Académique Documents
Professionnel Documents
Culture Documents
John C. GoOOman
and
Michael D. Stroup
EXEOJTIve SUMMARY
New evidence shows that there are remarkable differences among the people
we label as "poor." The poverty population includes the elderly poor as well as
unwed teenage mothers. It includes people with college degrees as weJl as
people who are functionally illiterate. It includes the healthy as well as the
sick. It includes people who are able to support themselves through productive
work as well as people who are mentally impaired. It includes people who use
the welfare system only for temporary relief as well as people who become
perpetual wards of the state.
Every year large numbers of people fall into poverty, but remain poor for
only short periods of time. At the same time a large portion of people who are
now poor wiIl remain poor for very long periods of time.
Among the people who fall into poverty in any given year, 45 percent
will be out of poverty by the end of the year.
Yet of those who currently are poor, about half wlll remain poor for
at least a decade.
Ninety-four percent of all shelters for the homeless in the U.S. are
operated by private sector organizations.
There is mounting evidence that the private sector does a better job at
getting aid first to those who need it most, at encouraging self-sufficiency
and self-reliance, at encouraging the family unit, and at using resources
efficiently. Currently, the federal government has a monopoly on welfare tax
dollars. It is time to end this monopoly by allowing private citizens to make
decisions on how their welfare tax dollars should be spent.
A proposal to privatize the welfare state begins on page 33 and is followed
by 21 questions and answers on the details of the proposal.
3.0
2.0
0.5
0.4
0.3
1955
1960
1965
1970
1975
1980
In his 1986 State of the Union address, President Ronald Reagan called for
a national reexamination of the nation's welfare system--of its effect s on
family, individual initiative and self-reliance, and most important, of its
effects on children. As a result, a national debate has begun. On the one
hand, there are those who argue that the effects of the U.S. welfare state are
primarily beneficial and benign, helping people who are in poverty because of
external circumstances over which they have no cont rol. On the other hand,
there are those who argue that the welfare state is creating poverty, encouraging millions of people to choose the condition of poverty because of the
attractions created by an overly generous welfare system.
This study argues that there is some truth on both sides of the debat e.
Welfare does indeed help people who find themselves in a condition of poverty
over which they have little or no control. At the same time there is overwhelming evidence that the welfare state encourages dependency, the breakup of
families and the emergence of the single-parent household--effects which
no humane, well-meaning person can approve.
An ideal welfare system is one which helps people who are in genuine need,
without at the same time encouraging anti-social behavior. In this study we
argue that this ideal cannot possibly be achieved through reform and modification of federal welfare programs. Nor can it be achieved by turning over the
administration of such programs to state and local governments.
The ideal welfare system requires "hands-on-management," a system in which
the amount and type of aid is determined on a case-by-case basis, depending on
the individual circumstances of the recipient. Such a system can be run and
administered only by the private sect or.
In short, the solution to the U.S. welfare-poverty crisis is to privatize
the welfare state.
1The authors would like to thank the following people for their helpful
comments and criticisms during the preparation of this manuscript: ,\tartin
Anderson (Hoover Institution), Stuart Butler (Heritage Foundation), Edwin Dolan
(George Mason University), Lowell Gallaway (Ohio University), Anna Kondratas
(Heritage Foundation), Dee Martin (White House), Tom ~\oore (President's
Council of Economic Advisors), Charles Murray (Manhattan Institute), Gerald
Musgrave (Economics America, Inc.), June O'Neill (U rban Institute), and Gordon
Tullock (George Mason University). These helpful comments do not imply
endorsements, however. The authors of this report bear sole responsibility for
its contents. Proposals similar to the ones made in this study have been made
by Donald Sammis and Joseph Piccione. See Joseph Piccione, "The Human Services
Option: New Funding for the Charitable Sector," (Washington, D.C.: The Free
Congress Research and Education Foundation, 1982).
1
EVIDENCE OF A PROOLEM
That
evidence
scholarly
is clear,
Anecdotal Evidence
What U.S. pollcymakers are coming to reaHze only reluctantly is a fact
that any radio talk show host can confirm on a moment's notice. Let the talk
show host brinlS up the subject of welfare and the phone banks will light up
immediately as callers eagerly recount first-hand knowledge of young women
who intentionally become pregnant in order to become eligible for welfare, of
welfare recipients who refuse employment opportunities in order to retain
welfare eligibility, of welfare recipients who cheat and defraud the system,
and so on.
Most social scientists are reluctant to base public policy on evidence
collected in such a casual way. However, a good social scientist does not
totally ignore such evidence either.
Scholarly Studies
Beginning in the mid-I960s a number of studies of the welfare system were
conducted by scholars with impeccable academic credentials. None of these
studies actually proved that welfare was causing poverty.
Yet each provided a
penetrating analysis of particular dimensions of the problem and did so in
very powerful and persuasive ways.
The Moynihan Study. In what has become a classic in the field, The Negro
Family2 was published in 1965. Its author, Daniel Patrick Moynihan, then a
professor at Harvard University, expressed alarm over the fact that 20 percent
of all black children were living in single-parent households. (Today the
figure is more than 60 percent.) The book touched off a storm of controversy,
as did his later advice to the Nixon Administration: Quit pouring money into
the black community and instead follow a poHcy of "benign neglect."
