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This is a point I tried to make in conversations I was having back in 1994 or so about the welfare reform that was then being debated. It's a rather technical

This is a point I tried to make in conversations I was having back in 1994 or so about the welfare reform that was then being debated. It's a rather technical point, though, so it was hard to get it heard in all the shouting about welfare moms. Step-function subsidies are evil. (A "step function", in math, is a function whose value changes sharply at a single point, like a stairstep.) They're evil for just the reason being discussed here, that they create a point where a small increase in earnings causes a large decrease in total income. When it comes to income taxes, our legislators are smart enough to use piecewise linear functions, but somehow this very small amount of mathematical sophistication goes out the window when it comes to subsidies for the poor. And people's lives are ruined.

usaar333 8y ago
> Our legislators are smart enough to use piecewise linear function Yes, but it's also hard to avoid when you are offering non cash welfare. An example for middle income people is affordable housing. You get into the unit (saving you $25k+ over market rate) if income below $X. Otherwise, you don't. I haven't figured out a way to avoid this cliff that isn't exceedingly complicated or violates the intention of the program.
- komali2 8y ago
  I'm very interested in solutions to this, as a bay area resident - somehow separating units into "the poor people houses" and "the rest of the people houses" doesn't quite seem like the right long term solution to anything. I don't have a solution, hence why I ask.
  - comicjk 8y ago
    You could give poor families a housing subsidy, which drops off smoothy as a function of income. You can't give a family half a house, but you can easily give them half as big a subsidy, knowing that they can more than make up the difference with their higher income. This also means that the family receiving the subsidy can live wherever they want. I think some of the smarter housing programs already work this way.
    - SilasX 8y ago
      That still has the effect of a (probably high) marginal tax and disincentivizes increasing one's income just the same. Why take night classes or work harder at your job if the $100/week raise comes with $80/week less in rent subsidies + taxes? (Example figures; you can change it around but most realistic situations are going to look similar.)
      - gizmo686 8y ago
        If you want to abolish the marginal tax, then I would start by looking at tax reform. If you think the marginal tax imposed by a given welfare system is too high, you can just tweak the numbers.
        SilasX 8y ago
        I meant that it's effectively a high marginal tax, when you decrease the housing subsidy as the recipient earns more income. That is, if every $100/month gain in wages comes with a $30/month decrease in subsidy, that's effectively a 30% marginal tax (on top of all their other taxes). (And I don't know what you mean by "just tweak the numbers"; the more generous benefits you want, the more you have to disincentivize work; no amount of "tweaking" avoids the core tradeoff.)
        gizmo686 8y ago
        What do you want the marginal rate to be? 1%? Just have a $1/month decrease in the subsidy for every $100/month increase in wages. Personally, I would prefer if all welfare was unconditional and we did all of this tweaking through the explicit tax code, but that is an implementation detail. >The more generous benefits you want, the more you have to disincentivize work; What disincentives work is the marginal decrease in benefits. Assuming you have adequate funding, there is no need to increase the rate of marginal decrease. If you don't have adequate funding, then you will need to fund the increased benefits to the not-as-poor by decreasing benefits to the poorer. There is, admitadly, a decreasing marginal value of money that does behave like you are describing, but its effect is dwarfed at the level of income we are talking about.
  - AnthonyMouse 8y ago
    > I'm very interested in solutions to this, as a bay area resident - somehow separating units into "the poor people houses" and "the rest of the people houses" doesn't quite seem like the right long term solution to anything. The real problem is that we do taxes wrong. We have a progressive tax schedule on the tax side, but then we want to have benefits phase outs on the benefits side. But these are really opposites that cancel each other. It's also very hard to reason about, because if you have multiple benefits programs that phase out in the same place, you can accidentally produce these >100% marginal rates at specific income levels. And progressive tax schedules are very expensive. If you e.g. reduces taxes by 10% on incomes under $40,000 then someone who makes $40,000 pays $4000 less in taxes. But so does everyone who makes more than $40,000, because they now pay $4000 less on the first $40,000 of their income. The answer is to not phase out benefits whatsoever, let that be the progressive component of the system, and use a single uniform tax rate. The uniform rate supplies the revenue to compensate for the lack of phase outs, but will never produce a cliff.
  - jadedhacker 8y ago
    If you want the left perspective, all or nearly all housing would be public housing. This cuts landlords and banks out of the loop and decreases housing prices for everyone. No one goes homeless. You can move whenever you want, though there might be waitlists in some cities depending on how it's implemented. For what it's worth though, we already have waitlists, you can just skip them by having sufficient money.
    - komali2 8y ago
      This seems interesting, I wonder why it's being downvoted? I personally don't understand the value landlords contribute to society so I'm curious what a society without them looks like. I expect I can get sarcastic answers about failed Communist states, but I'm hoping someone has spirited examples.
- tomjen3 8y ago
  It seems obvious that the solution is to make it like we have in Denmark: If you have a rent that is more than some multiplier for your income, you get a cash subsidy. It goes up drastically if you have kids, and it only covers up to a certain amount of square feet (so you can't get money for a giant apartment). In other words, a stepwise/linear function that means it is always worth making more money. Since something like this is so obvious, what am I missing in this solution?
