Welfare, Tax Credits, and the Gordian Knot

Writing this blog/column has provided limited opportunity to review issues with the seriousness they deserve.  Cynthia and I have been tasked with keeping it light, punchy, and fun – we’ll leave it to you to judge our success.

However, with the editorial page’s recent take on Warren Buffett, the Earned Income Tax Credit (EITC), and its role in the state income tax, there is an opportunity to look at some of the roadblocks to tax and welfare reform.

The Earned Income Tax Credit is likely the one cash assistance program for which Republicans can take responsibility.  Signed by President Ford and significantly expanded by President Reagan, today it is championed by everyone from Rep. Paul Ryan, President Obama, and, yes, the BDN editors.

By providing a tax credit to low- and moderate-income families to offset payroll and income taxes (and, sometimes, provide a cash subsidy), it helps reduce the tax consequences of working, while guaranteeing some measure of support.  In some ways, it can be seen as the tax corollary to the elimination of the “welfare cliff.”

Effectively, the EITC was an attempt to establish a “guaranteed minimum income” or “negative income tax.” Its intellectual foundation can be traced — in part — to the Nobel-laureate economist Milton Freedman of the University of Chicago.  But a “minimum income” was also a cause championed by avowed socialists like Richard Cloward and Frances Piven.

Of course, a number of other programs also contribute to “guaranteed minimum income” payments, social security and unemployment among them.  Housing programs, health care, food stamps, and other benefits offer like-kind assistance which also impact the standard of living of recipients, mitigating their need for direct income.

Why walk through all this?  To detail the intricacies of the myriad of well-meaning government programs which make up the “welfare system,” including the tax code.  The EITC (and its Maine analogue) may help mitigate the payroll and income tax consequences of working, but if negative consequences in other programs are present, the credit will not have its full intended effect.

Additionally, trying to juggle different eligibility standards and income cutoffs in tax and benefit programs is difficult enough for the government administrators, lobbyists, and legislators who deal with it every day.  In order to keep it all straight, you almost need to commit yourself to it full time — talk about a disincentive to work!

In order to enact real welfare reform or real tax reform, you need to tackle all these programs, laws, credits, and benefits as the incoherent mass they are and try to force some semblance of sanity onto them.  Not to mention glean some savings from the substantial overhead needed for their administration.

Unfortunately, attempting to burn the field and start over will result in uproar from all corners.  Each constituency has a particular program they like and support, and there is perceived political gain in demonizing what the “other side” comes up with.

For example, if a Republican proposed abolishing food stamps in favor of a direct, monthly cash stipend to individuals and families through the tax code (a bolstered EITC), she would be pilloried for “attacking poor women and children” — whether the underlying idea had merit or not.

It is incumbent on us as voters to push our elected representatives in the direction of real change, and then provide them the latitude to make decisions which will rock the boat.  Welfare reform was a major theme in 2014 which resonated with Maine voters, and the numerous attempts at tax reform — from Rs, Is, and Ds alike — over the past 5 years shows consensus that something should be done.

The same needs exist at the federal level with numerous legacy programs.  Social security was created when Prussia was still a state, while the “War on Poverty” began when the Beatles had just come to America.  And the last major tax reform was undertaken when cell phones were the behemoths used by Zack Morris and Gordon Gekko.

The world has changed in that period and, if you were designing a safety net from scratch, you would likely not wind up with this convoluted mess.  Warren Buffett and the BDN editors are correct that the EITC can be an useful program to combat poverty but, viewed in isolation, it’s merely rearranging deck chairs on the Titanic.

The only solution may be cutting the Gordian knot and starting over.  In Maine, that means significant welfare and tax reform which helps all people up, both by increasing the efficacy and coherence of our assistance programs and by decreasing the tax burden upon them.

I recognize it is easy to point out the problem and it is hard to draft the solution, but let’s hope we can get there.  Doing nothing can no longer be acceptable.


Michael Cianchette

About Michael Cianchette

Michael Cianchette was the chief counsel to Gov. Paul LePage from 2012-2013 and deputy counsel from 2011-2012. A Navy reservist, he was deployed to Afghanistan from 2013-2014 as a trainer and adviser to the Afghan National Police. He is an alumnus of the Leadership Maine program and holds a BA in economics and political science from Boston College along with a JD and an MBA from Suffolk University. He works as in-house counsel and financial manager for a number of affiliated companies in southern Maine.