The Anderson Study. Martin Anderson, a Senior Fellow at Stanford
Universitys Hoover Institution and at one time chief of the Office of PoliCY
Development in the Reagan White House, wrote the pathbreaking book Welfare in
the late 1970s. In it he calculated how much a poor family in California would
lose (in terms of taxes and lost welfare benefits) if the breadwinner went
2Daniel P. Moynihan, The Neg.ro Family: The Case for National Action, (Washington, D.C.: U.S. Department of Labor, March 1965).
Astonishing)y,
Poor families could lose as much as 80 cents for earning one more
dollar from productive work.
Anderson concluded that the welfare system was designed from top to bottom to
encourage dependency and to discourage self-reliance.
The Gilder Studies. Geor6e Gilder is a SOCiologist who in the mid-1970s
did something no other modern scholar had done before. He spent several years
living among poor families who were receiving welfare. Gilder's study, Visible
Man4 and his best-seHer, Wealth and Povert y5 analyzed in great detail how the
welfare system was destroying the family, especially the black family, in
low-income communities.
The NCPA Study. "Welfare and Poverty"6 was the first study to document how
the welfare establishment has managed to spend increasingly larger sums of
money, while at the same time maximizing the poverty count. Official measurements of poverty count only money income, and ignore in-kind benefits such as
medical care, food stamps and public housing. By spending ever-increasing
amounts of money on in-kind (non-cash) benefits, instead of cash benefits, the
welfare establishment has managed to make welfare increasingly att ractive
without disqualifying reci~ients by endangerinb their status as "poor."7
Between 1965 and 1981, cash transfers to the poor barely changed at
all in real terms.
Over the same period, non-cash benefit s for the poor increased 5,238
percent.
The Murray Study. More than any other single study, Charles :v\urray's
Losing GroundS shocked liberals and conservatives alike into a realization that
something was wrong with the U.S. welfare system. Murray ar6ued that in our
central cities the black family has been aU but destroyed, and he made a
forceful case that the welfare system bore chief responsibility for this
shocking development.
Statistical Proof
One of the criticisms of the studies by Murray, Gilder and others is that
they did not perform rigorous statistical tests to support their positions.
Social scientists, by nature, like controlled experiments and rigorously
developed econometric tests of important propositions. As it turns out, this
kind of evidence is now in hand.
The Negative Income Tax Experiments. In controlled experiments performed
by the U.S. Department of Health and Human Services, the effect s of a guaranteed income on families were observed over several years in large cities. In
the Seattle and Denver Income Maintenance Experiments, families were given a
minimum level of income by the federal government. Compared to similarly
situated families not on welfare, families who were given the income chanf,ed
their behavior substantially:9
NCPA by Lowell
first-of-its-kind
people who were
of the welfare
8Charles Murray, Losing Ground, (New York: Basic Books, 1984). See also Charles
Murray, "White Welfare, White Families, White Trash," in National Review, \larch
28, 1986, pp. 30-34.
9Summa rized in Murray, Losing Ground, pp. 151-152. See also Overview of the
Seattle-Denver Income Maintenance Experiment Final Report, U.S. Department of
Health and Human Services, May, 1983.
lOLowell Gallaway and Richard Vedder, "Paying People to be Poor,1t Policy Report
11121, National Center for Policy Analysis, DaJJas, Texas, 1986.
4
Since 1972, there has been a strong, positive relationship between the
amount of welfare spending and the amount of poverty, after adjusting for other
important factors, including the unemployment rate and the rate of economic
growth. Put simply, we are experiencing more poverty because we have been
increasing the amount we pay people to be poor.
One of the greatest tragedies of the welfare system is its effects on
children. The statistical evidence shows that:
The states that have paid the most generous benefits to welfare mothers
have experienced the greatest increases in child poverty. By contrast, states
that have been the least generous have seen major reductions in child poverty.
Between 1969 and 1979, the child poverty rate rose 27.9 percent in the
10 states with the highest welfare benefits.
Over the same period of time, the child poverty rate fell by 17.4
percent in the 10 states with the lowest welfare benefits.
The GAO Report. 11 In the previous studies, the focus was on the harmful
effects of increased welfare benefits on the behavior of people. \\'hat made
this study by the General Accounting Office unique was that it focused on the
opposite phenomenon: \\'hat happens to the behavior of people when welfare
benefits are reduced?
!lAn Evaluation of the 1981 AFDC Changes: Initial Analyses, General Accounting
Office, April 2, 1984.
5
should have the reverse effect: Denied welfare benefits, former recIpIents
would be expected to engage in more productive work and other behavior which
causes families to be reunited. The GAO study sheds interesting light on
these speculations.
Although couched in bureaucratese, and worded carefully to avold making any
judgements about why AFOC mothers were behaving as they did, the GAO study'
produced evidence that shows what common sense and previous studies already
suggested. Bereft of AFOC and food stamp benefits, welfare mothers turned to
private options to recoup the losses.
The GAO study focused mainly on welfare mothers who were earning a privat e
income before and after losin& their AFOC benefits. The study showed that
approximately two years after losing AFOC benefits:
On the average, welfare mothers had increased the number of hours they
worked, were commanding a hil:)her hourly wage, and overall had increased their real income from working si 6nificantly.
Not only did the welfare mothers who lost AFOC benefits respond by changing
their work behavior, they also reacted to the loss of welfare benefits by
making important chanl:)es in their family lives.