  - usaar333 8y ago
    We have a similar thing in the US (section 8). The program is intended for low income people. The affordable housing programs I'm mentioning aim to help people at roughly the median income afford expensive areas to ensure income diversity. Cash based methods can significantly hurt that goal as such people generally would be better off living in a cheaper area anyway. Or the program handles subsidies building by building which seems administratively complex.
- gizmo686 8y ago
  Don't make affordable housing a binary in or out system. Instead of kicking someone out at $X, increase their rent until it hits market value at $Y income.
  - usaar333 8y ago
    The units are administered by private developers/management. Who collects the extra rent? If the developers, you create strong malincentives to rent to people that likely will earn more in the coming years.
    - Retric 8y ago
      The state would get the extra rent allow it to subsidize more affordable housing. However, affordable housing is inherently a terrible idea. There is no reason to subsidize retired people living in highly desirable areas for example. But subsidizing cops is also ineffecint when you can simply pay them more directly and avoid overhead.
    - gizmo686 8y ago
      HUD/local PHA. Affordable housing is not an unfunded mandate. The landloard still receives the full rent; the only difference is who is paying it. Further, we are talking about changing the welfare system. If we had a system where the landlord made substantially less from affordable housing units, we would likely already need to switch systems, because I cannot imagine that being a functional program.
      - usaar333 8y ago
        > If we had a system where the landlord made substantially less from affordable housing units, That's how this works in California. Unfunded mandate on developers. Developers agree to it so they get their development permits. (The system is then administered by the successor management office and occasionally audited by the city. Directing excess rent to the government is possible, but introduces a number of calculation and administrative complexities. ) Finally you get the problem that this system is going to push up the median income in affordable housing (income rising, landlords preferring higher income individuals for stability, etc.), hurting the program's intention. That said I think this solution is better, but I don't understand how high the admin cost goes.
- IkmoIkmo 8y ago
  Some countries will let the market figure out prices but will offer a sliding scale rent subsidy. From an income of 15k a year and below you get 100% rent subsidy, which falls down to 0% at an average income of say 40k.
SilasX 8y ago
I wouldn't say it's evil, but it has certain dependencies: that people legitimately want to get out of poverty and unemployment, and see that as an end in itself, even if a purely monetary hyper-optimizer would just milk the welfare system as long as they can. If social pressures (or selection for proud people) don't simulate that, then step-functions are going to create the death spiral. Even continuous functions can create high effective marginal taxes with most of the same (mal)incentive structure.
- ScottBurson 8y ago
  I don't think "evil" is an overstatement at all. At the cliff, the effective incremental tax rate is not only well over 100% but can be almost arbitrarily large. [ETA:] And the real damage that has been done to people's lives, for decades now, is substantial. If welfare had been done right in the beginning, with no cliff, I'm not even sure it would be an issue now. It's certainly an experiment worth trying! > Even continuous functions can create high effective marginal taxes Agreed (as we're discussing in another subthread). So, what are you saying? The cliff is fine as it is? You have a better idea? What?
  - SilasX 8y ago
    I agree that a continuous function is better than a stepwise function. I don't agree that it avoids the core problem with stuff-giving welfare problems, which is that they introduce high effective marginal taxes. I think those get trapped in death spirals the very same way unless you introduce orthogonal disincentive effects against gaming the system, like social pressures, work training requirements, benefit limits.
    - ScottBurson 8y ago
      I think that as long as it's in their clear and immediate interest to make a little more money, most people are going to try to find a way to do that. I think poverty itself applies all the "stick" that's needed; as long as even part of a "carrot" is available, people will reach for it. (Sure, there will be exceptions, but that's not what we're talking about here; we're talking about most people.) I don't think people need "social pressures" to get them out of poverty — the idea is ridiculous and, frankly, offensive. [Edit: that was too strong, and I withdraw it. I'm not sure how effective it can be, though, for the government to try to apply social pressure, and I don't think it's most of what's needed, anyway.] What they need is a little more help. Case in point: In 2015, Montana implemented a bipartisan, state-funded employment initiative that offers Medicaid recipients a range of services, including career counseling, on-the-job training and tuition assistance. The program is voluntary — people can sign up when they enroll in Medicaid — and it’s paired with targeted outreach so that those who stand to benefit most from the program are aware of their options. So far, more than 22,000 Montanans have participated, and employment among nondisabled Medicaid recipients is up 9 percent in the state. [0] [0] https://www.nytimes.com/2018/07/07/opinion/sunday/do-poor-people-have-a-right-to-health-care.html https://www.nytimes.com/2018/07/07/opinion/sunday/do-poor-pe...
lsc 8y ago
Yeah, but isn't this the problem that the earned income tax credit was designed to solve?
natecavanaugh 8y ago
I was under the impression that the welfare reform at the time was an attempt to remove the incentive to stay on welfare (and that what was passed was the most politically viable during that period), but I'd be happy to learn otherwise, since I was an unexperienced, if politically vocal, teenager at the time it was being passed. There was quite a bit of hyperbole during and immediately after, but I haven't heard much later from either side about where the implementation was flawed or how it could be improved, so any info will be happily chewed on :)

