Income Maintenance Experiments
Income Maintenance Experiments
The income maintenance experiments in the United States and Canada were tests of a welfare program known as a negative income tax, which was designed to assist families in need while preserving their incentives to work. The negative income tax is the most important proposal in the history of welfare reform and has been a major object of study in the social sciences.
The idea of the negative income tax is generally associated with the Nobel laureate, conservative economist Milton Friedman (1962, chap. 12), although liberal economists Robert J. Lampman (1920–1997) and James Tobin (1918–2002) were also early developers. Friedman’s proposal had both liberal and conservative elements. On the liberal side, he proposed that all families with low incomes receive an unrestricted grant from the government, leading to what some others termed a guaranteed annual income. However, Friedman noted that such a grant threatens to reduce work incentives by providing income support to families even if they are not employed. To counter that disincentive, Friedman proposed that families be given a financial incentive to work by means of a “tax rate” that would result in higher income if they worked. For example, if the tax rate were 50 percent, a nonworking family with a monthly grant of $500 who went to work and earned $100 would experience a grant reduction of $50 (50 percent of earnings) to $450. The family’s total income would rise to $550, the sum of $100 of earnings and a grant of $450, providing the desired financial incentive. The lower the tax rate, the smaller the benefit reduction that would occur and hence the greater the work incentives.
In 1967 the federal government decided to conduct a social experiment to determine whether a guaranteed, unrestricted grant for nonworkers would induce working families to quit work and whether a low tax rate would counter that disincentive (Greenberg et al. 2003). To test the negative income tax, the government proposed to select a group of poor families, to randomly assign them to an “experimental” group and a “control” group, to give the experimental group the negative income tax, and then to later observe how many families in each group were working. The difference in the work levels of the two groups would be taken to be the effect of the negative income tax.
Four experiments were designed and implemented in the United States and one in Canada. They were located in New Jersey and Pennsylvania; South Carolina and Iowa; Gary, Indiana; Seattle, Washington, and Denver, Colorado; and in Manitoba, Canada (Greenberg and Shroder 2004). The first began in 1968 and the last ended in 1979. Most were designed as described previously, but with one variation: different families in the experimental groups were given different guaranteed grant amounts and different tax rates, allowing a test of the effect of the levels of the guaranteed income amount and the tax rate on work effort.
The first question was whether offering families a guaranteed income if they did not work would reduce work effort. The answer from all the experiments was an unequivocal “Yes.” The work levels of experimental families were almost always less than those of control families (Burtless 1986; Greenberg et al. 2003; Greenberg and Shroder 2004; SRI International 1983). For example, in the Seattle-Denver experiment, married men in the experimental group were five percentage points less likely to work during the year than those in the control group; the corresponding figures for married women and for single mothers were eleven percentage points and seven percentage points, respectively. Further, the comparisons of work levels across families with different experimental plans revealed that families who were offered more generous grant amounts did, in fact, work less.
The second question was whether Friedman’s idea of giving families a financial incentive to work with a reasonably low tax rate countered this disincentive. The answer to this question was much more ambiguous. Overall, the data from the experiments showed a mixed pattern of effects of this kind (e.g., SRI International 1983, Table 3.9). Why a stronger work response to financial incentives was not found generated a great deal of research over the subsequent years, with some arguing that statistical flaws in the experiments’ design led to this result. But the leading explanation is that a reduction in the tax rate expands the generosity of the program, relative to the existing welfare program, and tends to bring new families onto welfare who had not received benefits previously. The work reductions of these families partially or wholly offset the positive work effects for those families initially on welfare.
The researchers conducting the experiments also gathered data on other aspects of behavior. For example, families in the experimental group had slightly greater expenditures on housing and increases in homeownership, stayed in school longer, and had greater increases in test scores among children in lower grades (Greenberg et al. 2003; Hanushek 1986). On the other hand, in the Seattle-Denver experiment, there was a surprising increase in the rate of marital dissolution, a controversial result that was not anticipated by policymakers or researchers. The negative income tax had been predicted to increase marital stability because it extended benefits to two-parent families compared to the current welfare system.