Other Studies. Other, more general studies of the welfare system have
confirmed the existence of a major problem. These include studies from some
traditionally liberal sources, including the Wisconsin Institute for Research
on Poverty and the Urban Institute. For example:
One recent study concludes that all U.S. transfer payments combined
have reduced the Jabor force by 4.8 percent. 12
12Sheldon Danziger, Robert Haveman, and Robert Plotnick, "How Income Transfer
Programs Affect Work, Savings, and Income Distribution: A Critical Review,"
Journal of Economic Literature, Vol. XIX (September, 1981), p. 996.
6
Another study suggests that aU of the Reagan welfare budget cut shave
increased the labor force by as many as one million people.!.3
However, before drawing any general conclusions about the welfare system
from these findings we need to take a closer look.
TWO VIEWS OF POVERTY
l.3Robert Haveman, "How Much Have the Reagan Administration's Tax and Spending
Pollcies Increased Work Effort?,1t in Charles R. Hulten and Isabell V. Sawhill,
editors, The Le ac
of Rea anomics: Pros ects for Lon -Term Growth,
(Washington, D.C.: The Urban Institute Press, 1984. See also the analysis of
this estimate in David Henderson, "Analyzing the Reagan Record," National
Center for Policy Analysis, Policy Report 11114, October, 1984, pp. 9-12.
14Michael Harrington, The New American Poverty, (New York: Basic Books, 1984);
Sar A. Levitan and Clifford M. Johnson, Beyond the Safety Net: Reviving the
Promise of Opportunity in America, (Cambridge, Mass.: Ballinger Press, 1984);
John E. Schwartz, America's Hidden Success: A Reassessment of Twenty Years of
Public Policy (New York: Norton, 198.3).
15Charles Murray, Losing Ground; George Gilder, Wealth and Poverty; Warren
T. Brookes, The Economy In Mind, (New York: Universe Books, 1982) Chapter 7.
Going down the narrow road, ringing the bell, waltlng while an official
with a not-too-pleasant face looked through a grating to see who was there,
and hearin~ his unpleasant voice ... made it easy for me to understand why
the poor dreaded and hated these places It was not necessary to write
the words 'Abandon hope all ye who enter here' everything possible was
done to inflict mental and moral degradation . of goodwill, kindliness,
there was none.l 6
On the other hand, there were other prominent people who devoted their
lives to improving the plight of the poor, yet concluded that poverty was
mainly the result of individual behavior. Charles S. Loch, secretary of the
Charity Organization Society, one of the most important private charities in
England at the turn of the century, wrote that "Want of employment in nine
cases out of ten in which the plea is used is not the cause of distress. It
is, as often as not, drink."17
In Loch's view, it was important that the
conditions under which relief was given never be perceived as more desirable
than the least appealing job opportunities in the labor market.
TWO VIEWS OF WELFARE
of the
Welfare
State
Thus, Greg Duncan and Richard Coe argue that the U.S. welfare system serves
as social safety net, which bives relief to people in need without encouraging
long-term dependency.l8
By contrast, those who take a behavioral approach to the problem of ?overty
see the U.S. welfare system as one which increasingly rewards bad behavior.
Why do we have increasing poverty in America? To Charles Murray,the answer is
stra1~htiorward: We have increasing poverty because we are paying people to be
poor. 19
TABLE I
Two Views of Poverty
Problem
Solution
Bureaucratic Approach:
Lack of Income
Behavioral Approach:
Behavior
Change behavior
Result
Bureaucratic Approach:
Welfare increases
income
Reduces poverty
Behavioral Approach:
Welfare rewards
bad behavi or
Increases poverty
For states:
For individuals:
20Mary Jo Bane and David T. Ellwood, "SUpping Into and Out of Poverty: The
Dynamics of Spei1s," unpublished manuscript, August, 1985.
10
Among people who become poor at any point in time, 1+5 percent will be
out of poverty within one year.
Among people who currently are poor, more than half will remain in
poverty for 10 years or more. 22
The average black chlld in poverty today will remain in poverty for
almost two decades. 23
Bane and Ellwood also discovered that even among the short-term poor, there
are radical differences in the reasons for their poverty and in the methods
that are used to bet out of poverty. In their own words, "The poverty population is extremely heterobeneous.n21+
These differences are important. Continuing with the hospit al analogy, no
one in his right mind would recommend that the chronically ill be given the
same medical treatment as the short-stay patient, or that all short-stay
patients be diagnosed and treated in the same way, regardless of medical
condition. Yet that is precisely the way the federal government runs the
welfare st at e.
21+ Ibid.
25This section is based on An Evaluation of the 1981 AFOC Changes: Initial
Analysis.
11
To see how lucrative welfare benefits in Boston are, consider the case of
a welfare mother as described by a reporter writin o in the Boston Globe in
1975:
The mother is well-organized. She buys food stamps twice a month, refuses
to live in a housing project, is a member of a community women's group at
Catholic charities, and is studying for her high school diploma. Her
bimonthly cash grant is $466; she gets a flat grant every three months of
$142; and her monthly savings from food stamps amount to $86. Her cash
income may be given as $599 monthly, or $7,138 a year. If she and her
family spent the average amount paid personally for health care in this
country (and the mother gets some psychiatric care), this would amount at
full cost to an additional $1,750 in health care expenses. Since there are
no financial restrictions for the family on the use of health care, and the
mother is intelligent and knowledgeable, one may assume that full use of
this opportunity is taken. The three older children go free of char6e to
an alternative school which costs paying pupils $2,000 a year, and another
child goes to a day care center whose cost for a paying child would be
$1,000 a year. Cash income and free health and education services to thi s
family thus amount to $16,023. The older children work summers, and I will
not cost that out. The family pays no taxes, and need put nothing aside
for savings, as the welfare department is committed to meeting its needs.