usaar333 8y ago

> Our legislators are smart enough to use piecewise linear function Yes, but it's also hard to avoid when you are offering non cash welfare. An example for middle income people is affordable housing. You get into the unit (saving you $25k+ over market rate) if income below $X. Otherwise, you don't. I haven't figured out a way to avoid this cliff that isn't exceedingly complicated or violates the intention of the program.

komali2 8y ago
I'm very interested in solutions to this, as a bay area resident - somehow separating units into "the poor people houses" and "the rest of the people houses" doesn't quite seem like the right long term solution to anything. I don't have a solution, hence why I ask.
- comicjk 8y ago
  You could give poor families a housing subsidy, which drops off smoothy as a function of income. You can't give a family half a house, but you can easily give them half as big a subsidy, knowing that they can more than make up the difference with their higher income. This also means that the family receiving the subsidy can live wherever they want. I think some of the smarter housing programs already work this way.
  - SilasX 8y ago
    That still has the effect of a (probably high) marginal tax and disincentivizes increasing one's income just the same. Why take night classes or work harder at your job if the $100/week raise comes with $80/week less in rent subsidies + taxes? (Example figures; you can change it around but most realistic situations are going to look similar.)
    - gizmo686 8y ago
      If you want to abolish the marginal tax, then I would start by looking at tax reform. If you think the marginal tax imposed by a given welfare system is too high, you can just tweak the numbers.
      - SilasX 8y ago
        I meant that it's effectively a high marginal tax, when you decrease the housing subsidy as the recipient earns more income. That is, if every $100/month gain in wages comes with a $30/month decrease in subsidy, that's effectively a 30% marginal tax (on top of all their other taxes). (And I don't know what you mean by "just tweak the numbers"; the more generous benefits you want, the more you have to disincentivize work; no amount of "tweaking" avoids the core tradeoff.)
        gizmo686 8y ago
        What do you want the marginal rate to be? 1%? Just have a $1/month decrease in the subsidy for every $100/month increase in wages. Personally, I would prefer if all welfare was unconditional and we did all of this tweaking through the explicit tax code, but that is an implementation detail. >The more generous benefits you want, the more you have to disincentivize work; What disincentives work is the marginal decrease in benefits. Assuming you have adequate funding, there is no need to increase the rate of marginal decrease. If you don't have adequate funding, then you will need to fund the increased benefits to the not-as-poor by decreasing benefits to the poorer. There is, admitadly, a decreasing marginal value of money that does behave like you are describing, but its effect is dwarfed at the level of income we are talking about.
- AnthonyMouse 8y ago
  > I'm very interested in solutions to this, as a bay area resident - somehow separating units into "the poor people houses" and "the rest of the people houses" doesn't quite seem like the right long term solution to anything. The real problem is that we do taxes wrong. We have a progressive tax schedule on the tax side, but then we want to have benefits phase outs on the benefits side. But these are really opposites that cancel each other. It's also very hard to reason about, because if you have multiple benefits programs that phase out in the same place, you can accidentally produce these >100% marginal rates at specific income levels. And progressive tax schedules are very expensive. If you e.g. reduces taxes by 10% on incomes under $40,000 then someone who makes $40,000 pays $4000 less in taxes. But so does everyone who makes more than $40,000, because they now pay $4000 less on the first $40,000 of their income. The answer is to not phase out benefits whatsoever, let that be the progressive component of the system, and use a single uniform tax rate. The uniform rate supplies the revenue to compensate for the lack of phase outs, but will never produce a cliff.
