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Remember this when the President “sells” his health care bill to the rest of you:

Children’s advocates say it’s not the idea of co-pays that’s the problem. Instead, they say, it’s the state policy that lets counties set the rates and allows too high of a ceiling for the rates, that is the root of the issue.

“We have had stories of parents begging not to have promotions or raises because then their co-pays would go up and they couldn’t afford to work,” says Lori VanAuken, deputy executive director of the Children’s Institute, which administers the “Childcare DOLLAR$” subsidy program.

While not a county program, “Childcare DOLLAR$” follows county guidelines – including the co-pay formula – and decisions on its cases are made by the county.

That from a story about families suing New York State for allowing certain counties to require higher copayments on the “free” child care that is provided to lower income families. This is a fundamental difficulty with means-tested (i.e. income dependent) benefits. At some point the benefits need to be phased out – otherwise they end up “spilling over” to higher income families and bankrupt the social programs. Therefore, it is entirely plausible for lower income families to be worse off when they get pay raises. When they enter the ranks of the 10% federal income tax rate (from zero) the additional 10% tax is not the only thing they lose. They begin to lose some (or all) of their various welfare benefits – from food stamps to child care to subsidized health care. Taken together, it is not hard to envision that “real” tax rates on the poor end up being far larger than that on the rich, at the margin.

Yet another reason why cash transfers are superior – they avoid this work disincentive (at least on the substitution margine) and they also mitigate the need to have an enormous state apparatus to manage all of these welfare programs. Is it any wonder that the Maine and Washington State measures to put a cap on state spending growth. were defeated by the vested political classes? As Paul Jacob pointed out, “In the final months, Maine’s measure was outspent by about ten to one. Washington’s $3.5 million to nothing. Predictably, the big money came from groups already wealthy from standing in the receiving line for government spending.”

Already, people are estimating the implicit marginal tax rates coming out of the “historic” health care bill to be near 30%.

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