizable personal child care deduction which\nISA would eliminate.\nI TAB\nTAB I\nLABOR SUPPLY AND PROGRAM COSTS\nINTRODUCTION\nStatic economic theory predicts that taxes and transfers have the\npotential to reduce work effort: taxes because they reduce the\nreward from work and transfers because they make work less necessary.\nThat theory, however, gives no clue as to the magnitude nor the\nsignificance of any reduction. For many years economists and\nothers have been concerned lest the high marginal tax rates (i.e.,\ntaxes on the last dollar earned) in progressive tax systems reduce\nthe incentive to work of earners of high incomes. Nevertheless,\ninvestigations into the work effort response of physicians and\nlawyers have detected no such response to high rates of taxation.\nIn the 1960's comprehensive income-tested cash assistance plans,\nwhich provide a basic benefit paid to families with zero income and\nthen reduce that benefit as family earnings increase, began to be\ndiscussed. People soon realized two things. First, the amount of\nthe benefit paid and the rate at which it is reduced as earnings\nincrease' could reduce work effort. Second, the welfare system as\nit then existed (and now exists) was of this same basic structure\nand could be reducing the work effort of welfare recipients.\nThere are several reasons to be concerned about reductions in work\neffort caused by a transfer program.\nWork itself is valued. Moreover, since transfer\nbenefits are financed by taxes levied on those\nworking, it is not fair for transfer recipients\nwho could be working to choose leisure and be\nsupported by taxpayers.\nIf a transfer recipient reduces his/her work effort,\nfamily earnings and thus family income falls. Since\nthe amount of transfer varies inversely with income,\na reduction in work effort has two undesirable\nconsequences:\nThis is the benefit reduction rate, which is like a tax rate in\nits effect because it determines how much total income increases\nwith an increase in earnings.\n2\nthe cost of the program to the Federal\ntreasury is increased; and\nthe efficiency of the program is reduced\nsince it takes more Federal funds to pro-\nvide a given standard of living after the\nwork effort reduction than before.\nA: reduction in work effort means a reduction in the potential\nlevel of goods and services that can be produced by the nation's\nwork force. That is, if all members of the labor force were\nemployed, voluntary reductions in work effort by some would\nresult in a reduction in the gross national product. To the\nextent that the economy is operating at less than full employ-\nment, any voluntary work effort reductions would cause a reduc-\ntion in potential GNP, but no change in actual output. Economists\ncall such output reductions a \"real\" cost to society since society\nactually (or potentially) loses something -- the goods and\nservices not produced by those who voluntarily reduce their work\neffort. This is to be distinguished from the cost noted in\nthe above paragraph which involves a redistribution of, rather\nthan a reduction in, society's resources.\nIt should be noted that not all reductions in work effort are un-\ndesirable. Many in society would prefer that mothers of young\nchildren be home caring for those children rather than be working\nout of the home (or at least that they have the option of doing so).\nAlso, a reduction in hours worked, or even a resignation to\nenable one to search for a better job or to engage in training,\ncan in the long run pay dividends to society as well as to the\nindividual. It should also be noted that labor supply response\nto a transfer program can take two forms: (1) reducing hours\nworked, and (2) quitting a job entirely. While both are worri-\nsome, the latter is generally considered the more serious concern\nsince it raises the specter of the able-bodied loafer.\nSOURCES OF INFORMATION ON LABOR SUPPLY RESPONSE\nConcern over possible work effort reductions led to the launching\nof a series of government-sponsored, controlled experiments with\nincome transfer plans which in many ways are quite similar to\nISP and to a very large number of statistical studies of existing\ndata. The purpose of these studies was to produce quantitative\nestimates in the three areas of concern discussed above: work\neffort reduction, program cost increase, and reduction in the\ngross national product.\nThere are two basic types of studies that produce estimates of\nlabor supply responses to income-tested transfer programs.\n3\nExperimental Studies. In the New Jersey Graduated Work Incentive\nExperiment, the results of which were published by DHEW in\nDecember, husband-wife families were actually enrolled in various\nincome-tested cash assistance plans with different levels of basic\nbenefits and benefit reduction rates. Their incomes, work effort,\nand other characteristics were followed and recorded. Similar\ndata were also gathered over the same three year period from\nmembers of a \"control group\" of quite similar families who re-\nceived no benefits from the experiment. The experimental and\ncontrol families were then compared with the knowledge that\ndifferences in behavior were caused primarily by the income\ntransfer plan. Basic benefits in the experiment were 70%, 100%\nand 125% of the poverty line ($4550 for a family of four in 1974)\nand benefit reduction rates were 30%, 50% and 70%. Statistical\nmethods were applied to analyze the data in order to estimate the\neffects of the various plans on measures of work effort. Other\nexperiments are investigating similar concerns, primarily for\nother target populations.\nStudies Using Census Cross-Section Data. The purpose of the ex-\nperiments described above was to generate data reflecting the\nbehavior of transfer program participants. In addition, other\nsources of data exist which contain observations on the income,\nearnings, and work effort of a wide range of persons (but not the\nsame persons over time, as is the case with the observations in\nthe experiment). These data bases, collected as a matter of course\nby the Census Bureau and other groups, can also be used to estimate\nthe effect on work effort of a program like ISP,\nESTIMATES OF LABOR SUPPLY RESPONSE\nThe range of estimated work effort responses to transfer plans is\nlarge and is dependent on the statistical methods used, the data\nbase, the population in question, and a number of other factors.\nNevertheless, some generalizations from the data seem permissible\nand are presented below as the best information available on the\nsubject. These changes in work effort will then be used to derive\nthe consequent changes in program cost and in GNP. The three prin-\ncipal areas of concern will be discussed in turn.\nHEW is currently funding three other income maintenance experi-\nments. Two, Seattle-Denver and Gary are still in the operating\nstage. Data from the rural experiment are currently being\nanalyzed. Preliminary results suggest findings consistent with\nthose from New Jersey.