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 State Coalition Approves Internet Sales Tax Plan

Prospects in Legislatures, GOP Congress Uncertain

By Brian Krebs Staff Writer

Tuesday, November 12, 2002; 5:21 PM

Revenue-hungry states today took the first step toward building a national framework for taxing items sold over the Internet.

In a meeting in Chicago, lawmakers and tax officials from 30 states -- including Virginia and the District of Columbia - endorsed a proposal to simplify their tax laws and enter into a voluntary pact to collect online sales taxes. Maryland officials present at the meeting abstained from today's vote.

"This is a 21st century system that will dramatically improve the morass that currently exists," said Utah Gov. Mike Leavitt (R), a key leader in the states' effort. "I'm confident that this agreement....will mark the beginning of a new phase of this process."

The voluntary program would take effect when at least 10 states representing 20 percent of the U.S. population have amended their laws to implement the program. Participating states would then be free to ask Congress to approve a mandatory, nationwide online sales tax regime. It's unclear, however, if Congress would go along with any online sales tax proposal.

"We think that once these states have simplified their systems it will be appropriate for the federal government to reward that effort," said R. Bruce Johnson, commissioner of the Utah state tax commission and co-chair of the implementing states group. "We're doing everything we can to make it clear that the states can work together."

Currently, 45 states and the District of Columbia levy sales taxes, with rates varying from state to state -- and often from town to town.

Under the Streamlined Sales Tax Project proposal, states would be required to establish uniform definitions for taxable goods and services, and maintain a single statewide tax rate for each type of product. The project also seeks to simplify tax reporting requirements for online sellers. Currently, there are more than 7,000 different state and local tax jurisdictions nationwide.

Today's vote is a welcome development for the nation's largest main street retailers, who have argued for years that the current system gives online vendors an edge over so-called "bricks-and-mortar" stores.

"Our ultimate goal is that everybody will have to play by the same rules," said Maureen Riehl, state and industry relations counsel for the National Retail Federation, a trade group that represents nearly 1.4 million stores.

And for states facing rising budget deficits, the stakes are huge. The U.S. General Accounting Office has estimated states lose nearly $13 billion each year on untaxed Internet transactions. That figure will more than triple to $45 billion by 2006, according to a 2001 University of Tennessee study conducted for the Institute of State Studies.

More Paperwork for Businesses

Several unanswered questions loom large for the Internet sales tax effort, including how to win support for the proposed system from online retailers.

Most states have "use tax" laws that require people to file a special form for reporting the sales taxes they owe on items bought online, but such laws are notoriously difficult to enforce, and few people actually comply with them.

Rather than going after use taxes, all of the participating states plan to entice online merchants to collect sales taxes voluntarily by sharing with them a portion of the tax revenues that they remit. Currently, one-third of all states share sales tax revenues with online retailers, with reimbursement rates ranging from a half percent to 1.75 percent of the total taxes collected.

Revenue sharing aside, small and large Internet businesses that maintain a physical presence in just a handful of states while selling to customers nationwide are likely to balk at the costs of collecting sales taxes, said Richard Prem, director of global indirect taxation for

A unified revenue-sharing model envisioned in the states' plan fails to "come anywhere close to scratching the surface of the cost" of complying with the system, he said.

Internet vendors would likely bear substantial costs just in terms of the tax preparation needed to file as many as 45 separate tax returns each year, experts contacted for this story said.

Under the states' plan, online sellers would be required to purchase approved software to compute the appropriate state and local taxes or to certify with the state any in-house calculation systems already in place. E-tailers could choose to outsource tax collection to a certified third-party under the states' plan.

So far, participating states have conducted only one tax software pilot, involving four states, three technology vendors, and one online seller.

Of the technology vendors participating in the pilot, just one -- Salem, Mass.-based Taxware, working in conjunction with Hewlett-Packard -- managed to get a system up and running.

The online store in that pilot was O.C. Tanner Co., the Salt Lake City-based company that forged the medals for the 2002 Winter Olympic Games.

