Economic modeling of how to end poverty in the United States while saving taxpayers trillions of dollars
TLDR; we can end poverty and save taxpayers more than $3 trillion each decade by investing seed money grants equal to the federal poverty guidelines into EVERY American household.
The U.S. government, through its federal poverty guidelines, defines absolute poverty as having insufficient income to purchase the bare minimum in food, clothing, shelter, and/or transportation. The Department of Health and Human Services makes an estimate of this poverty guideline figure per household size every year, updated and adjusted for inflation.
If we were to provide every American household with seed money grants² (SMG) equal to the federal poverty guidelines, by definition there would be no more absolute poverty amongst US citizens (Scenario 1). Done this way, it would cost us $2.76 trillion to end poverty.³
Strangely enough, there appears to be no legitimate academic or government attempt to quantify the economic cost of poverty in the US. This figure, if calculated, would estimate the cost of social welfare programs, law enforcement, lost GDP, lost tax revenue, lost productivity, etc. due to poverty in the country. The closest approximation comes from researchers at the Brown School of Washington University in St. Louis. They conducted a rigorous analysis of the economic impact of childhood poverty in the US and estimated the annual cost to be $1.03 trillion.
I’ll use this $1.03 trillion figure, which likely is a significant underestimate of the total value that includes adult poverty until a more robust estimate of the impact of poverty on US taxpayers is available.
At a $1.03 trillion impact, scenario one fails to both end poverty and save taxpayers trillions of dollars over the next 10 years. It does indeed end poverty, but at much too expensive of a price tag.
If we include a phase-out program that slowly recovers the seed money grants from those earning wages at a flat rate, the price tag drops significantly.
With a 20% phase-out rate (Scenario 2), the price of ending poverty drops to $1.26 trillion. Much cheaper, but we still haven’t achieved our goal of ending poverty while saving taxpayers at least a trillion dollars over a decade.⁴
We end poverty for a mere $930 billion with a 33% phase-out rate (Scenario 3). And under this scenario, we save about $100 billion a year by eliminating the $1,030 billion impact of poverty while spending only $930 billion to do it! Over a decade, we’ve saved $1 trillion dollars for taxpayers. And don’t forget, we are only using childhood poverty to estimate our savings here, so the real figure is likely higher.
Figure 1. Seed Money Grants end poverty while saving taxpayers trillions of dollars.
At a 50% phase-out rate (Scenario 4), the cost of ending poverty drops down to $748 billion and generates $2.8 trillion in savings for US taxpayers each decade. Now we’re cooking!
We have now achieved our goal of ending poverty and saving taxpayers trillions of dollars. Still, it is worthwhile to explore additional scenarios that have further reductions in cost and lower effective marginal tax rates for our poorest citizens. Given the benefits cliffs that many social welfare programs create, low-income households currently face effective marginal tax rates from 50% to as high as over 100% in several income bands. That is a major disincentive to work that disappears with seed money grants.
If we have a 50% phase-out rate and eliminate the TANF and SNAP programs (Scenario 5), the cost price tag drops down to $501 billion and our savings leap up to $3.3 trillion over a decade.
The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) have significantly reduced poverty in this country. Both, however, are means-tested programs that create a benefit cliff and to an extent, a disincentive due to the effective marginal tax rates those nearing the benefits cliff will experience. This disincentive to work is NOT due to the recipients having money, it is due to them losing that money if they get a job and earn more.
If we have a 50% phase-out rate, eliminate TANF and SNAP programs, and eliminate the EITC and CTC (Scenario 6), we end poverty for $353 billion and save taxpayers $3.5 trillion each decade.
There are other areas where we could further reduce the cost of ending poverty, with the downside of reducing the total investment in our most vulnerable citizens. Federal-state unemployment insurance, for example, provides the unemployment benefits that Americans receive temporarily when they lose their jobs.⁵ This was designed to prevent workers from falling into poverty when they lose their jobs and to stimulate the economy during downturns when large portions of the population simultaneously lose their jobs. Spending on unemployment varies meaningfully from year to year but can be as low as $45 billion in some years and has exceeded $150 billion in other years, excluding COVID-19-related years.
As we have already seen, these savings are not necessary to generate trillions of dollars in economic returns completely ending poverty in America. I encourage legislators, voters, researchers, and policy analysts to explore which combinations of phase-outs and program alterations lead to the strongest returns on our investment in our most under-invested citizens.
To learn more, visit endpovertymaketrillions.com
[1] I have completed this analysis using the open-source software and data provided by PolicyEngine, a web app that calculates taxes and benefits for society and households under current policy and customizable policy reforms. With PolicyEngine, you can design simple or complex tax and benefit reforms, and see how they affect the US budget, poverty, and inequality, as well as how they affect your own finances. Staying true to the ethos being PolicyEngine, I am publishing this openly and for free so that anyone can peer-review this work and provide their thoughts. Please send comments, criticism, and feedback to darryl@endpovertymaketrillions.com
[2] Seed money grants are small but meaningful investments into every American citizen. They are unconditional cash grants distributed twice a month. The total annual amount of the seed money grants is equal to the federal poverty guidelines.
[3] PolicyEngine uses individual-level data while the federal poverty guidelines are a household measure. I use an adult grant amount of $10,000 and a child grant amount of $4,000 to approximate a policy of grants equal to the federal poverty guidelines. An average family in the US is 2.5 people and 22% are children. The federal poverty guideline for this family would equal $20,760. Using my approximations here, they receive $21,665 in seed money during 2022, paid in twice-a-month installments.
[4] The savings are no longer the full $1.03 trillion because we are removing benefits from the poor to bring down the cost of the program and to eliminate benefits cliffs, or effective marginal tax rates. I estimate this by comparing the PolicyEngine % poverty reduction of this and subsequent scenarios to scenario 4, our baseline for full poverty reduction. PolicyEngine uses a higher poverty line (Supplemental Poverty Measure) than the federal poverty guidelines.
[5] PolicyEngine currently cannot assess the impact of eliminating unemployment insurance. I have therefore not included this variable in any scenario in this analysis. Doing so could bring the price of ending poverty as low as $200 billion per year.