A working head of family would have to earn at least $20,000 to match this
standard of living. 26
Differences in Conditions.
As Table II Shows, the characteristics of
welfare mothers who lost their AFOC benefits in Dallas and Boston are quite
different. Clearly the welfare mother in Dallas was in greater need.
The Dallas mother had more children and younger children than her
Boston counterpart.
After AFOC payments were discontinued, the Boston mother was three
times more likely than the Dallas mother to be above the poverty
level, three times more likely to have private health insurance, and
38 percent less likely to turn to private charity for food.
Surprisingly, 2.5 percent of the Boston mothers who lost AFOC payments
had a college degree and 1.7 percent had a graduate degree.
The Boston mother also showed greater ability to hold down a job Lor a
longer period of time. Length of time with the current employer was
twice as long in Boston as it was in Dallas.
The Boston mother went on AFOC more quickly, stayed on it longer, and
was more likely to have received other welfare benefits (such as
housing subsidies).
She also was more likely than the Dallas mother to have received AFDC
as a child.
Differences in Labor Market Response. Among AFOC mothers who lost their
benefits in 1981, the loss in Boston was more than twice the loss in Dallas.
In addition, about 85 percent of the Boston women also lost food stamps,
compared with only 42 percent in Dallas. Yet despite the greater loss of
benefits in Boston, the welfare mothers there suffered much less economic
dislocation than those in Dallas.
The difference stems from the fact that Boston mothers were more likely to
recoup in the private marketplace income that they had lost from AFDC and food
stamps.
Boston mothers increased the hours they worked, earned more per hour,
and, on average, increased their monthly earnings by 25 percent.
contrast, in Dallas, where AFOC mothers had a greater need and less ability to
compete in the marketplace, welfare benefits had only a moderately discouraging
effect.
In Boston, 11 percent returned to AFOC (usually after ceasing employment), whereas in Dallas the percentage was twice as high.
It appears that the more lucrative the private marketplace options, the more
likely that work will be chosen over welfare.
The comparison of these two cities, then, underscores the difficulty in
making generalizations about the nation's welfare system. Even beneralizations
about a single city are hazardous. In Dallas, for example, 24 percent of
welfare mothers who lost AFOC benefit s had real incomes just as high or higher
than they had when they were receiving benefits and, thus, suffered no enduring
economic hardship.
14
TABLE II
Loss of Welfare Benefits:
Effects on Welfare Mothers
(Two years after loss of benefits)
Boston
Dallas
$156
$7 1
85%
42%
29%
1 1%
2.8
3.1+
33%
52%
56%
43%
8 .5
61
4 .6
5 .3
19%
16%
.3 4
1.7
- 12%
-31 %
43%
249&
35%
21%
66%
1 S%
49%
16%
28%
59%
2.2
1.5
$.85
$.27
$176
$ 36
25%
6%
1.5%
24%
5%
22%
11 %
22%
16
3.
Aid should be given in a way that encourages independence and seJfreliance.
Since the very act of giving relief encourages dependence,
procedures should be adopted to create positive incentives for
self- sufflci ency.
4.
The welfare system should not encourage the break-up of the family.
Family members should never find it in their economic self-interest to dissolve
the faml1y unit.
5.
Short-term help should be available to many; long-term help should be
reserved for a few. A humane welfare system is one which readily provides
temporary and emergency help to those in need, while a responsible welfare
system is one which provides permanent aid to only the very few who cannot
support themselves.
6.
The goals of the welfare system should be achieved at the mlrumum
cost. As with every other social goal, it is in our self-interest to find the
most cost-effective ways of operating the welfare system based on these
principles.
PUBLIC SECTOR FAIWRE/PRIVAlE SEcrOR SUCCESS
More than 85 percent of all adult Americans make some charit able
contribution each year. 28
If the value of volunteer labor is included, private sector contributions to charitable causes exceed the poverty budgets of federal,
state and local governments combined.31
In this section we contrast some of our best private charities with federal
welfare programs in terms of the characteristics of an ideal welfare system.
29Ibld.
3OIbld.
31This is total spending on means-tested programs. See Vee Burke, "Cash and
Non-Cash Benefits for Persons with l.imited Income: Eligibility Rules, Recipient
and Expenditure Data, FY 1982-84," Congressional Research Source Report
No. 85-194 EPW, September 30, 1985.
18
.3OThe U.S. Department of Health and Human Services, Helping the Homeless: A
Resource Guide, (Washington, D.C.: 1984) p. 115.
31lnterviews with Dallas Salvation Army social services program administrators
and di rect ors.
19
Stage One:
The crisis stage, when a family is provided with
immediate, temporary shelter.
Yet
Where do people in need turn for help when they aren't betting g,overnment
assistance? They turn to private charities. 34
Ninety-four percent of all shelters for the homeless in the U.S. are
operated by churches, synagogues, non-religious groups, and other
voluntary organizations.
