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Trust only genuine AFI-packaged archives ... anything else may be just that: ANYTHING ELSE. +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Privatizing Welfare By Funding It With a Double-Value Tax Deduction: Imagine Cutting Welfare Taxes 71 Percent Less But Increasing Welfare Handouts Over Threefold! by Roleigh Martin [1] June 26, 1994 My policy making philosophy is simple: in contrast to extremists that the ends justify the means, I contend that the means must be justified and that the means dictate whether the actualized ends are justifiable. Empirically, I believe that the choice of means almost always predetermines whether the desired ends will be obtained. The argument today about welfare varies between those liberals who are concerned about the need for welfare and those conservatives who are concerned about the actual impacts of welfare. The conservatives to date have taken two positions that are self- defeating: either they have argued for the abolition of welfare and the civic good-mindedness of the community rejects that or they have argued for restructuring welfare with a tax-based workfare program which is still redistributionist and hence, non-conservative. A third position can be advanced -- one that centers itself on the means -- how welfare is funded. As a seated alternate to this year's Minnesota state GOP convention, I discussed this idea with a few state legislators who have asked for a detailed paper. I confirmed my hunch that under the existing welfare system, about 25 cents on the collected-tax dollar targeted for welfare finds its way into a welfare- recipient's hand. The balance goes to the tax collecting system and the welfare bureaucracy. Yet private sector welfare agencies are able to pass along anywhere from 80-90 cents on the collected dollar to recipients. Imagine the following welfare system -- keep in mind it is flexible enough to handle anticipated rare problems -- it's flexibility will be explained afterwards. Imagine the State Government announces that welfare will henceforth not be tax-funded at all and instead will be funded by a double-value state tax deduction and private sector welfare agencies. A double-value tax deduction (DVTD) means that if an individual contributes one dollar to a private sector welfare agency, he or she is able to deduct two dollars as a charitable contribution on his or her state income tax. Immediately an astute reader has one concern: what about donations to non-welfare charities? To avoid having this double-value tax deduction drain away all charitable contributions to the existing single-value tax deductions (i.e., a dollar given is a dollar deducted), the tax law could require that the ratio of DVTD dollars must be a 1:2 ratio with single-value tax deducted dollars. That is, an individual if he or she wanted to donate $300 to private sector welfare agencies would have to also donate $600 to non-welfare private sector charitable/educational agencies in order for that $300 welfare donation to count as a double- value tax deduction. (In the absence of the 1:2 ratio, the contributor could still obtain a single value tax deduction, of course.) By "private sector welfare agencies," I am referring to any lawfully recognized 501(c)3 charitable organization, whether religiously involved or not, whether locally based or nationally known. The proposed legislation will have to somehow provide a mechanism to distinguish those 501(c)3 charitable organizations that are engaged in qualified welfare operations versus those that aren't. The State could require the following four items of information to be collected by the private sector welfare agencies: the social security number of the recipient, the dollar amount received, date, and tax ID number of the private-sector welfare agency. From the information collected, information can be summarized and reported in two forms: -- to the public, they will be able to determine which private sector welfare agencies are most efficient at getting recipients "back on their feet" off of welfare; -- to the private-sector welfare agencies, they will be informed if individual recipients they are serving are also collecting money from other welfare agencies. The private sector charitable agencies should not have access to records in the original database that has real SSN data for people who are not receiving nor requesting to receive welfare benefits from the individual agency. The collecting of money from more than one private sector welfare agency would be totally legal, as long as the recipients are not lying under contract laws if any of the private-sector welfare agencies have their recipients sign forms stating they agree under private- sector contract law that they have filled out their form truthfully as a contractual condition for obtaining the private welfare assistance. You see, there is no need for state intervention in the agency forms and procedures used -- existing contract law can handle that. The only thing the State needs to concern itself with are the four items of information earlier listed -- the free market can handle the rest. You see, some welfare agencies may be more generous than others -- some may want to piggyback other agency's efforts. Let the donating private-sector determine by their voluntary contributions what agencies are worthy of their donations. A modified duplicate of the State's database should be made public for private-sector scholarly analysis where the individual Social Security numbers (SSN) are randomly altered but in a consistent manner. For instance, a SSN of 123-456-7890 could become