\n4\nWork Effort\nThe results of the New Jersey experiment suggest that very few\nmale family heads, most of whom would be newly covered by ISP,\nwould quit their jobs. Hours reductions, the experiment suggests,\nwould average about six percent. While it is difficult to predict\nhow various workers will react, it is likely that much of this\nhours reduction would reflect reduced overtime and moonlighting.\nAmong wives with working husbands the reduction would be con-\nsiderably greater, ranging up to 40%, although the base from\nwhich this reduction might occur is quite small since very few\nlow-income families have wives working regularly in addition to\nthe husband.\nMany studies of the work effort response of male family heads using\ncross-sectional Census data have been undertaken. Among those\nconsidered to be the most sound methodologically, the range of\nwork effort reduction for male family heads is predicted to run\nfrom a very small percentage to 15-18 percent. The average esti-\nmate from among these studies, about eight percent, is roughly\nconsistent with that found in the New Jersey experiment. Esti-\nmates of work effort response for wives from the cross-sectional\nstudies are also quite consistent with the experimental results.\nThere have been no experimental and relatively few cross-sectional\nstudies of the labor supply behavior of unrelated individuals and\nolder persons. Generally, the few existing studies suggest work\neffort reduction on the order of 15 percent.\nAs is noted in the qualifications section below, much of the ISP\nrecipient population is now covered by transfer programs which\nexpose them to greater potential work disincentives than those\nto be found in ISP. In addition the entire ISP-eligible popu-\nlation (including unrelated individuals) is currently eligible\nfor Food Stamp benefits. The estimate of change in program costs\nhas been adjusted to reflect the existence of these current-law\ntransfer programs.\nProgram Costs\nIf hours worked are reduced, income will fall and as a result\nprogram costs will rise. It is estimated that the labor supply\nreduction that is predicted by the existing literature would lead\nto an increase in ISP program costs of approximately $600 million.\nThis amount is included in the basic program cost estimates as\ndiscussed in Tab F.\n5\nGross National Product\nA reduction in the amount of work would reduce society's capacity to\nproduce. Employing reasonable assumptions regarding how such a reduction\nwould affect the economy, it is estimated that as a consequence of ISP,\nand assuming roughly full employment in FY 79, GNP might fall by about\n$1.7 billion or less than one-tenth of one percent of FY 79 GNP.\nCONCLUSION\nIt is unlikely that the ISP would result in much work effort reduction\namong men that support families. Indeed, popular concerns about such\nan eventuality seem to have been much exaggerated. The modest labor\nsupply effects we might expect led us to add $ 600 million to program\ncosts which is reflected in the cost data throughout this proposal.\nThis estimate can be considered an upper bound in that it assumes that\nthe work test would have zero impact. In fact, what scant evidence there\nis on the efficacy of work tests indicates that they can be expected to\nhave little effect.\nA1\nAPPENDIX: CAVEATS AND QUALIFICATIONS\nAs noted in the text, estimating labor supply response is a\ncomplex undertaking. This appendix will list a number of factors\nto be borne in mind when using the results of labor supply\nstudies.\nThe New Jersey experiment introduced a temporary change in the\nlives of participants and for this reason may not be fully re-\nflective of their true long run behavior in response to a\npermanent program. Also, during the experiment the state of\nNew Jersey changed the structure of the local welfare system\nby adding an unemployed fathers component to AFDC. It is unclear\nhow these factors may affect the results, but on balance a modest\nunderestimate is likely to have occurred. Further analyses of\nthe data for New Jersey are underway and it is expected that more\ninformation on these issues will be forthcoming.\nThe basic assumption of the cross-sectional studies, that the\nmeasured response to wage and income variations in the data\naccurately reflects the likely behavioral response to an alter-\nation in transfer policy, is a tenuous one. In addition, the\ncross-sectional estimates do not account for the fact that\nworkers in families whose incomes are above, but close to, the\nbreakeven point (income level at which eligibility ceases) might\nreduce their work effort so as to qualify for benefits. The\nmagnitude of such an effect is difficult to gauge, but to the\nextent that it occurs the estimated change in labor supply would\nbe too small. Hence the estimates of change in work effort have\nbeen adjusted upward to reflect this problem.\nAnother problem in using the results of the labor supply studies\nto predict behavior is that many participants in any new transfer\nplan will have been receiving benefits under existing programs,\nsuch as AFDC or Food Stamps. For this reason, the existence of the\nbasic benefit and benefit reduction rate in ISP will not be a new\nevent in the lives of participants and ignoring this fact could\nlead to considerable overestimates of labor supply response. There\nis no fully satisfactory way to handle this problem. For the pur-\nposes of producing the estimates presented in the text, the\nfollowing assumption has been made: the ISP will produce no change\nin the work effort of AFDC and SSI recipients. This is reasonable\nsince the basic benefit and benefit reduction rates in the three\nprograms are not too dissimilar.\nA2\nAll those who would be eligible for ISP benefits are currently\neligible for Food Stamp benefits. The Food Stamp basic benefit\nand benefit reduction rate are one-half and 60 percent of those\nin ISP, respectively. Thus even for members of intact families,\nchildless couples, and unrelated individuals, the potential work\ndisincentive effect of ISP would not be new. In order to account\nfor this fact, the reduction in earnings for those currently covered\nby Food Stamps and to be newly covered by ISP has been reduced by\n40 percent.\nTAB J\nINCOME SUPPLEMENT PROGRAM WORK TEST\nAvailable evidence suggests that only in rare instances would the receipt\nof an Income Supplement Program benefit cause persons to cease working.\nNevertheless, in order to insure that none can question the integrity\nof the program, I am recommending that the ISP legislation mandate the\nstates to operate, for specified categories of recipients, a regis-\ntration-type work test.\nThis tab briefly discusses the issues involved in the design of a\nwork test and describes the principle elements of the recommended\nform of work test.\nBasically there are three issues involved in developing a work test:\nAt what level of government -- Federal or state -- should\nthe work test be administered?\nHow much manpower service delivery should be authorized by\nthe work test? and\nWhat administrative mechanism should be used to deliver services?