Romney’s plan to help families and promote work

UC Berkeley

High rates of child poverty are a national disgrace. Last year there were 10.5 million children living in poverty — more than one in seven kids. For a mom and two children, this means an annual income of less than $20,598. Child poverty leads to real-time suffering and long-term consequences. Alleviating poverty improves a range of kids’ education and health outcomes. These gains last through adulthood, when low-income children who benefitted from safety net programs have higher rates of employment and earnings. 

Last week, Sen. Mitt Romney (R-Utah) released a bold plan for a monthly child benefit that would meaningfully reduce child poverty. Run through the Social Security Administration, his plan would provide monthly payments of $250 for children ages six to 17, and $350 to those under age six. The benefit would phase-out beginning at $200,000 in income for a single parent and $400,000 in income for a married couple. The benefit would go to almost all parents and would not depend on parental work status or the use of market-based childcare, as current child tax credits are.

The Romney plan offers a number of key advantages over current policy. First, it would simplify the provision of income support to low-income families. The child benefit would replace some tax credits embedded in our complicated federal tax code. It would also streamline the Earned Income Tax Credit (EITC) while maintaining its key pro-work feature. As currently designed, the EITC accomplishes two things. It subsidizes the wages of low-income workers, thereby rewarding and incentivizing work, and also transfers a larger credit to workers with more children. 

The Romney plan would maintain the wage-subsidizing feature of the EITC but would rely primarily on the new child benefit to deliver per-child income benefits to families. Subsidizing the wages of low-income workers and providing income assistance to families with young children are two distinct policy goals, and it makes sense to have two different policy programs to accomplish them. Furthermore, the modified EITC under the Romney plan addresses the sizable penalty on two-earner married couples implicit in the current EITC design — a move that is both pro-marriage and pro-work.

Second, the Romney plan recognizes that it is important that the safety net relieve material hardship, while minimizing any resulting distortions to the decision to work. As professors, we teach our students the standard labor decision model from economics. In this model, an increase in unearned income from a government benefit will reduce work through an income effect: most people will want to use some of their new income to buy leisure. The key disincentive to work in this model comes from the reduction in the return to work on account of high marginal tax rates imposed on workers as the government benefit phases out with higher earnings.

A promising feature of the Romney plan in this regard is that the child benefit does not phase out until very high levels of income, essentially eliminating that phase-out distortion. Still, the Romney plan would provide cash to low-income families without earnings. The evidence suggests that any such effect on parental earnings coming just from this income effect will likely be very small. 

Moreover, moving away from a safety net that is only available to those with positive earnings isn’t all bad. A work-based safety net is not well-designed to buffer families during recessions, and it essentially punishes children whose parents can’t find work.

Part of the financing for Romney’s plan would come from the elimination of the Temporary Assistance to Needy Families (TANF) program. TANF was created by the 1996 welfare reform and is a decentralized program that states use for a variety of purposes, including limited cash support (generally with work requirements), as well as funding for childcare, job training, college scholarships, marriage classes and other assorted activities. Replacing this hodge-podge program with a streamlined child benefit is a step in the right direction.

But simply eliminating TANF will leave holes in the budgets of states. These budget gaps could be offset with targeted federal support for important investments that would encourage and reward work, such as center-based childcare or accredited higher education or training programs. 

There is much to like about this proposal, but it could be even better and do more to ameliorate child poverty in this country with a few straightforward changes.

Because of the way Romney’s child benefit would be financed, some unmarried working mothers may be made worse off by the plan, and $3.3 billion would be cut from the food stamp program. To realize the full anti-poverty effects of his proposal, Romney should alter the way it is paid for. Reducing assistance for some low-income single mothers to help provide a child benefit to others is unnecessary. Taking food away from the hungry to help parents with children is unwise. There are far better ways to raise the revenue necessary to fund a child benefit program.

The child benefit proposed by Romney is a major step toward building a better, more effective safety net for children. It has launched a robust debate today about how to fight poverty. It can and should be improved to help all Americans living in poverty, especially children, to see a better tomorrow.

Melissa S. Kearney is the Neil Moskowitz Professor of Economics at the University of Maryland and director of the Aspen Economic Strategy Group. Diane W. Schanzenbach is the Margaret Walker Alexander Professor of Social Policy and director of the Institute for Policy Research at Northwestern University. 

Tags Child benefit earned income tax credit economy Federal assistance in the United States Mitt Romney Social programs in the United States Temporary Assistance for Needy Families Welfare economics Welfare in the United States

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