O.C. Tanner tax manager Jake Garn said Taxware's software worked well, but wondered whether the system would function as smoothly when subjected to a much larger volume of queries from all 45 participating states.

"[T]his was very small transaction volume compared to the level of traffic our main business generates," Garn said.

Neither supporters nor opponents of the plan have a clear idea how much the whole collection and remittance package would cost the average Internet merchant, though the participating states plan to conduct a comprehensive study in the coming months. They also are planning to run another tax technology pilot.

Aside from the cost considerations, though, opponents of the plan say it would be tough to enforce and could infringe on consumer privacy.

"Whether I'm buying prescription drugs or sex toys online, someone is going to have to keep track of what I bought so they can figure out how to tax it," said Grover Norquist, president of Americans for Tax Reform. "How do you do this without massive violations of privacy?"

Under the states' plan, certified software vendors and service providers would calculate and report taxes without retaining the consumer's personally identifiable information. According to the proposal, that information would be kept only for items that are deemed exempt from taxation, a qualification that varies from state to state.

The sales tax effort may also pit small Internet sellers against larger operations. Larger Internet retailers that maintain offices or sales forces in the majority of the states stand the most to gain from the states' plan, the NRF's Riehl conceded. Larger retailers also are more likely to already have built in-house tax collection and remittance systems.

"The (sales tax) simplifications alone are going to amount to a net cost savings for our members," she said. "We see the reimbursements as a long overdue acknowledgement that there's a substantial cost to doing this."

Questionable Fate in GOP Congress

Streamlined Sales Tax Project supporters said they expect states representing a fifth of the U.S. population to pass implementing legislation by June 2003, the end of the fiscal year for most states.

"I think by the middle of next year at least 10 states will have passed the necessary legislation, particularly when they start noticing the millions of dollars it will take to settle their deficit situations," said Neil Osten, communications director for the National Conference of State Legislatures, which fully supports the simplification effort.

It remains unclear, however, whether or when the Republican-controlled Congress would recognize the compact.

The current legal block to online sales taxes dates back to 1992, when the U.S. Supreme Court ruled that merchants cannot be required to collect sales tax unless they have a physical location in the state where the customer is located. The court said it would be unfair to require out-of-state sellers to comply with thousands of state and local tax jurisdictions across the nation. But the high court also ruled the Congress has the authority to allow states to require remote sellers to collect taxes.

In 1998 and again last year, Congress debated tying legislation to reward the states' efforts -- should enough of them simplify their tax systems -- to a bid to extend a ban on Internet-specific taxes, such as taxes on Internet access fees. In each case, Congress voted to extend the ban without including the simplification incentives.

A least one influential opponent of the effort is already planning legislation that would keep the Internet access tax ban from being "taken hostage" as a vehicle for considering the states' proposal.

Sen. George Allen (R-Va.) said the first piece of legislation he will introduce next year would be a standalone bill to permanently extend the ban on new Internet-specific taxes.

"If the states want to come up with their own simplification schemes, that's fine. But that still doesn't make it right to require someone who has no representation in your state to pay taxes there," said Allen, who heads the Senate Republican High-Tech Task Force.

Leavitt and other supporters of the proposal disputed arguments such as Allen's.

"It ignores the fact that sales and use taxes aren't imposed on people who collect them, they are paid by the people doing the buying," Leavitt said.

In the meantime, online retailers would be wise to seize the revenue-sharing incentives included in the states' plan before it's too late, O.C. Tanner's Garn said.

"If the states are right, and enough business shifts online that it creates a much larger cost disadvantage, the states may then have the political muscle they need to get Congress to back this without any" revenue sharing for retailers, he said. "Maybe it's a good thing to try to see the future and work for a mutual solution."

© 2002

The Nation
GOP Faces Criticism As Internet Tax Debate Heats Up

By Robert B. Bluey Staff Writer
December 09, 2002

( - A leading tax reform advocate is warning consumers that this holiday season might be the last to enjoy tax-free shopping on the Internet.

The National Taxpayers Union, a group that lobbies for lower taxes, claims mounting budget deficits are prompting several states to consider a streamlined approach to Internet taxes. Even Republicans have lined up in support.

