Build Back Better: Hefty Hidden Subsidies for Idleness and Desertion

 

James Tobin, a John F. Kennedy adviser, Nobel laureate, and leading Keynesian economist of his day, concluded in 1965:

Public assistance encourages the disintegration of the family . . . it is bad enough to provide incentives for idleness but even worse to legislate incentives for desertion. . . . All too often it is necessary for the father to leave his children so that they can eat.

Public assistance today is far more generous than in Tobin’s time, prompting elected officials from Bill Clinton to Barack Obama to acknowledge that, in the latter’s words, “we have to have work as the centerpiece of any social policy,” and that “children benefit not just from loving mothers and loving fathers, but from strong and loving marriages as well.” Nevertheless, 48 U.S. senators are now pushing hard to transform families with ambitious new legislation that contains a multitude of hidden but hefty disincentives for work and marriage.

Take Section 23001 of the Build Back Better bill (BBB), which would create a large new federal childcare program. For each year that a couple has children under age 5, being unmarried could easily save them over $10,000 annually in childcare costs compared to being married, because the new program would base the subsidy on household income, without combining the incomes of unmarried parents. If, say, a mother was earning 75 percent of the median household income in her state, her young children would receive care paid for entirely by the federal government — if, that is, she was not married to anyone earning income. The same mother, if married to an earner, would have to bear childcare costs herself. In 2022–24, the family would pay full price, which would likely exceed $15,000 per child per year (e.g., $30,000 for two children under age 5). In later years, being married with a working father would cost them 7 percent of their household income, which itself would be a five-figure expense if the father earned a bit more than the median.

For most families, the childcare costs of having additional children (beyond one) aged 0 to 4 would be zero. The different incentive for a second, third, etc., young child would affect the number and spacing of births, inducing some demographic groups to specialize in large families and others to have fewer children. Some parents would have incentives to keep children under the custody of relatives. Israel has seen such distortions result from its generous welfare programs.

Childcare is just one among a number of programs that would strongly encourage even middle-income people to seriously consider single parenthood. Several Republican senators wrote to Majority Leader Chuck Schumer to object to the new marriage penalties built into Democrats’ proposed reforms to the Earned Income Tax Credit. They cited a new marriage penalty of $2,713 in additional taxes, which seems like pennies in comparison to the additional childcare costs waiting for married couples in Section 23001. That does not include marriage penalties inherent to the $220 billion that BBB would spend on “affordable housing,” the details of which have not yet been determined.

Childcare costs are high enough already, but the new childcare program would increase them further. Under the heading of “quality regulation,” BBB requires that childcare workers be paid as much as elementary-school teachers. According to the Bureau of Labor Statistics (2020), elementary-school teachers earned an average of $63,930 annually in 2019, as compared to an average of $25,510 for childcare workers. That is, under BBB, childcare facilities would have to pay childcare workers 151 percent more. Because $63,930 is nowhere near what equates supply and demand in the childcare market, its operation would have to change dramatically in order to comply with the statute. Perhaps childcare workers would be required to hold master’s degrees, or be represented by unions that could otherwise limit supply the way they do for kindergarten teachers.

Last year we all witnessed the willingness of public-teacher unions to significantly undermine child learning in order to obtain minuscule health benefits for the teachers, while neighboring private schools kept their schools open. Perhaps child outcomes would be worse in a public-childcare system too. Indeed, Quebec imposed “quality” regulation on its childcare market, which studies found to “increas[e] early childhood anxiety and aggression” with “a large, significant, negative shock to the preschool, noncognitive development and health of children exposed to the new program, with little measured impact on cognitive skills” and “worse health, lower life satisfaction, and higher crime rates later in life.” The regulated public facilities end up being toddler farms with little opportunity for cognitive and social development, which many ordinary families tolerate because they are “free.”

BBB includes several programs that distribute benefits in ways that discourage work through two fundamental economic mechanisms. First and foremost is the creation and expansion of employment-tested benefits. Full-time employment is a major barrier to participation in the programs, even if that employment does not produce much income. Specifically, BBB allows even America’s highest-income households to participate in subsidized “Obamacare” insurance plans as long as they are not engaged in any job that offers health insurance. For most full-time workers, their employment status by itself excludes them and their families from the additional Obamacare subsidies delivered through BBB, especially its sections 137501 and 137502.

The second mechanism is income-tested benefits, which discourage the earning of income by withholding benefits as a household’s income rises. The proposed federal childcare program cited above is an example. Another is in Section 136407, which creates a tax credit for 15 percent of the price of the purchase of an electric bicycle, but the credit is reduced $0.20 per additional dollar earned by the household. More important, from an aggregate perspective, are the new federal childcare program and various additions to major income-tested programs such as Medicaid, “affordable housing,” and the Child Tax Credit. All of this means that as one’s income from working goes up, the amount offered by these benefit programs goes down. The means testing creates high marginal tax rates on workers for working an extra hour, day, or week, or for undertaking the kinds of skill upgrades that would get them a promotion.

The bill would also reduce work by limiting competition in the labor market, imposing employer mandates, and increasing consumer prices for telecommunications, energy, and other products. All these disincentives go on top of those already in the baseline due to a continuing portfolio of federal, state, and local tax, spending, and regulatory policies.

I estimate that the several implicit employment and income taxes in BBB would increase marginal tax rates on work by about 8 percentage points. I expect that such a change in the disincentive would reduce full-time equivalent employment by about 6 percent, or almost 9 million jobs over 10 years. Any economic effect of financing BBB — with current or future personal or business income taxes — would go on top of this estimate.

Let’s hope that potential adverse effects on families have been carefully considered before rushing to pass this bill. As European countries learned the hard way, job losses and “lone parenthood” tend to accumulate over time as businesses and households further adjust to the fact that work and marriage are no longer customary behavior in significant segments of the population.