ABC-ZXY- EIMN but all occurrences of 123-456-7890 would become the same. Yet, 123-456-7891 might (under randomization) become HAT-BCE-MLOP. The idea is that there is no consistent algorithm to allow one to reverse the alteration from the alphabetized SSN to it's original numeric SSN. [2] In this welfare system, competition would be abundant. Existing charitable contributions would continue under the required ratio 1:2 tax law. But the government only needs to spend less than one-seventeenth of what it spends now to have welfare recipients receive the same amount of money! That assumes several things, first, that income taxes in the state average 8.5 cents on the dollar. A new tax deduction reduces state revenue from taxes collected by 8.5 percent of the amount deducted. DVTD would reduce state revenue from taxes collected by 17 percent of the amount deducted. One billion dollars from taxes collected for welfare now means $250 million to welfare recipients -- remember the other 75 percent goes to the cost of collecting taxes and the welfare bureaucracy. Assume that private sector welfare agencies, plus the cost of computerizing and reporting the gathered four pieces of information reduces the average efficiency of private sector welfare agencies to 75 cents on the dollar level (the existing range reported in the general press is between 80-95 percent efficiency). To get $250 million to welfare recipients via the DVTD method requires only $56.7 million of "lost taxes" due to the tax deduction. 17.6 times less revenue is required! A liberal state, such as Minnesota, could adopt this method and allow up to five times as much money to be given to recipients than the existing system yet still reduce the tax burden by over 71 percent! The table on the next page shows the mathematics involved. In the table is a reference to "triple-value funding" -- I'll explain that later. The Moral Benefits The worst thing about welfare today, as it is has been funded since the days of President Roosevelt, is that the money collected is through the power of the gun -- the power of the state that backs the tax law rests on force that will be used if the taxes are refused. The message sent by the current funding method is that the recipients consider it a guaranteed entitlement -- a governmental right. The children of the recipients are being given the message that their parent (normally, only a single parent is involved) is entitled to money because the parent is a victim. And then the child is taught, particularly if the child is Black or Indian that they are still being victimized by racism. It is only a graduated--distorted though--step of logic for the child to wrongly infer that since the force of guns (through Tax Law) is being used to take other people's money for his parent, that the child has the right to also use force to get money for his own needs, particularly since he is told everywhere that he or she is an underdog because of institutionalized racism. This is speculation but does it help explain some of our crime statistics? Now I know that this paragraph is awful blunt and politically incorrect--but the juvenile criminal facts bear this out. Prior to welfare by taxation, the juvenile poor--even the juvenile racial minorities--were very well behaved. Check your history. Under the DVTD Method, no such message will be sent to the children of welfare recipients. The giving is entirely voluntary. Not a single individual is forced to make the donation to obtain the tax deduction. It isn't taxes collected but state tax revenue lost by the existence of the deduction. Recipients will know and so will their children that the money they receive is through the generosity and love of their fellow citizens. People do not make money or save money through tax deductions. If I donate a dollar under the DVTD method, I reduce my state taxes by 17 cents but I reduce my retained revenue by one dollar. Yet Americans are very generous people. They will give to private sector welfare agencies. --------------------------------------------------------------------------- The Double-Value Tax Deduction Welfare Method v. Current Method* Tax System What Percent impact for over- welfare diff. of Funding revenue Revenue head recipients needed method pool** pool pct would get taxes Current $1,000,000,000 $1,000,000,000 75.00% $250,000,000 Double-Value 56,666,667 333,333,333 25.00% 250,000,000 5.67% Triple-Value 85,000,000 333,333,333 25.00% 250,000,000 8.50% Tax impact What welfare if 5 times recipients Size of Double larger would get Value Pool 56,666,667 283,333,333 1,250,000,000 * See data assumptions in text. ** The tax impact for the double- & triple-value deduction methods refers to "taxes lost" due to the deduction. The cost of the state database operations are not shown. --------------------------------------------------------------------------- One legislator asked me what if up-state people in the countryside do not give enough to private sector welfare agencies? Well, some of the metro (down-state) donations could be to state-wide private sector agencies. Secondly, if the DVTD method is not pumping enough money into private sector welfare agencies, the state could make it a triple-value tax deduction. That is, a dollar donated is a three dollar tax deduction. The table presented above shows how even a triple-value tax deduction reduces the impact on tax revenue 11.7 times less! What is the difference in this moral message? If someone voluntarily helps you out when you are down, don't you not want to abuse the favor? Don't you want to quickly get yourself back on your feet? Don't you want to get yourself back well