\nIn particular, should existing delivery systems and legal\nauthority (ies) be used or should new mechanisms be developed?\nI believe that the experience of the Federal government's manpower and\nsocial service programs over the last decade has taught us that such\nservices are best administered by state and local government. This view\nis central to the block-grant approach behind the new Comprehensive Employ-\nment and Training Act of 1973. Among other things, this new Act closed\ndown the programs that tried to create a delivery system directed from\nWashington. Thus, a state-administered work test fully supports\nthe Administration's view of the appropriate distribution of functions\nacross levels of government. In addition, the alternative of a Federally-\nadministered work test can easily become very expensive. It is well to\nrecall that the second version of FAP contained a Federally-administered\nwork test which became so heavily laden with supportive services and the\ncosts of creating a new delivery system that over 30% ($1.7 billion) of\nH.R. 1's net welfare expenditures would have gone to such ends rather than\ndirect cash assistance.\nThe questions of the level of service delivery and which delivery mechanism\nare closely related. Experience with the heavily service-oriented work\nrequirement in the Aid to Families with Dependent Children program sug-\ngests that such work tests are expensive, administratively cumbersome\nand cost-ineffective. Many evaluations of the manpower programs launched\n2\nin the 1960's suggest that in the absence of an adequate number of\njobs, these programs, too, are not cost-effective. Thus, a\nwork test that both well serves those subjected to it and provides\nfor simple and efficient government would stress job finding as a\ngoal.\nThe discouraging evidence on the likely efficacy of a wide range of\nmanpower and social services suggests that the Federal government\nshould not require their use. Instead, the Federal government should\nmake certain that those ISP recipients who could probably profit from\nassistance in job finding be required to accept such services. Job\nfinding services will ultimately be provided at a local level since\ntheir provision at any other level makes little sense (although, of\ncourse, various localities should share information so that regional\ndisparities in labor supply and demand do not persist). Thus, state\nadministration of the work test is indicated with the states developing\nprocedures within Federal guidelines that spell out the Federal govern-\nment's overall goals for the ISP work test. It is important to remember\nthat such a Federal-state relationship already exists with respect to\nthe work test in the states' Unemployment Insurance programs, and there-\nfore the existing Federal-State Employment Service network already is\nequipped to perform precisely the tasks envisioned here for the ISP\nwork test.\nFinally, the absence of a work test in ISP could be easily challenged\non equity grounds. The Federal government, as already noted, mandates\na work test in Unemployment Insurance, a Federal-state program in which\nthe Federal presence is relatively restrained and which is based on\n\"social insurance\" principles. It would be inconsistent for the Federal\ngovernment to impose a less stringent work requirement on recipients of\nISP which will be a fully Federal endeavor financed from the general\nrevenue (with the possible exception of state supplementation programs).\nDescription of the Work Test\nThe legislation enacting the ISP would mandate the states to operate a\nwork registration-type work requirement and provide funds for that\npurpose. The major features of such a work test would be:\n0\nFederal regulation or legislation would establish two types\nof recipients. The first type would consist of all those who\nwould be categorically excluded from the work test, such as\nthe aged, blind, and disabled population; minors; those needed\nto care for members of the two previously mentioned groups;\nand the already employed. The second type would include the\nremainder -- those presumptively able bodied persons with no\nchild care or other home responsibilities and who are not\nalready employed.\n3\nThe presumptively able bodied recipients of ISP benefits\nwho are available for job placement would be referred to\nthe State Employment Services for assistance in obtaining\nan appropriate job or training opportunity. In the event\nthat such persons refused to cooperate with the State\nEmployment Services, their ISP eligibility would cease and\nthe amount of their families' benefit would be reduced\naccordingly,\nFunding for the work test, which would include funds\ncurrently expended to support the work requirements in the\nWIN and Food Stamp programs, would be placed in existing\nauthorities. While final decisions await further con-\nsultation with the Department of Labor, it is likely that\nfunds to support the work test would be delegated to the\nSecretary of Labor and expended under Comprehensive Employ-\nment and Training Act authorities and/or the provisions of\nthe Wagner-Peyser Act (the Federal-State Employment Services\nsystem). This would allocate to the States and localities\nwhich would administer the work test under ISP the funds to\nsupport the services they deem appropriate.\nSummary\nI would mislead you if I argued that the work test recommended here\nis vital to the ISP for programmatic reasons or that it would pay for\nitself. Indeed, available evidence suggests the opposite. I do feel,\nhowever, that a work test based on something like required referral\nof unemployed ISP applicants to the State Employment Services would\nanswer any concerns regarding the proposal's commitment to work, while\nminimizing the administrative burden and financial costs associated\nwith such efforts. The alternatives of Federal administration and/or\nintensive service delivery promise only to build large bureaucracies which\nwould perform functions that are, in significant ways, foreign to the\nISP proposal and in which we can have little confidence of high social\nreturn.\nTAB K\nTAB K\nADMINISTRATIVE STRUCTURE OF THE INCOME SUPPLEMENT PROGRAM\nAs part of the interagency planning in support of this proposal's pre-\nparation, a Task Force, directed by the Internal Revenue Service with\nmembers from HEW and Treasury, examined its administrative feasibility\nand standards of operation. In order to be able to reach a judgment\non those issues the Task Force had, in effect, to design an operational\nsystem for ISP and determine what the resource needs of such an endeavor\nwould be. The principal findings in the Task Force Report, submitted\nin late April, may be summarized as follows:\no The benefits payments portion of the proposal is adminis-\ntratively feasible, both in terms of the proposal's goals\nof objectivity, simplicity and universality, and in terms\nof the IRS's standards of program integrity -- provided\nthat there is reasonable adherence to the Task Force's\nrecommendations concerning pre-legislation planning, systems\ntesting and implementation, enrollment phase-in and proposed\nlevels of assistance to recipients and enforcement in the\nongoing program.