Reforming “Waste, Fraud, and Abuse” in Means-Tested Benefit Programs

Highly recommended is Shutting down fraud, waste, and abuse: Moving from rhetoric to real solutions to federal benefits programs (Deloitte University Press, May 11, 2016) Deloitte’s research collection of studies outlines process reforms and analytic tools to reform federal benefits programs. The Collection offers this introduction :

Fraud, waste, and abuse are perennial problems for government benefit programs. To make their anti-fraud dollars work harder and smarter, agencies can build platforms that combine predictive analytics, behavioral economics, and collective intelligence into a holistic enterprise system, coordinating data from across the enterprise while remaining agile enough to respond to new vulnerabilities.

The Shutting down fraud, waste, and abuse study notes that reducing “fraud, waste, and abuse” in federal benefits programs has been a goal of Presidents as far back as Taft. Quotes from 20th Century Presidents are interesting but depressing to read. Little seems to change and misspent federal benefits dollars just keep increasing. The authors report:

Yet despite decades of pledges, campaigns, and thick reports, the challenge remains. The Government Accountability Office recently announced it found $137 billion in improper payments in 2015, an increase of $31 billion in just two years.8

The authors call for “sidestepping” the old debates and rhetoric and instead draw from the new enterprise tools available to modern managers and consultants:

We urge agencies to cut across silos and use new tools and techniques, such as predictive analytics, behavioral economics, and collective intelligence, to reduce system-wide vulnerabilities. Redesigned systems can reduce the chances of wasting funds in the first place. By creating an ecosystem in which the incentives of all stakeholders align to prevent fraud, waste, and abuse, the government can begin to drain the sources of a perennial problem.

Again, the size of the challenge:

The Congressional Research Service estimates that the federal government allocated nearly $2.1 trillion for mandatory expenditures in 2014, mostly for benefits programs.15 How much of that enormous sum was lost to fraud, waste, and abuse? For 2015, the White House estimated a loss of $137 billion through improper payments.16

Fiscal Trouble with Federal Benefits Programs
A May 2, 2016 Cato Institute podcast with Harvard’s Jeffrey Miron and Bloomberg’s Megan McArdle discusses the fiscal side of federal benefits programs, “America’s fiscal imbalance.”

For an overview see the Miron’s White Paper “U.S. Fiscal Imbalance over Time: This Time Is Different.” Jeffrey Miron is director of economic studies at the Cato Institute and director of undergraduate studies in the Department of Economics at Harvard University. The full 38-page study can be downloaded (pdf).

For students researching reform, the Deloitte study provides nuts and bolts (chips and predictive analytics?) approaches to delivering promised benefits at lower costs. The Cato study supports that case that these (and other) reforms are essential for America’s future fiscal health.

On the negative, there are plenty of defenders of status-quo federal benefits programs, and others insisting that higher taxes on the rich will solve any fiscal problems. In the podcast Megan McArdle comments that lifting the cap on Social Security taxes for the rich is unlikely to be enough. Because Social Security benefits are limited, and because SS is described as a retirement insurance program, SS doesn’t tax income over $118,000 in 2016. So, some reformers say, just lift the cap and tax the rest of rich people’s income.

(Stoa debaters should note that Social Security is not a means-tested federal benefit program. That is, the benefit (future Social Security payments) does not depend on means or income. Medicaid is a means-tested benefit. Medicaid services are provided only to those who can show they don’t have enough income or assets to pay their own medical costs. Some Social Security reformers suggest shifting SS to be means-tested, so it would more like the retirement insurance program originally intended. Here is AARP Study advocating means-tested SS benefits (pdf).)

McArdle notes that lifting SS tax caps, a 12% tax increase on the rich, might help with the solvency of Social Security but would do nothing to address Medicare, Medicaid, or other federal benefits shortfalls. And boosting taxes on wealthy people will influence their behavior and investments.

McArdle uses the phrase “tax cattle” to discuss the challenge of raising taxes on the rich.  In “Those Tax ‘Loopholes’ Were Created for a Reason” she looks at revelations from the Panama Papers. In responding to a NYT story complaining about U.S. corporations headquartered in Delaware to reduce state taxes, McArdle observes:

Legislators have a regrettable tendency to view their citizens, and particularly their corporate citizens, as a species of tax cattle, in whom they have some sort of perpetual property rights. Just ask someone who has spent time trying to persuade the state of New York that no, really, I don’t live there any more.  States do not have a right to keep corporations headquartered in their states, any more than they have a right to keep their citizens from leaving. 

Very rich people certainly could afford to pay higher Social Security taxes, and higher state and federal taxes to support federal means-tested benefits programs. But two questions arise: is there a justice or fairness claim that the wealthy should pay more in taxes? This 2015 CNBC story reports:

According to a projection from the non-partisan Tax Policy Center, the top 1 percent of Americans will pay 45.7 percent of the individual income taxes in 2014—up from 43 percent in 2013 and 40 percent in 2012 (the oldest period available). (Tweet this)

The bottom 80 percent of Americans are expected to pay 15 percent of all federal income taxes in 2014, according to the study. The bottom 60 percent are expected to pay less than 2 percent of federal income taxes.

Advocates for higher taxes on the wealthy could counter that higher tax rates hurt the wealthy less, since they still have so much left after taxes to still enjoy their wealthy lifestyles. (And even frugal Scrooges would still have plenty of gold to count each evening.)  The fairness question remains. Do the very wealthy enjoy more federal services for their higher tax payments?

Separate from fairness debates is the practical issue of how wealthy people will respond to higher tax rates.  The California government has discovered that wealthy Californians respond by moving to other states, often with the companies they own and run.

Californians are fleeing the state in unprecedented numbers, and their primary destination is Texas, according to an analysis issued Monday.

About 5 million Californians departed the Golden State between 2004 and 2013, while 3.9 million arrived from other states for a net population loss of roughly 1.1 million, The Sacramento Bee reported Monday, using tax return data from the Internal Revenue Service. 

The estimated loss in annual income to California? Roughly $26 billion. 

Federal tax increases will lead wealthy Americans to spend more on tax-accountants, and likely buy more tax-free bonds to lower their taxable income. Higher taxes will push some wealthy Americans to give up U.S. citizenship and relocate to lower-tax countries. CNN Money, in “Record number of Americans dump U.S. passports” (February 8, 2016) reports:

The number of citizens and long-term residents cutting their official ties to Uncle Sam jumped more than 20% last year to 4,279, according to a CNNMoney analysis of the latest government data. …

Eighteen times as many Americans renounced their citizenship or long-term residency in 2015 compared with 2008. Last year was the third record-breaking year in a row. 

Unlike most other countries, the U.S. taxes its citizens on all income, no matter where it’s earned or where they live. For Americans living abroad, that results in a mountain of paperwork so complex that they are often forced to seek professional help, forking out high fees for accountants and lawyers.