enough on your feet to be able to pay back the favor -- if not to the person who helped you -- then at least to other people who become desperate as you once did? Yet, if any of you collected public assistance -- whether food stamps, unemployment or what not, did it make you have the above feelings? Of course not! You felt entitled to it -- you felt it was yours and you weren't grateful to anyone--were you? The only thing you might have felt grateful for was big government. That is an awful thing in America to instill into people. Under the DVTD method, individuals will feel grateful to the goodness of private-sector individuals and not to big government. This is obviously a conservative philosophy approach to funding welfare. I hope readers will broaden their appreciation for this approach and read the historically insightful book of Marvin Olasky, The Tragedy of American Compassion (Washington, D.C.: Regnery Gateway), 1992. Meeting Various Obstacles Mr. John H. Fund in the June 14th, 1994, Wall Street Journal editorial page, in "Welfare: Putting People First," advocates a similar approach but using a tax credit versus a modified tax deduction. The problem with a tax credit is that it impacts tax revenue 5.88 times as much as the DVTD method and the message sent to recipients is no longer that of love--for giving is no longer a voluntary financial sacrifice of the giver- -the sacrifice is no longer there. Furthermore, Mr. Fund's approach lacks the information feedback that exists in the DVTD method and without that, recipients could abuse the system through approaching multiple, competing private-sector welfare agencies and the underclass could conceivably grow. Last, to pass this proposal, there will have to be more political groups behind it than for maintaining the existing system. If we advocate the generous approach of reducing the impact on state tax revenue by threefold but increasing the pass-through revenue to recipients by fivefold, it should be easy to get welfare recipients to vote for the change -- it's been said that change is always resisted unless the improvement is seen as overwhelmingly to one's benefit. With the ratio of DVTD to normal charitable tax deductions 1:2, or whatever it must be to gain the support of existing charitable organizations, it will be greatly advantageous to these private sector organizations for they will see tremendous growth. Conservatives, including welfare-conservative minded Democrats, should naturally favor the DVTD method over the current method or any tax-funded workfare approach. That leaves the welfare bureaucrats and diehard statists as the main opponents of DVTD. Given a good campaign, DVTD should be easy to pass into law, especially if it tried and succeeds at a county level first. DVTD can be easily tuned to fit disfavorable conditions by adjusting either the tax deduction -- go for a triple-value or quadruple-value tax deduction for instance, or by adjusting the DVTD to normal tax deduction donation ratio -- perhaps 1:2 or 1:3 or 1:4. Because of this flexibility, target spending can be approximately met even though this is not a central- planning/funding setup. The main point is that with the double-value tax deduction method, the means are justifiable and are most likely the best means to obtain ends that we can justify proudly. Free market competition in charity will rule and once again, as the generous in America did in the 19th century, we can be seen as caring neighbors in the community to the lesser well-off citizens who will be helped in an environment of freedom to choose which method (source of help) do they want to turn to for help to get back on their feet. Just as the well-off people have freedom of choice, let's enable all Americans to have freedom of choice to determine how they struggle through life -- not just after they get back on their feet but before that. It's time that all Americans, rich and poor, once again treasure freedom of choice! Questions and Answers I submitted the initial draft of this proposal to newsgroups on the Internet and on Compuserve. I received very enthusiastic support for the proposal--no opposition--but I did receive several questions for which the answers are hard to retroactively fit into the main text. These questions and answers follow. Please note that the questions and attitudes in these questions are not mine! Some of the attitudes in these questions are harsher than my own! Question 1: "On the whole, I like the idea. However, I am not sure of the justification of the 1:2 requirement. Allowing for my incomplete knowledge of relevant law, aren't all charities set up for public service in one form or another? Should welfare charities be singled out over, say, the Red Cross, or the local community theater? Do Goodwill and the Salvation Army count? How about the United Way? Where is the line drawn on welfare vs. non-welfare charities? I would prefer to see the double tax deduction for all charities." Answer 1: In the public's eye there are two types of public services needed -- those that are so vitally a matter of life and death that the public has decided not to leave them to voluntary contributions such as welfare versus those considered of a lesser urgency but still desired for which the public allows them to have a tax-deduction status but funding is otherwise left up to voluntary contributions. This proposal maintains that distinction and separates the two "camps" via the single versus the multiple-value tax deduction (i.e., in case the double-value tax deduction does not raise enough money, the concept allows a triple-value, etc., tax deduction to be created). As said