\nUsing a set of operating assumptions, the Task Force designed,\nin broad outline, a structure for ISP and estimated its personnel\nand other resource needs. These estimates, which relied\non both analogous IRS activities and directly relevant experi-\nence from the HEW Income Maintenance Experiments, compare favorably\nto IRS manpower and administrative resources devoted to\nrevenue collection.\nThe ISP has no operational program design feature that would\neither require or preclude the .selection of one agency rather\nthan another to assume operational responsibility for the\nprogram; it could be administered by an existing agency,\nsuch as IRS or SSA, or by a newly created special purpose\nagency.\nThe remaining sections of this tab describe ISP's basic substantive\nelements and administrative structure, outline its field operations\nand conclude with some observations on feasibility conditions.\nPROGRAM ELEMENTS\nA household's eligibility for benefit payments and the amount of such\npayments would be determined by the composition of its membership, the\namount of its nonbenefit income, and the nature and value of the assets\nowned by its members.\n2.\nFiling Unit Rules - As a general presumption, all individuals\nrelated by blood, marriage or adoption who live in the same\nhousehold would be regarded as members of a single unit for purposes of\nISP benefit determinations. In contrast, the filing unit for\ntax liability would continue to be defined primarily in terms\nof individuals because of the limits on the extent to which\none individual should be compelled either to compute or pay a\ntax liability on another's income. This departure from the\ntax system in the ISP is necessary because it is the income\nof a family or household that is the single best measure of\nthe need of its individual members. Any alternative which\nwould attempt to measure the actual extent of income pooling\nand joint consumption among individuals within a household\nwould be administratively infeasible and intrusive.\nIn addition to the general definition of a filing unit, there\nwould be rules to cover the special situations of foster\nchildren, nonseparated spouses who are living apart, non-\nresident children under age 18, and sub-families in a house-\nhold that can certify themselves as separate and distinct\neconomic units.\nIncome Definition - The definition of income which would be\ncountable in the calculation of benefits would include all\ngross receipts in cash or in kind from any source, with the\nexception of a very few types of receipts specifically identi-\nfied as excludable.\nItems were excluded only if: they represented income that was\nnot truly available to meet current needs; their inclusion\nwould defeat a program goal; the reporting and compliance\nconsequences would be disproportionately great; an unreasonable\neconomic incentive would otherwise obtain; or their inclusion\nwould grossly violate a generally accepted social viewpoint.\nUsing this approach the definition of income for the ISP\nwould be very broad, including items such as Social Security\nbenefits and gifts which are not treated as income for\nFederal income tax liability.\nFew expenditure deductions from income would be permitted in\nthe computation of benefits under the ISP. The only departure\nfrom the presumption against deductions would be in the area\nof those existing \"adjustments to income\" allowed in the tax\nsystem, such as expenses incurred in the production of self-\nemployment income.\n3\nAssets Test - In addition to having to meet the principal criteria\nof income eligibility, a filing unit could not own more than a\nspecified dollar amount of certain types of assets. The test\nwould exclude from consideration business related assets, owner\noccupied dwellings and reasonable amounts of land appurtenant,\none automobile, the cash value of life insurance, and furniture\nand personal effects located in the place of residency. These\nproposed exclusions from the assets test are based on consider-\nations of administrative feasibility and accepted social views\nregarding housing and essential personal property. The fair\nmarket value, net of applicable encumbrances, of the house-\nhold's nonexcluded assets could not exceed certain benchmarks.\nWithin a range bounded by a minimum for a filing unit of one\nor two persons and a maximum for a unit of seven or more, the\nbenchmark increases with additional members. This approach is\nof necessity somewhat arbitrary. However, the alternative of\nimputing income from nonexcluded assets, while theoretically\nmore equitable, would entail considerable administrative complexity.\nAccounting System - The program would consider eligibility only\non a yearly basis. Unlike the tax system's fixed calendar year,\nthe year for ISP purposes would be defined in terms of a twelve\nmonth moving period. In addition all determinations would be\nretrospective; that is, based only on income for an elapsed\nperiod of time. These two features (a moving calendar year\nand retrospective reporting), in combination with a method of\naccounting for the income stream called the \"carry forward,\"\nprovide the best possible compromise among the competing\npolicy objectives of equity, responsiveness to change in family\nincome and composition, and administrative efficiency. Alter-\nnatives that would have involved the fixed calendar year or\nprospective estimates of a unit's future income stream were\nexamined but rejected, for they would have entailed serious\nover and underpayment problems, collection consequences, and\ngreater opportunities to manipulate the program.\nIn order for the preferred accounting system to function with\nreasonable responsiveness, the ISP population will be required\nto report either once every month or once every three months.\nA unit will be designated as a monthly or quarterly filer\ndepending on the constancy of its income. Units with a history\nof stable or no income would file quarterly; those with a\nhistory of fluctuating income monthly.\nSelf-Employed - The ISP, just as its tax system counterpart,\nwould perforce have some special rules for the unique situations\nof the self-employed. As noted, the tax system's adjustments\nto income would generally be allowed as deductions from the income\nbase. Similarly, business related assets, that is, property\nreasonably related to and needed for the production of income,\nwould be excluded from that eligibility test. While the Internal\nRevenue Code would offer primary guidance on these two matters,\nspecial rules will be needed to prevent the incorporation\ninto the ISP of measures, however desirable in the tax system,\nwhich are inappropriate in measuring income need; for example,\naccelerated depreciation, capital loss carryovers, and the like.