"That is probably the most troubling aspect," said Pete Sepp, an NTU spokesman. "Much of the impetus of this expanded tax authority is coming from Republican governors, who are simply on the wrong side of this tax issue."

Republican Utah Gov. Mike Leavitt has been an outspoken leader of the movement, along with outgoing South Dakota Gov. Bill Janklow, a Republican who was elected to the state's at-large congressional seat.

Last month lawmakers from 30 states met in Chicago to endorse a plan that would streamline their tax codes and allow businesses to voluntarily join a system to collect sales taxes for online purchases. About half the states that support the plan are led by Republican governors.

The NTU viewed the meeting as momentum to place Internet taxation back on the nation's agenda after it received little attention this year. The Streamlined Sales Tax Project, as it is being called, would not take effect until it is ratified by 10 states that make up 20 percent of the U.S. population. No state has adopted the plan.

Sepp said there are a handful of governors in support of the system who are using budget deficits to aggressively lobby other states to get on board.

"The leadership is coming from a core of governors - Republicans and Democrats - who hope to impose this on some of the remaining states that haven't been aggressively pushing for this taxation," he said. "Now with the deficit picture growing even worse for 2003 than it was for this year, it seems that states can't resist that temptation."

While the NTU refers to the states as a "cartel" wanting to impose new taxes, the National Governors Association, a supporter of the streamlined plan, views the move as a logical step toward a 21st century tax code.

The governors' association estimates that by 2006, states and local governments will be losing about $40 billion in sales tax revenue as a result of uncollected taxes, said Frank Shafroth, director of state and federal relations for the group.

Shafroth said the NTU has turned the issue into a question of new Internet taxes, which he said is untrue. Instead, he argued, some municipalities and businesses are unable to collect the taxes they are owed under current tax laws.

For instance, someone in Miami might not think taxes are owed to an online bookseller in Seattle, but legally that purchase should be documented on a tax form, Shafroth said. Many people do not realize that is the case, he said, and businesses find it too burdensome to comply with the more 7,500 different state and local sales tax laws.

Under the proposal, businesses would automatically charge a sales tax based on where customer was making the purchase. Shafroth said a computer system would ease the burden and take consumers off the hook for the taxes they owe.

"There would be no new tax on the Internet," he said. "The problem here is if you have a system where some people pay the taxes they owe and others don't, something's got to give. You either have to raise taxes on people who are already honestly paying or you have to find a way to make sure taxes are paid."

But Sepp warned that under such a plan, consumers would end up paying more for goods. In addition, he said, taxes could impede the Internet's growth, which would ultimately harm some of the businesses the plan is meant to help.

"It may cause a lot of Internet shoppers to decide the extra tax is not worth the convenience of shopping online," he said. "They might as well go out shopping at the mall if they have to pay the tax anyway. That may have unintended consequences for this developing marketplace."

The American Conservative Union Foundation

 Myth of Spending Cuts
by Brian M. Riedl

During the 2005 budget reconciliation debate, critics trotted out the tired old myth that Republicans were cutting spending for the poor to pay for tax cuts for the rich. Many commentators accepted this as truth and repeated it, including Washington Post columnist E. J. Dionne, who accused the Republicans of passing a “cut-from-the-poor, give-to-the-rich budget.”

However, the facts simply do not support these overheated claims. Rather than reduce entitlement spending, the budget reconciliation bill merely reduced its projected five-year growth rate from 39 percent to 38 percent. Furthermore, the “additional” tax cuts were nearly all extensions of existing tax provisions that would soon have expired.

More broadly, the accusation that poor families are shouldering more of the tax burden while receiving less of the spending is empirically false. From 1979 through 2003, the total federal tax burden on the highest-earning quintile (one-fifth or 20 percent) of Americans—who earn 52 percent of all income—rose from 56 percent to 66 percent of all taxes. Their share of individual income taxes jumped from 65 percent to 85 percent.On the spending side, antipoverty spending has leaped from 9.1 percent of all federal spending in 1990 to a record 16.3 percent in 2004.