earlier, the enabling legislation will have to have a mechanism to distinguish those charities engaged in welfare versus non-welfare operations. Question 2: "Don't give it to them, make them get out from in front of their TV's or out of their beds and work for their welfare. There is enough litter to be picked up, ditches to be dug, etc." Answer 2: The individual private sector agencies could require work for the handout; it'd be up to the market to decide if they want to only fund work- requiring private sector welfare agencies. Question 3: "My personal problem with welfare today is I do not believe that a person who does not work should receive more money/benefits than a person who does." Answer 3: The private sector agencies under my plan don't necessarily have to use the donations to give cash handouts to welfare recipients -- it's whatever the marketplace would determine -- it might decide to go for private sector training/boarding schools that provide on-the-job training/work and room/board to welfare families. Such jobs might be quite unattractive to non-welfare recipients but attractive to those at the bottom of the latter. Rather than have elitists decide, I'm in favor of the charitable marketplace deciding. No one is forced to donate under my proposal. You can save your own money if you want. Question 4: "Will there be a tax reduction for everyone since the state will no longer be paying for welfare?" Answer 4: There would be a reduction in state government spending equal to the amount of the current welfare setup. Taxes collected will be reduced the same less the small fraction of "taxes lost" due to the tax deduction (see the data table shown above). Question 5: "How does the federal portion of welfare fit into your plan?" Answer 5: The state would apply for a waiver from federal government and the U.S. Congressmen/Senator from the State would be wise to ask for whatever money it's entitled to to go to other projects however I'd prefer a tax rebate to taxpayers. Question 6: "How is the benefit amount determined?" Answer 6: Totally left up to individual agencies and the marketplace. Significant abuse would not be able to happen because of the database/reporting features. Any abuse would be made public and the marketplace would stop donating. Normal 501(c)3 charitable laws would be in force to prevent criminal abuse by the private sector agencies. Question 7: "Will the recipient ever have to go to more places under your plan than they do today?" Answer 7: That may or may not be the case--but if they do, the agencies handing out benefits, work or money to them will be told via the database reporting mechanism. Question 8: "How does the recipient determine which agencies they go to?" Answer 8: The same way people make decisions about the marketplace today--they learn from advertisements, word of mouth, libraries, or consumer guide agencies. Question 9: "Please explain how the different agencies can give different benefits. If I was an agency I would give all the money to one recipient-- myself!" Answer 9: You'd be in violation of 501(c)3 charitable contribution laws and quickly be in deep trouble. Nobody would want to donate to any agency that isn't a 501(c)3 charitable agency. Each 501(c)3 agency has information they publish that they use to attract donations. Within the constraints of 501(c)3 laws and marketplace feedback with the database reporting mechanism, different agencies can do very different things. That's the whole idea--to introduce consumer/payor-marketplace sensitivity and competition to welfare. Question 10: "I personally don't agree that recipients will get off welfare because good hearted Joe is giving him the money rather than the government." Answer 10: The private sector agencies are under no obligation to give any money to such abusers--no one is entitled to a single penny under my proposal. The recipients could really have to prove their case. Now some bleeding-heart do-goody agencies might be easier to rip off--but only bleeding-heart softies would donate to them--which is their right--it's their money. The more astute people will be more discerning with their money. *** 1. The author has a Master's degree in Sociology (1977) and works in the private sector as a Knowledge Engineer. He is also President of Applied Foresight, Inc. of Edina, Minnesota, which publishes two electronic magazines--ShareDebate International (edited by the author) and Imprimis Online (edited by Ronald Trowbridge of Hillsdale College, Michigan) --devoted to innovation in politics appreciative of the free market that are carried on thousands of computerized Bulletin Boards around the world, featuring such authors as Nobel Laureate Milton Friedman, Ben Bova, Jerry Pournelle, William Tucker, Doug Bandow, Thomas Sowell and over 50 other noted writers. The author's address is 5511 Malibu Drive, Edina, Minnesota 55436. Phone: 612-945-6529 (work hours), 612-933-3092 (home). Internet: rol@uhc.com. Compuserve ID: 71510,1042. Fax: 612-945-6502 (at office- include cover sheet). 2. Researchers do not need SSN data but statisticians wants raw data so that they have control over aggregation and disaggregation analysis; hence the need to scramble SSNs because the SSN data is too confidential to be made public to them. However the private sector welfare agencies need to be informed if their clients are getting contributions from more than one agency (which again, if individual rules allow it, would be okay; but it would be up to individual agency rules--all enforced by contract law if they so wish); hence the need for a database with the SSN data kept intact. Thus two databases are needed. ###