\nThe most significant departure from normal practice in the\ntreatment of the self-employed would be in the accounting\nsystem. Self-employment net income which is suitable for\nmonthly or quarterly reporting, as in the case of a carpenter,\nwould be thus measured and reported along with all other\nincome in that filing unit. However, much self-employment,\nas in the case of a farmer, involves irregular income and\nexpense patterns. For these situations, the program would\ntake the previous year's actual 1ump sum self-employment\nincome, divide it into twelve equal segments and impute the\naverage monthly amount into the current year as if it were\nreceived in that year. Once imputed this self-employment\nincome would be treated no differently than other income in\nthe operation of the ISP accounting system.\nORGANIZATIONAL STRUCTURE\nThe operational base of the agency would be a field structure of approx-\nimately 1000 field offices supervised by some 40 area offices. The\nfield offices would contain groups of front line personnel primarily\nconcerned with enrollment and assistance to filing units in reporting\non changes in income, assets, and household composition. These same\npeople would, however, perform various verification functions which\ncan be done in the office. Each field office would additionally\ncontain a conferee to conduct informal redeterminations of assistors'\ndecisions when questioned by a filing unit, and personnel to keypunch\ndata from applications, income and other periodic reports directly\ninto the national computer system. The area offices would exercise\ndirect management control over the field offices and provide adminis-\ntrative support to them. In addition, the area offices would house\neducation staff to inform the public about ISP benefits and obligations,\ninvestigation staff to perform indepth or on-site enforcement activi-\nties beyond the capacity of field office personnel, and an adminis-\ntrative law judge to hear formal appeals from contested decisions not\nsettled at the conferee level.\nComplementing the field structure would be about seven data processing\ncenters which would receive information directly from terminals in the\nfield offices, process it and prepare the payment tapes for use by the\n5\nBureau of Accounts. The agency would be centrally directed by a national\noffice supported by staff at the regional level. In keeping with the\nnondiscretionary and substantively simple nature of the ISP, the number\nof personnel needed at the national and regional levels would be few,\nand approximately one-third of them would be assigned to inspection\nactivities in the field.\nSYSTEMS DESIGN\nThe central concept in the systems design is the placing of decentralized\ndata entry and access in the field offices. To accomplish this, each\nfield office would be provided with one or more terminals that would\nallow it directly to enter or access data into or from the national\ncomputer system by means of a data link to its associated data processing\ncenter. In practice, all data communications between a field office and\nits data processing center would be routed through a mini-computer and\ncommunications concentrator located at the appropriate area office.\nThis intermediate link would provide communications traffic control,\ndetection of errors or missing data elements and data formatting.\nDecentralized data entry implies that all reports from the program's\nfiling units, such as the monthly or quarterly income change reports,\nmust be delivered to the field offices by mail or hand. The laternative\nof consolidated report collection and data entry in either the area\noffices or at the data processing centers was considered but rejected.\nWhile that alternative might yield economies of scale in data processing,\nit was determined that the collection, human review and edit, and data\nconversion of reports at consolidated points would introduce unaccep-\ntable delays in processing and responding to filing errors and omissions.\nIn addition, decentralized data entry is the logical extension of any\ncapacity in the field for immediate query and response. It was the\njudgment that such a capacity would be essential if the program is to\nbe responsive to recipients, efficient in correcting agency errors,\nand effective in the prevention of duplicate filing and other improper\nactions.\nPROGRAM OPERATIONS\nEnrollment. Four features of program operations are especially important--\nenrollment, periodic reporting, enforcement and sanctions, review and\nappeal. They are each briefly described below. The agency design\nprovides for a public information or education staff to inform the public\nof the program, and a system of toll free operators so that people can\nobtain more detailed descriptions of the program's eligibility require-\nments. However, persons who believe that their households might be\neligible would have to take the initiative and contact their nearest\nfield office. Manifest ineligibles would be screened out by field\noffice personnel by means of a short questionnaire. These personnel\n6\nwould then assist those who would appear to fall within the program's\nincome and asset criteria in the application and enrollment process.\nUpon completion and review of supporting documentation, the infor-\nmation would be entered into the national computer system by field\noffice terminal and automatically compared to a master directory file\nto prevent any duplicate filing or other improper action.\nPeriodic Reporting. A critical aspect to the program is its periodic\nreporting requirements. Depending on the constancy of their income,\nrecipient households would have to report on their income either every\nmonth or every three months. Each income report updates the households\nmoving twelve-month accountable period, while obsolete information from\nthe year previous is dropped from the base used to calculate benefits.\nAfter receipt in the field office, each income report would be reviewed\nand, if it has no obvious errors or omissions, entered into the national\ncomputer system. In the event of an omission or obvious error, the head\nof the household would be contacted and asked to come to the office to\ncomplete or correct the form. Benefit payments would be made monthly.\nThus, a typical sequence in the ongoing program would be as follows:\nA family receives a form to report January income in early February,\ncompletes it and sends or carries it to the appropriate field office\nby mid-February. Personnel in the field office review the report,\ncontact the family if necessary, and enter the information into the\nnational computer system. In early March, the family receives a check\nbased on its income history through January. Coincidently, the family\nreceives a form to report on February's income, and the cycle would then\nrepeat itself.\nAll filing units would also be subject to an annual assets review\nreport which would be handled in exactly the same manner as the\nperiodic income reports.