- jadedhacker 8y ago
  If you want the left perspective, all or nearly all housing would be public housing. This cuts landlords and banks out of the loop and decreases housing prices for everyone. No one goes homeless. You can move whenever you want, though there might be waitlists in some cities depending on how it's implemented. For what it's worth though, we already have waitlists, you can just skip them by having sufficient money.
  - komali2 8y ago
    This seems interesting, I wonder why it's being downvoted? I personally don't understand the value landlords contribute to society so I'm curious what a society without them looks like. I expect I can get sarcastic answers about failed Communist states, but I'm hoping someone has spirited examples.
tomjen3 8y ago
It seems obvious that the solution is to make it like we have in Denmark: If you have a rent that is more than some multiplier for your income, you get a cash subsidy. It goes up drastically if you have kids, and it only covers up to a certain amount of square feet (so you can't get money for a giant apartment). In other words, a stepwise/linear function that means it is always worth making more money. Since something like this is so obvious, what am I missing in this solution?
- usaar333 8y ago
  We have a similar thing in the US (section 8). The program is intended for low income people. The affordable housing programs I'm mentioning aim to help people at roughly the median income afford expensive areas to ensure income diversity. Cash based methods can significantly hurt that goal as such people generally would be better off living in a cheaper area anyway. Or the program handles subsidies building by building which seems administratively complex.
gizmo686 8y ago
Don't make affordable housing a binary in or out system. Instead of kicking someone out at $X, increase their rent until it hits market value at $Y income.
- usaar333 8y ago
  The units are administered by private developers/management. Who collects the extra rent? If the developers, you create strong malincentives to rent to people that likely will earn more in the coming years.
  - Retric 8y ago
    The state would get the extra rent allow it to subsidize more affordable housing. However, affordable housing is inherently a terrible idea. There is no reason to subsidize retired people living in highly desirable areas for example. But subsidizing cops is also ineffecint when you can simply pay them more directly and avoid overhead.
  - gizmo686 8y ago
    HUD/local PHA. Affordable housing is not an unfunded mandate. The landloard still receives the full rent; the only difference is who is paying it. Further, we are talking about changing the welfare system. If we had a system where the landlord made substantially less from affordable housing units, we would likely already need to switch systems, because I cannot imagine that being a functional program.
    - usaar333 8y ago
      > If we had a system where the landlord made substantially less from affordable housing units, That's how this works in California. Unfunded mandate on developers. Developers agree to it so they get their development permits. (The system is then administered by the successor management office and occasionally audited by the city. Directing excess rent to the government is possible, but introduces a number of calculation and administrative complexities. ) Finally you get the problem that this system is going to push up the median income in affordable housing (income rising, landlords preferring higher income individuals for stability, etc.), hurting the program's intention. That said I think this solution is better, but I don't understand how high the admin cost goes.
IkmoIkmo 8y ago
Some countries will let the market figure out prices but will offer a sliding scale rent subsidy. From an income of 15k a year and below you get 100% rent subsidy, which falls down to 0% at an average income of say 40k.