Misreading the Data<>

The data clearly show that the tax burden is shifting annually up the income scale while spending continues to move down the scale. In other words, the people with the highest incomes are paying more of the tax burden while the poor are receiving more of the spending. Yet the misperception that the federal government is doing the opposite persists. This misperception is based on five factors:

The stereotype that Republican government automatically means less redistribution.

Baseline budgeting, which guarantees that large, persistent, annual increases in entitlement spending will go unnoticed because they occur automatically. Conversely, any attempt to scale back these automatic increases receives extensive media scrutiny because it requires a separate vote.

Tax cut sunset laws that require Congress to pass a new tax bill merely to keep the current tax rates at the same level, which allows these bills to be misreported as “new” tax cuts.

The misleading focus on how tax relief saves wealthy taxpayers the most money while ignoring the mathematical reality that the bottom half of taxpayers cannot receive much tax relief because they already pay almost no income tax.

An erroneous belief that tax cuts for upper-income Americans substantially reduce the amount of tax that they actually pay. Indeed, there is little correlation between tax rates and taxes paid.

Furthermore, the persistent increase in federal antipoverty spending fosters an unhealthy dependence on government. For example, from 1990 to 2005, the Medicaid caseload doubled to 55 million participants, meaning that the government is increasingly taking over the health care system from private companies, community, and charitable organizations, thus eroding self-reliance, independence, and local community responsibilities. The measure of the effectiveness of government antipoverty programs is not how many people are trapped into financial dependence on the government, but how many people successfully make the transition away from dependence on the government.

The Increasing Tax Burden on the Rich

The often repeated myth that lawmakers are dumping more of the tax burden on low-income families is simply false. From 1979 through 2003, the highest-earning 20 percent of Americans—who earn 52 percent of all income—saw their share of the federal tax burden rise from 56 percent to 66 percent of all taxes. By contrast, the lowest-earning quintile of Americans—who earn 4 percent of all income—saw their share of the federal tax burden drop from 2 percent to 1 percent. (See Chart 1 and Chart 2.) Clearly, the rich are shouldering an increasing share of the tax burden.

The effective tax rate, which measures the actual share of income paid in taxes, is another way of examining the data. In 2003, the highest-earning quintile paid 25 percent of their income in federal taxes. The lowest-earning quintile paid just 4 percent of their income in federal taxes.

Bottom Two Quintiles: No Income Tax. Critics often suggest that poor Americans do not receive enough of the benefits from income tax cuts. Table 1, which also breaks down the tax burden by the type of tax, shows that in 2003, the bottom quintile paid an effective income tax of –5.9 percent of their income and that the second-lowest quintile paid an effective income tax of –1.1 percent. Their income tax burden was negative, meaning that they actually received a subsidy from Washington on April 15. This is due to the refundable Earned Income Tax Credit (EITC) and Child Tax Credit, both of which subtract income taxes dollar for dollar and can reduce income tax liability to below zero.

Simply put, the bottom 40 percent of earners collectively pay no income taxes, and many actually receive checks from Washington. The little tax burden that they pay is in social insurance taxes, as well as excise taxes (such as gas and cigarette taxes).

Chart 1

Chart 2

Top Quintile: Lower Tax Rates, Higher Tax Burden. Between 1979 and 2003, the share of income taxes paid by the highest-earning quintile jumped from 65 percent to 85 percent. Their share of all taxes paid (including social insurance, corporate, and excise taxes) increased from 56 percent to 66 percent. Upper-income taxpayers are paying more, not less, of the tax burden.

Paradoxically, this shift occurred after federal income tax rates for top earners were reduced dramatically. Between 1979 and 2003, the highest individual income tax rate was cut in half, from 70 percent to 35 percent. Yet the top earners’ effective income tax rate dropped only from 15.7 percent to 13.9 percent. (See Chart 3.) The effective tax rate for the highest-earning 1 percent dropped only from 21.8 percent to 20.6 percent.

Halving the highest income tax rate only slightly reduced effective taxes paid, for two reasons.