\nEnforcement. The need for program integrity demands a vigorous enforce-\nment program, particularly in the early years of operation. Efforts\nto encourage accurate reporting would include:\n0 mandatory face-to-face assistance on initial enrollment,\nwith a requirement that certain information be documented;\neducational activities involving the use of news media\nand direct distribution of information to recipients;\naudit examinations conducted randomly and as a result\nof apparent discrepancies detected through the use of\nthird party information obtained through computer infor-\nmation matching; and\nperiodic face-to-face reviews on a sample basis of reports\nsubmitted by filing units not otherwise examined.\nSome of this activity would happen as a by-product of other program\noperations. The enforcement activity as such would be divided into\ntwo levels: verification, which is a set of activities that can be\ndone by normal field office personnel in the office; and investigation,\nwhich requires specialized personnel to conduct in-depth office reviews\nor on-site visits.\nSanctions, Review and Appeal. A variety of sanctions would be available\nto the agency to assure its enforcement activities:\no In cases of willful fraud, criminal prosecution would be\navailable, though limited in practice to either flagrant\nfirst offenses or a second willful offense after previous\nwarning.\nIn cases of knowing fraud that, on balance, do not warrant\ncriminal prosecution, or in cases of inexcusable neligence,\na flexible civil monetary penalty would be available, not\nto exceed 100 percent of the over-payment in question.\nCases that involve either noncompliance with a work require-\nment, should there be one, or a household member misleading\nthe unit's head in reporting on the household's income or\nassets, would result in the elimination of the offending\nparty from the unit for purposes of setting its basic\nbenefit level. Such a person would, in the latter instance,\nalso be barred for a year from filing for benefits as a\nnew and separate unit. In addition, if a filing unit\ncontinued to. keep inadequate records after warning and\ninstruction in bookkeeping, the agency could, in cases\nof notorious noncompliance, reduce the unit's guarantee\nlevel until compliance was obtained.\nAny sanction would be applied only after a determination by a front\nline employee, review by his supervisor, and notice and opportunity\nfor a hearing to the affected filing unit. After an informal discussion\nwith the employee and his supervisor, the first recourse to the affected\nparty would be to request an informal administrative review by a field\noffice conferee. The next level would be to an administrative law\njudge at the area office level. However, for the convenience of\nappellants, many of the judges would travel a circuit among the field\noffices in their areas. Decisions of an administrative law judge\nwould be reviewable in a de novo proceeding in the U.S. District Courts.\n8\nThe same review and appeal process would be available in instances\nwhere a party feels aggrieved over a routine agency determination;\nfor example, rejection of an enrollment application, amount of a\ngiven monthly check, or refusal to certify separate economic status\nfrom a larger household.\nFEASIBILITY CONDITIONS\nThe Task Force concluded that certain conditions should be adhered to\nin order for ISP to be administered at reasonable cost and in an\nefficient and effective manner. A brief overview of those conditions\nfollows:\nCompliance - As noted, persons on the program would be required\nto submit monthly, quarterly or annual reports on income,\nassets and household composition. Widespread noncompliance\nin the form of late or incomplete reports could seriously\nundermine the administrative feasibility of the program.\nThe Income Maintenance Experiments have shown, however, that\nthe incidence of such deficiencies is well within accep-\ntable levels if the system is properly structured. IRS\nplanning for its new National Tax Administration offers\nassurance that the computer hardware and procedures exist\nto handle large and complex reporting volumes.\nEnforcement - The program is equally dependent on reporting\naccuracy. Understatement of income or assets, oversiatement\nof household size, or duplicate filing in more than one\nhousehold could, if on a large scale, have severe fiscal\nconsequences and undermine public confidence. The Task\nForce thus concluded that a sizable and visible enforcement\neffort should be built into the program. The Task Force\nset an initial annual coverage of twenty percent of the\ncaseload for verification or examination. After the first\nthree years, the coverage could be reduced to around ten\npercent.\nImplementation Schedule - The Task Force concluded that the\ntime required to place in position the manpower, facilities\nand equipment necessary to effectively enroll and administer\nISP was approximately four years. The principal constraint\nis that twenty months must be allowed subsequent to enact-\nment for data processing equipment procurement, installation\nand operational testing. When combined with the need for a\nphase-in of initial enrollment, thereby preventing an expensive\nworkload peak, the first payment under ISP could not be\nmade before the twenty-fifth month after enactment. Fortunately,\nthe two years of systems design, contract bidding, office site\nselection, and personnel training can take place between the\ntime the legislation is introduced and its enactment.\nTAB L\nWEALTH Sprication ATION\nTAB L\nTHE SECRETARY OF HEALTH, EDUCATION, AND WELFARE\nWASHINGTON, D. C. 20201\nNovember 6, 1973\nMEMORANDUM FOR THE PRESIDENT\nSubject: Major Domestic Program and Tax Reform\nMy staff and I have been struggling over the past eight months with\nthe reform of our social programs, including specifically the welfare\nsystem. The problems we confront are complex and difficult -- some\nsay intractable.\nWhile there is much in the diagnosis of these issues to warrant\npessimism about whether there is any solution, I have been exploring\none concept which in its elegant simplicity, boldness and scope offers\na way out of the mess. I advance it in this memo now, because if you\nfind it attractive and acceptable, we could:\ndevelop the proposal quietly with a very small group as the\ndomestic centerpiece of your State of the Union Message;\nprovide a surprise initiative which in its boldness and\nbalance could capture the imagination of the American people,\nif not the Congress; and\nreassert your leadership in the domestic field in a very\nstrong and affirmative way.\nBACKGROUND\nWhen I step back from the details of the problems which your major\nreforms have encountered, I find a common set of issues and obstacles\nwhich have impeded them.\nAlthough the approach to broad social problems which relies\non a multiplicity of narrow categorical assistance programs\nhas been widely recognized as a failure, or at least not\neffective, recommendations to eliminate these assistance\nprograms in favor of direct assistance to individuals, or\nrevenue sharing, is usually not well received. Without\na broad based understanding and support, we have been left\nto do battle one at a time with particular recipients,\n2\ninterest groups and Congressional committees with a strong\nstake in the existing structure of such categorical programs.