SilasX 8y ago

I wouldn't say it's evil, but it has certain dependencies: that people legitimately want to get out of poverty and unemployment, and see that as an end in itself, even if a purely monetary hyper-optimizer would just milk the welfare system as long as they can. If social pressures (or selection for proud people) don't simulate that, then step-functions are going to create the death spiral. Even continuous functions can create high effective marginal taxes with most of the same (mal)incentive structure.

ScottBurson 8y ago
I don't think "evil" is an overstatement at all. At the cliff, the effective incremental tax rate is not only well over 100% but can be almost arbitrarily large. [ETA:] And the real damage that has been done to people's lives, for decades now, is substantial. If welfare had been done right in the beginning, with no cliff, I'm not even sure it would be an issue now. It's certainly an experiment worth trying! > Even continuous functions can create high effective marginal taxes Agreed (as we're discussing in another subthread). So, what are you saying? The cliff is fine as it is? You have a better idea? What?
- SilasX 8y ago
  I agree that a continuous function is better than a stepwise function. I don't agree that it avoids the core problem with stuff-giving welfare problems, which is that they introduce high effective marginal taxes. I think those get trapped in death spirals the very same way unless you introduce orthogonal disincentive effects against gaming the system, like social pressures, work training requirements, benefit limits.
  - ScottBurson 8y ago
    I think that as long as it's in their clear and immediate interest to make a little more money, most people are going to try to find a way to do that. I think poverty itself applies all the "stick" that's needed; as long as even part of a "carrot" is available, people will reach for it. (Sure, there will be exceptions, but that's not what we're talking about here; we're talking about most people.) I don't think people need "social pressures" to get them out of poverty — the idea is ridiculous and, frankly, offensive. [Edit: that was too strong, and I withdraw it. I'm not sure how effective it can be, though, for the government to try to apply social pressure, and I don't think it's most of what's needed, anyway.] What they need is a little more help. Case in point: In 2015, Montana implemented a bipartisan, state-funded employment initiative that offers Medicaid recipients a range of services, including career counseling, on-the-job training and tuition assistance. The program is voluntary — people can sign up when they enroll in Medicaid — and it’s paired with targeted outreach so that those who stand to benefit most from the program are aware of their options. So far, more than 22,000 Montanans have participated, and employment among nondisabled Medicaid recipients is up 9 percent in the state. [0] [0] https://www.nytimes.com/2018/07/07/opinion/sunday/do-poor-people-have-a-right-to-health-care.html https://www.nytimes.com/2018/07/07/opinion/sunday/do-poor-pe...

lsc 8y ago

Yeah, but isn't this the problem that the earned income tax credit was designed to solve?

natecavanaugh 8y ago

I was under the impression that the welfare reform at the time was an attempt to remove the incentive to stay on welfare (and that what was passed was the most politically viable during that period), but I'd be happy to learn otherwise, since I was an unexperienced, if politically vocal, teenager at the time it was being passed. There was quite a bit of hyperbole during and immediately after, but I haven't heard much later from either side about where the implementation was flawed or how it could be improved, so any info will be happily chewed on :)