The private sector also is very heavily involved in emergency food distribution .35
The Second Harvest network (comprising 79 of more than JOO food banks
in the U.S.) distributes about liS million pounds of food each year,
worth about $78 million.
This food is donated by the food industry and by private donors; about
40 percent of it goes to food centers pat ronized by the homeless.
Several studies of low-income families confirm the fact that when ?eople
get in trouble, they turn to the private sector first. J6
34S. Anna Kondratas, "A Strategy For Helpinf, America's Homeless," (Washington,
D.C.: The Heritage Foundation, 1985) p. 10.
35Ibid.
36See Robert Woodson, liThe Importance of Neighborhood Organizations in \1eeting
Human Needs," in Jack A. Meyer, ed., Meeting Human Needs: Toward a New Public
Philosophy, (Washington, D.C.: American Enterprise Institute, 1984), p. 1.36.
21
37Lawrence M. Mead, Beyond Entitlement, (New York: The Free Press, 1936).
38Ibid., pp. 122, 12.5. For a summary of workfare programs currently underway see
S. Anna Kondratas "The Political Economy of Work-For- Welfare," (Washingt on,
Kondratas 6ives these
D.C.: American Legislative Exchange Council, 1986).
programs a mixed review and concludes that many of the favorable claims made
about certain workfare programs, including the Massachusetts program, cannot be
verified
.39Helping the Homeless: A Resource Guide, p. 17.
22
.s.
Temporary
YS.
Long-Term Relief
A prevalent philosophy in the private sector is that most people are fuJly
capable of taking responsibility for their lives in the long-term, but that
emergencies and crises occur in which help is both necessary and desirable. As
a consequence, private sector agencies make it surprisingly easy for recipients
to obtain emergency relief. It really is true that in America, almost anybody
can get a free lunch.
The almost universal characteristic of the private sector is: It's easy to
get on welfare, but hard to stay there. Most government programs, by contrast,
have the opposite characteristic: It's hard to get on welfare, but once on it,
it's easy to stay there.
In the public sector, there are often long waiting times between applying
for assistance and receiving aid.
In Texas, the waiting period is typicaJly two to three weeks for food
stamps.43
For AFDC, the waiting period is typically a month after the completion
of filling out complicated and cumbersome application forms. 44
The Dallas Salvation Army has had to hire a special staff to decifer
public welfare regulations and forms so they can adequately refer
people who come to them to the proper public agencies. 45
Of all women who receive welfare in any given year, about 60 percent
will receive welfare the next year.
There is considerable evidence that privat e sect or charity makes far more
efficient use of resources than do public welfare proorams. Consider some of
the ways private charities hold down costs:
Requiring Evidence of Need. Although temporary relief in the form of food
or shelter is fairly easy to obtain frorn private abencies, long-term assistance
or assistance in the form of cash is far more difficult. For example,4S
Before the Dallas Salvation Army will provide cash to help people
defray the cost of rent, recipients are required to present a
court-ordered eviction notice showing failure to pay rent.
44lbid.
45Dallas Salvation Army interviews.
46Martin Rein and Lee Rainwater, "Patterns of Welfare Use," Social Service
Review, No. 52, pp. 511-534, cited in Greg Duncan, Years of Poverty, Years of
Plenty, (Ann Arbor, Michigan: Institute for Social Research) p. 73.
~7Duncan, Years of Poverty, Years of Plenty, Table 3.1, p. 75.
48Dallas Salvation Army interviews.
2~
The caseworker also makes sure the individual applies for aU other
public and private aid for which he or she is eligible before
continued assistance is provided.
These procedures stand in stark contrast to those followed under the food
stamp program, AFOC and Medicaid. Indeed, most states could sionificantly cut
their Medicaid expenditures by followinb precisely the same procedures as those
followed by the Salvation Army:
Yet in most states there is no routine procedure for making sure that
all claims against private health insurance and Medicare have been
filed before Medicaid funds are granted. 50
In the food stamp program alone, about one in every 10 dollars was
spent on overpayments or payment s to ineligible families.
51 Ibid.
25
area. 54
Over the same period, the Texas Department of Human Resources, Region
5 (covering Dallas and 18 other counties) placed only 7,000
volunteers. 55
The number of people actually volunteering through the state agency is only
an estimat e. Whereas the private agency employs a staif of seven ful1-time
employees and a computer system to keep an accurate account of/olunteer
placements, the state program, by contrast, is run by only one full-time
coordinator working with a volunteer secretary. The state coordinator
frequently learns of volunteer work only after receiving monthly reports
submitted by the various agencies and programs. Unfortunately, there is no
consistent method of reporting that is followed by all agencies.
From what data that is avallable, however, we were able to learn the
foIl owl ng: 56
Operation Food Search in St. Louis provides about $& million worth
of food annually to local food banks and soup kitchens at a cost of
only 1.5 cents per pound.
Private foster care agencies have shown they can out-perform government agencies. 58
Private at;encies engaged in job training for teenagers59 and for the
mentally and physlcally handlcapped60 have shown they can out-perform
government agencies.
56Ibid.
57Compiled from material provided by Operation Food Search, 325 N. Newstead,
St. Loui s, Mo. 6310&.
58Robert Woodson, "Child Welfare Pollcy" in Meeting Human Needs, pp. 455-465.