First, lower tax rates provide greater incentives to work, save, and invest. High-earners respond by creating more wealth, and this additional income is taxed in the highest tax bracket. In this case, instead of taxing a small amount of income at 70 percent, the IRS taxed greatly expanded incomes at 35 percent. The reverse is also true: Higher tax rates reduce incentives and therefore depress incomes, dropping taxpayers out of the new higher tax brackets.

Table 1

Second, lower tax rates reduce incentives for tax avoidance and tax evasion. Taxpayers subject to a 70 percent tax rate are much more likely to hide their money in legal tax shelters or even to try illegally to evade taxes altogether. By lowering the top rate to 35 percent, lawmakers substantially reduced the incentive for taxpayers to shield or hide their income from the IRS.

Overall, the share of all taxes paid by the top quintile increased because their effective tax rates have remained steady, in spite of cuts in federal tax rates, while the effective tax rates paid by low-income earners have plummeted to below zero.

Unintended Consequences. <>However, this narrowing of the tax burden to a small minority of taxpayers undermines democracy, as those voting for government benefits are increasingly separated from those funding the benefits. In addition, because incomes at the top fluctuate much more from year to year, federal tax revenues have become more unstable as this group has assumed more of the tax burden. While most agree that upper-income families should pay more in absolute tax dollars than lower-income Americans, the increasingly overwhelming concentration of federal taxes within one group of Americans is a cause for concern.


Table 2

The Added Progressivity of the Bush Tax Cuts.<> Popular mythology also suggests that only wealthy taxpayers benefited from the 2001 and 2003 tax cuts. While high-income households did save more in actual dollars than low-income households, they did so because low-income households pay so little in income taxes in the first place. The same 1 percent tax cut will save more dollars for a millionaire than it will for a middle-class worker simply because the millionaire paid more taxes before the tax cut.

In 2000, the top 60 percent of taxpayers paid 100 percent of all income taxes. The bottom 40 percent collectively paid no income taxes. Lawmakers writing the 2001 tax cuts faced quite a challenge in giving the bulk of the income tax savings to a population that was already paying no income taxes.

Rather than exclude these Americans, lawmakers used the tax code to subsidize them (some economists would say this made that group’s collective tax burden negative). First, lawmakers lowered the initial tax brackets from 15 percent to 10 percent and then expanded the refundable child tax credit, which, along with the refundable EITC, reduced the typical low-income tax burden to well below zero. As a result, the U.S. Treasury now mails tax “refunds” to a large proportion of these Americans that exceed the amounts of tax that they actually paid. All in all, the number of tax filers with zero or negative income tax liability rose from 30 million to 40 million. The remaining tax filers received lower income tax rates, lower investment taxes, and lower estate taxes from the 2001 legislation.

Consequently, from 2000 to 2003, the share of all individual income taxes paid by the bottom 40 percent dropped from zero percent to –2 percent, meaning that the average family in those quintiles received a subsidy from the IRS. By contrast, the share paid by the richest quintile increased from 81 percent to 85 percent. Clearly, the tax cuts have led to the rich shouldering more of the income tax burden and the poor shouldering less.

Mobility Between Quintiles<>. Analyzing how a single income quintile fares over time creates the false impression of measuring the same people over time. However, few people remain in the same income quintile for their entire lifetimes. Many Americans begin their working careers in lower-income quintiles. During their working years, they add skills, receive pay raises, and find new jobs, and their income levels peak in the upper quintiles during their fifties and sixties before dropping back down to a lower quintile after retirement. Lifetime incomes are more equal than any one snapshot in time.

Chart 3

The data verify this picture. More than half of all taxpayers change income quintiles within a decade. This is especially true for those in the bottom quintile, two-thirds of whom move up within a decade. One study analyzed Americans who spent 1979 in the bottom quintile. By 1988, more of them had reached the highest income quintile (14.7 percent) than had remained at the bottom (14.2 percent). “In other words,” according to the Joint Economic Committee, “a member of the bottom income bracket in 1979 would have a better chance of moving to the top income bracket by 1988 than remaining in the bottom bracket.

By definition, 20 percent of Americans will always be in the bottom quintile, but economic growth can push up the threshold between quintiles so that even those remaining in the same quintile experience healthily rising incomes.