\nThis posture is not a winner.\nThe interrelationships of the domestic assistance programs\nhave become as important as the content of each one. To ignore\nthese interrelationships is to pile one program on top of another\nwith undesirable, unintended and costly results. Congresswoman\nGriffiths' ongoing studies have been documenting this fact in\nexcruciating detail in the public welfare area. The involvement\nof 19 different Congressional committees in various income security\nprograms does not help. In retrospect, your Family Assistance Plan\nprobably ran into as much trouble for what it did not address as\nfor what it contained.\nThere has been no assured means of linking domestic assistance\nprograms--reformed or otherwise--with fiscal sanity. The piece-\nmeal approach to expenditures and taxes in the Congress, and the\nschizophrenic public attitudes of support for specific programs\nand distaste for the total bill must be addressed with some\nspecific linkages. Your 1974 budget engendered a growing con-\ncern with this issue in the Congress, and attempted to deal\nwith it by means of a ceiling. Governor Reagan, with the same\nconsideration in mind, has proposed a specific Constitutional\nceiling in California.\nWe have not really come to grips with public frustration and\ndissatisfaction with the performance and size of the Federal\nbureaucracy and a related, growing dissatisfaction with the\nequity of the tax system. Much of the latter stems, I believe,\nfrom disillusionment about results achieved for taxes paid.\nWhile you have made consistent efforts to reduce the Federal\npayroll, improved efficiency is swamped by program additions\nand changes. Only major structural reforms are likely to make\nmore than a marginal difference.\nIf I were persuaded that the disorder and costs of the present programs\ncould be contained or somewhat improved, I might be tempted to recom-\nmend a series of modest improvements in welfare for you to present the\nCongress and the country. My assessment is to the contrary. A more\nmodest approach just does not address the fundamental issues, and does\nnot provide promise of success. Time is not on our side. Left alone\nor altered modestly, the present situation will inexorably get worse,\nmaking fundamental reform even more difficult later.\n3\nA few examples in the welfare system may undergird this assessment.\nFood stamps costing about $2.2 billion in FY 1974 are now projected\nto cost about $6 billion--perhaps more--by FY 1976. Our efforts to\ncash them out for a part of the low income population--the aged,\nblind and disabled--is rapidly eroding to nothing. Senator Long is\ngaining support for his work bonus which would pay a modest benefit\nto low income workers covered by the payroll tax. Appropriate in\npurpose, the Long proposal trivializes a good idea in a way that is\nlikely to create more problems than it solves, since it adds yet\nanother means-tested transfer program to the existing system. The\ndrumbeat of social security increases, which puts you in an im-\npossible position, continues apace. The list could go on and on.\nYou are slowly but surely being pushed into a corner of choosing\nbetween tax increases and an economically sane budget without attaining\nreform. Minor tinkering or sequential changes do not seem to work\nwith the Congress and, in any event, do not deal with fundamental\nstructural problems and program interrelationships. Only a major\nreform initiative seems to offer a way out.\nMAJOR TAX REFORM\nThe reform proposal which I have in mind is based on Milton Friedman's\nconcepts. It is fundamentally tax reform, but deals simultaneously\nwith the tax, welfare and domestic assistance systems. Through such\nan approach, we could:\nTie virtually all of our income support programs for the low\nincome population to the positive tax system and the IRS in\nsuch a way that these separate programs and many related service\nactivities would no longer be required: The Federal bureaucracy\ncould be significantly simplified and reduced.\nConstruct a system that requires benefit increases and tax\nincreases to be considered simultaneously. By locking tax\nand benefit structures together, it would be virtually im-\npossible to adjust one without adjusting the other. Indeed,\nthis action could perhaps be coupled with a constitutional\namendment which would limit the maximum percent of income that\ncould be taken in Federal taxes unless voters agreed to a\nhigher level.\nRemand to the States most of the individualized services and\nany cash supplementation which they might desire to make as a\nproper State and local role.\n4\nAdjust the personal exemption levels and tax brackets in a way\nthat will greatly improve the equity of the positive tax system.\nAs I noted at the outset, this concept is the only one which embodies\nfeatures designed to meet all of the major issues and obstacles which\nI have described. Specifically, this system would be designed along\nthe following lines:\nAll individuals or families would file an income tax return.\nThose above a set amount would pay taxes; those below it would\nbe eligible to receive cash benefits (some below the set amount\nwho have non-taxable income would not receive benefits).\nThe benefit schedule would be based upon the level of personal\nexemptions and standard deduction that the income tax system\nprescribes for the taxpayer or his family. For example, a\nfamily might receive a cash benefit equal to one-half of the\ndifference between its income and the sum of its personal ex-\nemptions and standard deduction. Such a schedule would provide\nfor a gradual phasing down of the cash benefit as family income\nincreases, thus:\n- paying greater benefits to those with greater need;\n- preserving work incentives; and\n- insuring that no one who is eligible for benefits would\nalso have a tax liability; and conversely, that no one\nwith a tax liability would receive benefits.\nBenefits would be set initially at levels that would permit at\nleast the elimination of the Federal role in AFDC and cashing\nout of Food Stamps. The new Supplemental Security Program (SSI)\nfor the aged, blind and disabled would also be superseded by\nthis program. Such benefit levels would require that the level\nof personal exemptions and possibly the standard deduction in\nthe tax system be raised. Any future increase in benefit levels\nwould require concomitant changes in taxes. Consideration\ncould also be given to some device--perhaps a Constitutional\namendment to require a referendum-to make tax increases above\nsome level subject to the vote of the public.\nIt would be possible to eliminate or sharply curtail Federal\nprograms in social services, manpower, housing and other anti-\npoverty activities, leaving such activities to the States. I\nwould expect that we could make very large reductions in Federal\nemployees in this Department and other agencies as well.