59Sean Sullivan, "Youth Employment" in Meeting Human Needs, pp. 215-257.
roy. Ruth McKinnon, Patricia W. Samors, and Sean Sullivan, "Business Initiatives
in the Private Sector" in Meeting Human Needs, pp. 53-91.
27
61"The Grass is Greener in Public Housing: From Tenant to Resident to Homeowner," A report submitted to the U.S. Department of Housing and Urban Development by the National Center for Neighborhood Enterprise, Washington, D.C. October, 1984.
62McKinnon, Samors, and Sullivan, "Business Initiatives in the Private Sector,"
in Meeting Human Needs, pp. 53-91.
63Andrea M. Haines, V. Ruth McKinnon, and Pat ricia W. Samors, "Social Service
Programs in the Public and Private Sectors," in Meeting Human Needs,
pp. 421-454.
64Ibid.
65Giving U.S.A.: 1985 Annual Report, p. 7.
28
In what follows, we briefly analyze some major tax reforms currently being
considered.
Reducing Mar&inal Tax Rates. When the highest tax bracket is 50 percent,
the "cost" of giving a dollar to charity for a high-income individual is
50 cents. This is because one-half of the gift is money that otherwise would
have gone to government in the form of taxes. Lowering the highest maq;inal
tax rate from 50 percent to 25 percent, raises the "cost" of giving from 50
cents to 75 cents. In other words, it becomes more expensive for individuals
to give to charities. In this way, lowering marginal tax rat es discourages
private donations to charity, despite its other beneficial economic effects.
Limiting Deductions for Charitable Contributions to Two Percent of Income.
Such a change would limit the tax advantage of making charitable contributions. Those who are more philanthropic would be more heavily taxed than they
are under current law.
Establishing a Deduction Floor for Non-Itemizers. This means that t axpayers who do not itemize on their tax returns would be allowed to deduct contributions only in excess of a minimum amount. In the House of Representatives
tax reform package, the floor was set at $100. The effect of this reform
would be to discouraGe giving. According to one estimat e:66
Experience with similar "floors" in the tax code shows that Congress tends
to raise them over time. 67
Increasing the floor to $.300 would increase the loss by 800 percent.
29
This reform would have its primary effect on low to moderate income
families. Of all private giving in 1981, one-third came from families with
incomes of less than $20,000. 68
Disallowing the Deduct ability of the Full Market Value of Gifts of
Appreciated Property_ Currently, taxpayers can make gifts of property which
has appreciated in value, and take a deduction equal to the market value of the
property without paying a capital gains tax. That practice would be ended if
the House version of the tax reform is adopted. The evidence suggests that:
Tax Policy
Current Law
Level of Giving
in .198.5
(billions)
Percent
Reduction
$65.7
Treasury I Proposal
51.3
-22.0%
Treasury II Proposal
54.8
-17.0%
House Proposal
62.5
-4.6%
Senat e Proposal
62.4
-4.9%
Senate Proposal II
(Packwood Plan)
53.7
-18.3%
The danger in this trend is that the entity that has failed so miserably in
administering its own welfare programs will come to dominate and control the
agencies that administer programs that work. For example, it is not uncommon
to find private agencies that are heavily dependent on government fundS
providing services almost exclusively to AFOC recipients. What this means in
practice is that the private agencies have accepted the federal government's
definition and conception of who is in need and who should be helped.
There is evidence that administrators of private, nonprofit or 6 anizations
are increasingly aware of the dangers of becoming financially dependent on
government.7.3
Eighteen percent said that receiving federal funds caused a significant distortion in the activities and objectives of their organizations.
.31
A $126,000 U.S. Department of Labor brant was used in part to pay the
salaries of rent cont rol lobbyists.
A $200,000 VISTA grant was used to fund a training camp for political
activists and community organizers.
all sources
See also
Overall, each additional dollar of social welfare spendinl!, by 60vernment leads to a 30 cent reduction in private contributions.
role of a public
position of being
coercion (throu;:;,h
dollars are spent.
34
opportunity to instruct the U.S. Treasury (on their income tax returns) to pay
up to 10 percent of their taxes to specific private charitable organizations.
Any amounts al10cated to private charities under this proposal would have to be
deducted from the federal government's poverty budget. In other words, for
each tax dollar allocated to private sector charity, pubJic sector charity
would be reduced by a dollar.
In 1984, total federal personal income taxes amounted to $296.2 billion.
Ten percent of this amount is approximately $30 billion, or a little less than
one-third of ail federal welfare spending. Had Proposal A been in effect in
1984, individual taxpayers would have had the opportunity to allocate one-third
of the federal welfare budget away from t;;overnment programs to private sector
programs. If the public took full advantage of this opportunity, then Congress
would be required to cut $30 billion out of pubJic sector programs. How the
cuts would be made would be left up to Congress.
Proposal B: Competition and More Choice
Proposal B is a natural extension of Proposal A. It broadens the choice of
the individual taxpayers by allowing individuals to allocate their entire share
of the social welfare budget among all public and private sector agencies and
programs involved in the "business" of welfare. Every social welfare
agency--public and private--wou1d compete against every other agency for
welfare tax dollars. In principle, Proposal B allows the public to make all of
the decisions on how the social welfare budget is to be allocated, although
individuals would be free to forego this responsibility by indicating on their
tax returns that they would like to relinquish to Congress the right to decide
how their welfare tax dollars are spent.