More Spending for the Poor<>

Just as common as the myth that poor families are paying more of the taxes is the myth that they are receiving less of the spending.

Chart 4 shows that an increasing share of the federal budget is spent on antipoverty programs. From 2.6 percent of the federal budget in 1962, antipoverty spending rose steadily to:

4.3 percent in 1970,

8.6 percent in 1980,

9.1 percent in 1990,

14.9 percent in 2000, and

16.3 percent (a record) of all federal spending in 2004.

Social Security and Medicare spending has risen by a similar percentage since 1962, from 13 percent to 33 percent of all spending. (See Chart 5.) All of this new spending came out of defense spending, which dropped from 49 percent of the budget in 1962 to 20 percent in 2005. The national security state has been replaced by the welfare/geriatric state.

Contrary to the rhetoric claiming that President George W. Bush has slashed antipoverty spending, its proportion of the budget has actually risen from 15.3 percent to over 16 percent since 2001. Table 3 breaks down the antipoverty budget and its growth since 2001.

All four categories of antipoverty spending have received healthy increases over the past few decades and in recent years.

Health Care. Since 1990, health spending on the poor has more than doubled from 3.3 percent to 7.6 percent of all federal spending. In that time, the Medicaid population has increased from 25 million to 55 million, while the average (inflation-adjusted) payment per beneficiary increased from $3,839 to $4,873.

Since 2001, Medicaid has added 10 million participants to its rolls and increased spending by 40 percent to $182 billion. Spending for the new State Children’s Health Insurance Program (S-CHIP) has increased by 39 percent while insuring 4.4 million Americans.

Chart 4

Housing. <>Housing subsidies jumped from virtually zero in 1960 to 1.5 percent of all federal spending by 1993, where it has remained since. During the 2001 through 2005 federal spending spree, housing programs received a 26 percent increase, an average of 5.5 percent annually. The Housing Certificate Fund/Rental Assistance, the largest traditional low-income housing program, has received a 39 percent budget hike since 2001.

Food Assistance<>. Since 1969, Food Stamp rolls have expanded from 3 million recipients to nearly 26 million. In that time, the inflation-adjusted average annual benefit per person also increased from $424 to $1,112. In the first four years of the Bush Administration, Food Stamp spending surged 71 percent to $33 billion as 8.4 million new recipients enrolled and the inflation-adjusted average benefit increased by 12 percent.

Food Stamps are not the only antipoverty food program.<> Child nutrition programs such as School Breakfasts and School Lunches have experienced a 24 percent budget increase since 2001; funding for Women, Infants, and Children (WIC) is up 22 percent; and the Commodity Assistance Program is up 44 percent. Total food assistance spending increased by 49 percent from 2001 through 2005.

Cash Support. <>After accounting for 2.2 percent of all federal spending in 1962 and 2.6 percent in 1990, cash-support spending in 2003 reached 5.0 percent of federal spending for the first time. The largest programs include:

Supplemental Security Income (SSI).<> The caseload for SSI, which provides benefits for the aged, blind, and disabled, has increased from 3.1 million in 1971 to a record 7.0 million in 2004. The inflation-adjusted average annual benefit also reached a record $5,324 in 2004. Since 2001, total SSI spending has increased by 36 percent to $41 billion.

Chart 5

Temporary Assistance for Needy Families (TANF)<>. TANF, the successor to Aid to Families with Dependent Children (AFDC), is the only major antipoverty program with a declining caseload and budget. After peaking at 14.2 million recipients in 1993, work requirements have brought the caseload down to 4.6 million in 2005. Consequently, since 2001, spending has remained flat at approximately $18 billion, and the average annual benefit per person has remained around $2,000 (or $6,000 for a family of three). This should not be considered a policy failure. As explained below, TANF moved millions of welfare recipients into work, reducing the need for large cash welfare benefits.

