Larry Jordan

Everyone is related, and everything is connected.

Income Taxes Part V: Welfare

Jul 18, 2022 by Larry Jordan, in Taxes
The Cato Institute produced a report that calculated the total value of welfare benefits, concluding that “...Welfare currently pays more than a minimum wage job in 35 states.” Really?

The report says that the total value of welfare benefits is $35,287 in California and $18,027 in Texas. Wow. What is the big difference? In California, $14,821 of the total value is housing assistance. What percentage of California welfare recipients receive housing assistance? One in eight, less than 12 percent. Really?

Without housing assistance, California welfare recipients receive $20,466 in welfare benefits, only $2,439 more than the $18,027 that Texas welfare recipients receive without housing assistance. Really. Who reads the fine print when the headline is so provocative?

Maybe you think that you would rather receive $18,000 by loafing, rather than working. In Texas, $7,337 of the value of benefits is Medicaid, and $6,312 of the value of benefits is food stamps, so you can receive $4,378 in cash by loafing or $18,000 in cash by working.

Maybe you think that you would actually receive less than $18,000 by working, because of the taxes that you would pay. Actually, I looked at this with a client, a single mother with three children who made $18,000 a year.

She received a refund of $10,000, including $1,500 of withholding, $2,250 of child credit, and $6,250 of earned income credit. You might be surprised to know that someone with an income of $18,000 can receive a refund of $10,000, but they can. It's not typical, but it's not uncommon, either.

(The earned income credit is popular among conservatives, because it encourages working. The earned income credit, which benefits the poor, costs taxpayers $70 billion annually. The mortgage interest deduction, which benefits the rich, costs taxpayers about the same amount.)

Maybe you think that if my client can get a big refund with a small income, she can just loaf on the beach. If she moves to California and opens a seashell business that nets $1,000 a year, she receives a refund of $275, including $400 of earned income credit less $125 of self-employment tax.

Get a job, get a $10,000 refund. Get a tan, get a $275 refund. If you do the math, you already know this.

These are other ways that working pays more than welfare, which are not reflected in the Cato study. My client paid $1,200 for health insurance; her employer paid an additional $20,800. She contributed $500 to a 401K; her employer matched that number. Both figures show on the W-2.

Working is better than loafing, even in California.

Note: This is not advice for poor people. They already know. This is an explanation for rich people.

To be continued...