In 1984, total means-tested welfare spending by the federal government was
$100.5 bi11l0n 80 --an amount equal to about one-third of all personal income
taxes paid that year. Thus, Proposal B would &ve individuals direct control
over how one-third of their tax dollars would be spent.
Proposal C: Competition and More Choice Still
IDYee Burke, "Cash and Noncash Benefits for Persons with Limited Incomes," p. 2.
35
Proposal C would do just that. Under the proposal, Congress would define a
"human services budget," which would include, in addition to poverty programs,
spending on education, medical research, arts and cultural programs. (Proposal
C would exclud e spending on religious and political activities, as would
Proposals A and B.) Under Proposal C, all public and private sector agencies
with a human services purpose would compete against each other for taxpayer
dollars, and individual taxpayers would have the option of allocating their
individual shares of the human services budget.
Advantages
The three proposals made here have obvious advantages that should lead to a
more humane and desirable welfare system. The proposals would replace monopoly
with competition and would allow freedom of entry into the marketplace.
Charitable organizations would be able to attract contributions only by making
a persuasive case to the public. No longer would inefficient, wasteful federal
programs be able to count on uncontested access to taxpayer dollars. No longer
would special interest c;roups be able to count on political largesse as a
result of their special influence. Most important, the people giving the
money would have direct control over how their "tax dollar contributions" are
spent.
36
APPE.N)IX
Twenty-One Questions and Answers About the Proposals
1. How will the "tax doUar contributions" actually get to the private
charities to whom they are designated?
In most cases, the private charities will receive funds exactly as they do
now--in the form of checks from givers. Under our proposals, the donor would
simply indicate on his income tax return the names and tax 1.0. numbers of the
organizations to whom he has allocated his tax dollar contributions. However,
taxpayers also will have the option of having the U. S. Treasury make the
contribution by indicating. on their individual tax returns which organizations they wish to give to and in what amounts--in a manner similar to the way
in which taxpayers can now allocate $1.00 of their taxes to the presidential
election campaign fund.
2. What if an individual wishes to make charitable contributions in excess of
the limits in your proposal?
Individuals wiH make two types of decisions with respect to private
charities: (1) whether to allocate a portion of their welfare tax dollars to
private charitable organizations, and (2) whether to contribute additional
personal dollars to these organizations.
The second category of
giving--voluntary, personal gifts--will continue to qualify for tax deductions
in exactly the same way as they currently are treated under the tax code.
3. How would a private organization qualify to be eligible for tax dollar
cont ributions?
The procedure would be identical to the one
organizations that wish to be able to receive
Under Proposals A and B, the organization's
confined to social welfare services.
Under
cultural activities also would be included.
a.
b.
c.
d.
6.
No. The same prohibitions that now apply to IRS designated 501 (c)O)
nonprofit organizations would apply to organizations that receive tax dollar
contributions. Public pollcy research institutes would be excluded under
Proposals A and B, but included under Proposal C.
7.
to allocate funds only to the extent that individual taxpayers choose to '/oluntarily relinquish this choice to Congress.
9. Isn't there already a problem of private charities spending too much money
on fundraising? Wouldn't this problem be made worse by the kind of aggressive competition you seem to want and approve or?
Maybe. Advertising does more than simply persuade. The best kind of
advertising also informs. Right now there is too little information about
public and private charities and what they do. Furthermore, some of the best
private charities have discovered that it is a real selling point to disclose
how ~ they spend on fundraising. For example, the Kansas City Salvation
Army, with a budget of over $5 million, spends only eight cents on fundraising
for every doUar it raises. 81 If the value of volunteer labor is included, the
organization probably spends less than a penny on fundraising for every dollar
of spending. In our opinion, that's a good argument for giving to the Kansas
City Salvation Army.
10. Won't most of the contributions go to agencies that employ slick Madison
Avenue advertising campaigns rather than to the charities that do the best job?
Our experience with the private marketplace teaches us
Not necessarily.
that people can be fooled some of the time, but as many a bankrupt businessman
knows, they cannot be persistently fooled.
1I. Given the complexity of the welfare-poverty industry, how can an average
citizen make intelligent choices about where his tax dollar contributions
should be spent?
One option Is to rely on the advice of "experts." Ric,ht now, the taxpayer
is coerced into taking the advice of one particular group of experts--the
U.S. Congress. Our proposal would leave that option open--individuals could
continue to allow politiCians to make decisions for them. But they also would
have the option of getting advice from other "expert S,II whose opinions are
not distorted by the desire to get re-elected.
12. Since each individual taxpayer will be making decisions without knowing
what decisions are being made by everyone else, how do we know that we won't
end up with some bizarre result that none of us really would approve of?
Let's take an example. Suppose everyone in the nation decides to donat e
all of his tax doUar contributions to the Salvation Army, on the assumption
that there wiH be many other people who wil1 give to other worthy causes, such
as suicide prevention centers and homes for battered wives. When the result s
are in, we learn that the Salvation Army is way over-funded and many other
iii
worthy causes have no money at aU. Seeing this result, people wish they could
go back and change their minds, but they can't.
Could something like this actually happen?