The political impact of the results of the income maintenance experiments was modest at best because political events moved too quickly (Moynihan 1973). President Richard Nixon (1913–1994) proposed a negative income tax to the U.S. Congress in 1969, long before the experiments had been completed. The plan passed the House of Representatives but failed in the Senate in 1972. Although the results of the experiments were used by the Jimmy Carter administration in formulating its welfare reform program, no negative income tax plan was ever seriously considered by Congress thereafter. When the results of the experiments were later published, the evidence of significant work reductions reinforced this lack of interest in a pure negative income tax (Greenberg et al. 2003).
While the negative income tax in its idealized form has never been implemented in the United States or Canada, the idea of providing financial incentives to work has proved to be a powerful one and has led to many welfare reforms having such features. Much subsequent research has provided stronger evidence that some families, typically those with the lowest levels of earnings, work more if given a financial incentive to do so, thereby giving more support to this idea than did the experiments. In the 1990s, many U.S. states added financial incentives to their welfare programs.
The primary alternative to financial work incentives is the idea of simply requiring work of anyone who receives benefits, a policy often characterized as using a “stick” to encourage work rather than a “carrot” of financial incentives. Such work requirements were introduced in the United States in the 1990s and have been introduced on a more limited scale in Canada in more recent years, and can be seen as directly addressing the work disincentives from unrestricted grants to nonworking families that were shown to occur in the experiments. Critics of work requirements argue that they eliminate benefits for some families who are in need but cannot work. However, a second alternative policy is an “earnings subsidy” that offers little or no grant support to nonworkers but gives a grant to those who work, possibly only those who work full-time, to provide work incentives. The U.S. Earned Income Tax Credit is the major existing policy of this type. Earnings subsidies, while providing incentives to work, also provide no support to nonworking families, who are usually in greater need. The debate on these issues continues.
The income maintenance experiments have also had a major legacy by introducing the idea of randomized trials as a method of social policy evaluation, which was a radically new idea in 1967. Since the 1970s, there have been over 250 subsequent experiments with various social policies (Greenberg and Shroder 2004). Most of these experiments have been less ambitious and of a much smaller scale than those testing the negative income tax, but they nevertheless have used the same core methodology.
SEE ALSO Negative Income Tax; Welfare
Burtless, Gary. 1986. The Work Response to a Guaranteed Income: A Survey of Experimental Evidence. In Lessons from the Income Maintenance Experiments: Proceedings of a Conference Held at Melvin Village, New Hampshire, September 1986, ed. Alicia H. Munnell, 22–52. Boston: Federal Reserve Bank of Boston.
Friedman, Milton. 1962. Capitalism and Freedom. Chicago: University of Chicago Press.
Greenberg, David, Donna Linksz, and Marvin Mandell. 2003. Social Experimentation and Public Policymaking. Washington, DC: Urban Institute Press.
Greenberg, David, and Mark Shroder. 2004. The Digest of Social Experiments. 3rd ed. Washington, DC: Urban Institute Press.
Hanushek, Eric. 1986. Non-Labor-Supply Responses to the Income Maintenance Experiments. In Lessons from the Income Maintenance Experiments: Proceedings of a Conference Held at Melvin Village, New Hampshire, September 1986, ed. Alicia H. Munnell, 106–121. Boston: Federal Reserve Bank of Boston.
Moynihan, Daniel P. 1973. The Politics of a Guaranteed Income: The Nixon Administration and the Family Assistance Plan. New York: Vintage.
SRI International. 1983. Final Report of the Seattle-Denver Income Maintenance Experiment. Vol. 1: Design and Results. Washington, DC: U.S. Department of Health and Human Services, 1983.
Robert A. Moffitt