\n5\nSubsequently, should inflation occur, we could widen the tax\nbrackets to which given tax rates apply, thus preventing both\ndecreases in the real value of the benefits transferred and\nincreases in the real tax burden on taxpayers.\nDISCUSSION\nWe have done some initial exploration of several important questions\nabout this reform proposal: how would the benefit structure work and\nwhat would it cost us? what problems would it raise?\nOur estimates at this point are necessarily preliminary, but inter-\nesting enough to warrant some optimism. The basic structure we have\nused for estimating purposes is a $3,000 benefit for a family of four\nwithout other income and a benefit structure for the aged, blind and\ndisabled which is the same as they are receiving under the SSI program.\nA benefit reduction rate as earned income rises of 50% is assumed so\nthat there are no payments above $6,000 made to a family of four.\nThis benefit schedule would provide $2,000 to a two person family\nor $3,900 to a six person family if they had no other income.\nSince most individuals and families have some income, a more\ntypical case would be a family of four with a $4,000 income who\nwould receive $1,000 or the same family earning $5,000 who would\nreceive $500. At today's minimum wage, a father heading a family\nof four earns about $3,200. Under the benefit schedule, his\nfamily would receive $1,400 in cash benefits, just enough to\nraise the family above the 1974 poverty threshold.\nThe total benefits to low income persons would run about $17-19\nbillion in FY 1976. Over 90% of these benefits would go to those\nbelow. the poverty level, which would cut the dollar poverty gap\napproximately in half.\nThese costs would be automatically offset through the elimina-\ntion of the AFDC, Food Stamp, and SSI programs which we esti-\nmate will cost the Federal government $14-15 billion in FY 1976.\nThis would leave an initial gap of $3-5 billion.\nA preliminary list of programs which would be eliminated or\nsharply curtailed as a result of the general plan would include\nsocial services, manpower programs, low-incore housing sub-\nsidies and miscellaneous anti-poverty programs. A conservative\nestimate of the FY 1976 cost offsets in this category would be\n$2.5 to $3.5 billion, thus offsetting much of the potential net\ncost. Potential personnel savings might add another $500 million\nto $1 billion savings.\n6\nWe estimate that the benefit program would provide $1.5 to $2.5\nbillion in fiscal relief to the states. If we turn social service\nprograms largely back to the states, such relief could provide a\npotential source of financing either services or supplements, if\nthe states so choose.\nRaising the exemption levels will result in reduced total Federal\nreceipts which we have not yet priced out with Treasury. This\nloss either could be partly or completely offset with rate adjust-\nments, or it could be accepted. The decision would depend on how\nmuch tax relief we could and wished to provide.\nThe net costs, if any, would be highest in the first and second\nyear. This comprehensive concept would, I am confident, be a\nsmaller burden on the taxpayers than the present system in the\nlong run.\nWhen I consider the major problems which this reform proposal raises,\nI find two: the potential difficulties with the Congress, and concern\nwith the work requirement.\nThe difficulties with the Congress come in two forms. First, the\nproposal cuts across many committees and thus is threatening to them\nand their categorical programs. I see no way to avoid this problem;\nindeed we should seek it out since it is necessary to any significant\nprogram reform and implies Congressional reform as well.\nSecond, the Congress will be sorely tempted to add the benefit program\nwithout eliminating other programs such as food stamps. This difficulty\nis clearly most serious and, like the first, cannot be avoided. If we\nJudge this problem overwhelming, we simply 'give up any hope of major\nreform. I do not understand you to be willing to admit defeat on this\nissue, and I share that view. The only way to deal with this issue\nis to put the proposal forward strongly and insist on comprehensive\nreform. It strikes me as an impeccable position.\nSome will no doubt attack this reform as not containing a strong work\nrequirement. It would be possible to put one in for able-bodied adults,\nbut I would strongly counsel against such a course. It seems to me\nthat a work requirement properly belongs and can be effectively adminis-\ntered only at the state and local level. With whatever funds the state\nchooses to use for supplementation or social services, they should be\nempowered to impose such work tests or requirements that are appro-\npriate and favored in their particular setting. If we attempt to\nimpose work requirements from the Federal level, we face the following\nproblems:\n7\nLogically, we incur an obligation to provide jobs in the public\nsector if all else fails. In the past, we have settled for weak\nwork registration requirements which have little impact.\nWe are forced to maintain confusing, large and expensive bureau-\ncratic structures independent of IRS to categorize the population\nand to provide manpower training and other support services which\nhave not proved very effective.\nWe begin to unravel the basic simplicity of the system and fall\nback toward the FAP proposal.\nThe incentives to work built into the reform proposal are strong rela-\ntive to our present system, and there is reason to believe that they\nwill work for most low income persons. Recent studies show a strong\nwork ethic among the poor, and experimental evidence demonstrates that\nwork effort among male heads of families would not be affected signi-\nficantly by such a program.\nIn summary, the Congressional and work requirement problems have satis-\nfactory answers and, in any event, are far outweighed by the advantages\nand opportunities of this reform:\nProgrammatic, tax and Congressional reform.\nA certain means to link expenditures and taxes.\nA strong measure to reduce the size of the Federal government.\nA bold, comprehensive approach which would virtually wipe out\nthe old Federal welfare system in favor of a unified and simpli-\nfied approach.\nThe use of the IRS system as a single efficient administrative\ndevice in which the public has confidence and all participate.\nThis action would also have by-product benefits in tax collection.\nAmerican citizens, particularly those of low income, would be\ntreated equitably across the country under a set of objective\ncriteria which would reduce the amount of subjective govern-\nmental intervention in their personal affairs.\nThe anti-poverty effects would be much better than current programs\nwhich now transfer funds to individuals well above the poverty line.\n8\nRECOMMENDATION\nI recommend that you adopt the Friedman concept in principle and direct\na small group from HEW, Treasury, OMB and the Domestic Council to\ndevelop fully a specific proposal for inclusion in the State of the\nUnion message.\nApprove\nDisapprove\nSee Me\nSecretary"
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