Earned Income Tax Credit (EITC).<> The EITC provides a refundable tax credit to low-income workers. Created in 1975, it has leaped from its original 6 million claimants to 22 million claimants in 2003. In addition to reduced taxes, the EITC provides a subsidy to millions of low-income taxpayers, which has expanded from an inflation-adjusted average of $668 per tax return in 1977 to $1,869 in 2003. Since President Bush took office in 2001, annual EITC outlays (in addition to decreased taxes) have increased from $26 billion to $35 billion.

Child Tax Credit.<> Lawmakers created a $500 per child refundable tax credit in 1998 and expanded it to $1,000 in 2001. The tax credit begins phasing out for singles earning over $55,000 annually and couples earning over $110,000 annually. This benefit, which saves a typical working family $2,000 to $3,000 annually, has increased from $1 billion in 2001 to a record $14.6 billion in 2005 while also reducing the amount of taxes that low-income families pay.

Other Programs. <>Since 2001, federal child care spending has increased by 32 percent (plus the increasing use of federal TANF dollars for child care), and federal funding for child support enforcement and family support has increased by 21 percent. The Low-Income Home Energy Program (LIHEAP) has maintained a level budget of $2.1 billion.

Table 3

Spending Versus Effectiveness<>

This paper shows that data on antipoverty spending refute the myth that these programs are being slashed. Yet more money does not necessarily mean more progress. All too often, lawmakers measure compassion by how much money is spent rather than by whether a program actually improves people’s lives.

Historically, people in need could rely on neighbors, mutual-aid organizations, religious organizations, educational organizations, and other community organizations for assistance. Such assistance would often come from locals who knew the family in need and could provide moral support and a plan to help them back on their feet in addition to financial assistance.

Today, families in need of housing, food aid, medical care, or other types of assistance simply walk into a government office, fill out a few forms, and walk out with a guarantee of perpetual government benefits. There is little if any personalization of services or planning to help them achieve self-sufficiency, independence, and personal responsibility. Community organizations and neighbors no longer have a reason to look out for each other because they have been replaced by a Washington bureaucrat with a checkbook. This checkbook compassion, while easy, cannot fix poverty.

For years, AFDC spent tens of billions of dollars subsidizing poverty, reducing work incentives, and encouraging illegitimacy. Predictably, welfare rolls skyrocketed, and poverty worsened. The 1996 welfare reforms replaced that failed system with one promoting work and family formation. It succeeded by moving people to work and attacking the root causes of poverty.

Today, the true measure of welfare reform’s success is the number of Americans who have left welfare for work. Caseloads have plummeted by 68 percent, black poverty is at the lowest level ever measured, and even illegitimacy rates have stopped their once steep growth. Thirty years of previous failures prove that this progress could not have happened in the traditional welfare system.

Chart 6

Chart 7

The measure of government effectiveness is not how many people can be trapped into the dependency of an ever-expanding government check, but how many people successfully make the transition out of dependency. Viewed in that way, the increase in Medicaid and Food Stamp rolls should alarm rather than encourage policymakers.

Finally, many antipoverty programs reduce economic growth by reducing incentives to work and be productive. This lower economic growth means fewer jobs, lower incomes, and more difficulties for those trying to escape poverty. Thus, many of the current anti-poverty programs are counterproductive to both a healthy society and a healthy economy.


The myth of increased government redistribution from the poor to the wealthy has important consequences for lawmakers. In particular, it clouds the real choices that must be made.

On the tax side, the mathematically impossible principle that income tax relief should be concentrated among families who pay no income tax prevents any consideration of legitimate tax relief or tax reform. Additionally, the misperception that higher tax rates induce substantially higher tax revenues among upper-income taxpayers translates into pressures for tax increases that harm economic growth without substantially increasing tax revenues.

On the spending side, the myth that antipoverty spending is being slashed also matters. In an era of massive, unsustainable spending increases and budget deficits, this erroneous consensus has effectively taken one-fifth of the non-interest federal budget off the table. In fact, anything less than the baseline growth of as much as 8 percent per year is now considered by many to be unconscionable. Given the long-term spending challenges that America faces, it is time to analyze realistically which areas of federal spending are increasing, what the legitimate functions of the federal government are, and what is ultimately affordable.

Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.