The Unrecognized Relationship Between Tax Law and Public Assistance

Abstract

Lawmakers enact tax laws to raise revenue, redistribute resources, and change behavior. The ability of a tax law to serve its goals depends on how individuals respond to the tax law, and how individuals respond to the tax law can depend on how it interacts with other laws. This article unearths unrecognized connections between the operations of tax law on the one hand and the voluntary nature of public assistance programs on the other. Because households’ decisions to enroll in public assistance programs depend on their disposable income, and higher taxes decrease disposable income, higher taxes render the benefits of public assistance more appealing to households. Low-income households not enrolled in public assistance programs can respond to an increase in taxes by taking up those programs. This article shows the importance of considering the interactions between tax law and public assistance, both by demonstrating the pitfalls that result if the interactions are not considered and by presenting several opportunities to increase take-up of public assistance if the interactions are exploited. In terms of pitfalls, this article shows that the interactions between tax law and public assistance programs can limit the ability of a tax law to raise revenue, redistribute resources from the rich to the poor, and change individuals’ behavior. In doing so, it uncovers novel legal questions that arise from these complex interactions between tax law and public assistance, including some related to tax earmarking, fiscal federalism, and income tax withholding. In terms of opportunities, this article outlines policy proposals that take advantage of the interactions between tax law and public assistance programs identified in the paper. For example, to encourage take-up of public assistance, governments could earmark the revenue from taxes paid in part by low-income households for the funding of voluntary public assistance programs, publicize how public assistance is funded, and publicize that tax laws are set with the expectation that eligible households take up public assistance. Some eligible households that would otherwise not enroll in public assistance programs would enroll because they would feel as if they earned the benefits, and other households would enroll because they would feel that they would be paying more than their fair share in taxes if they do not enroll.