We think it's extremely
unlikely for several reasons. In the first place, people make contributions to
private charities every day without consulting their neighbors on their giving
decisions. The results of such private giving are far from bizarre. Secondly,
all of the g,iving decisions will not be made on April 1.5. Giving decisions
will be made throughout the calendar year (in terms of cash gifts and pledges)
and people will have access to a great deal of information about where the
money is going by April 1.5.
In the third place, should there be some bizarre result, such as described
above, there are private sector remedies to deal with it. For example, private
pressure could be put on the over-funded Salvation Army to share some of
its unexpected wealth with the under-funded agencies. It would be in the
Salvation Army's self-interest to accede to the pressure in order to maintain
good relations with the giving public.
Finally, the problem--if it is a problem--is only a short-term one. People
have memories. In making giving decisions this year, they will remember what
everyone else did last year, and adjust their behavior in the libht of that
knowledge. Over time, we wiU move to a fairly stable eqUilibrium pattern of
giving in which people will be able to make reasonably well-informed decisions
about where charitable contributions are going and how they want to allocate
their own funds, given the overall pattern.
13.. What if no one allocated their tax dollar contributions to federal welfare
programs?
Under Proposal A, Congress would still have approximately two-thirds of the
federal poverty budget to allocate. Under Proposal B, federal welfare pr06rams
would have no money and would have to be abolished. Clearly there will be some
adjustment problems in eliminating programs of such size and magnitude. That
is why we propose phasing in the privatization of public charity over time.
14. What about programs for the elderly, such as Social Security and Medicare?
Social Security and Medicare are exempted under our proposals. However,
means-tested programs, such as the Supplemental Security Insurance program,
would be included since they are poverty programs.
16. Under your proposals, won't the total amount of public and private
charitable giving go down?
It is true that we anticipate that a great deal of
Not necessarily.
wasteful, inefficient and counterproductive spending wiU be eliminated.
Considered in isolation, this change would reduce the perceived need for
charitable giving" which in turn might cause a reduction in the amount of
"voluntary" giving and create political pressure to lower the amount of
"required" giving. However, we also are propos! ng a system under which
people wiU have complete control over their own giving decisions and thus,
will have an active, personal interest in how their dollars are spent.
As a result of the increased personal interest and control, it may be that
the public will be willing to accept higher tax rates for the purpose of
funding charitable activities. Personal voluntary giving may increase as well.
17. Technical question: How do we know that the tax dolJar contributions will
actually get distributed to the "right" charitable activities?
We don't. Economists have a theoretical way of describing "ideal" spending
decisions: The last dollar spent on program A should create just as much
social benefit as the last dollar spent on program B. One theoretical
criticism of the current system is that it has no mechanism for reaching this
ideal. Indeed, the current system is inherently destined not to reach the
ideal. That is because in the political arena, decisions are made on the basis
of political costs and political benefits (How many votes lost? How many votes
gained?) and not on the basis of economic costs and economic benefits.
The proposal we are making also has a theoretical defect, however. When
people make individual decisions on how tax dolJars are to be spent, they will
tend to aUocate their tax doUar contributions in the following way: The
last dollar spent on program A will provide just as much personal ("psychic")
benefit as the last dollar spent on program B. Clearly, the personal psychic
benefits people get from various spending decisions cannot be equated with
social benefit s.
What this means as a practical matter is that the system we enVISJOn will
not be perfect, even though we expect major improvements over the current
one.
18. If you admit that the system you propose is not perfect, how do we know
some important social goals will not be left urunet?
We don't. Consider the following problem.
Suppose that everyone in
Dallas, Houston and San Antonio has some concern about poverty in rural
Texas. For each individual, this concern is so small that he allocat es all of
his tax doilar contributions to charitable activities in the city where he
lives. As a result, no money flows from the large cities to help the problems
of poverty in rural Texas. However, if we add up aU of the "smalJ concerns"
of the mi11ions of people that live in the large, urban areas, they may total
up to a very big social concern over a problem that is &oing unsolved.
No one knows how serious such a problem might turn out to be. By gradually
movin5 to the system we envision, we wilJ have the opportunity to observe
whether such problems warrant modifications in the proposal.
19. If individual choice is superior to choices made by politicians, why not
extend your proposal to the extreme and allow each taxpayer to allocate all of
his tax dollars among all federal programs, including national defense?
This may turn out to be a desirable thing to do. However, that there are
potential problems with such a proposal because federal programs have diiferent
degrees of "pubJlcness" to them. As with the problem of rural Texas poverty,
individuals might tend to allocate all of their tax dollars to projects in
their own communities, with nothing left over for truly "national" problems,
such as national defense.
Again, we cannot know what choices people wi1J actually make until we
begin to experiment.
20.
Our proposals giving individuals choice over the spending of their tax
dollars apply only to the federal income taxes. However, state ~overnments
would be free to adopt similar probrams in their own jurisdictions. In
addition, taxpayers would be free to allocate their federal tax dollar contributions to state and local government welfare programs if they choose to
do so.
21. Under Proposal B and C, you would allow individual taxpayers to make all of
the choices on how welfare dollars are spent. If people chose to give all of
their tax dollar contributions to private sector organizations, wouldn't this
completely remove elected officials from the decision-making process and make
politicians essentially superfluous?
Yes.
xi
John C. Goodman is President of the National Center for Policy Analysis and
the author of several books and studies on entitlement programs.
Michael.D. Stroup received his bachelor of science degree in economics from
Montana State University and is a research analyst with the National Center for
Policy Analysi s.